Views on the dollar’s decline

An apt summary from Free Exchange:

The usual dynamics of any public discussion on a falling dollar are pretty well established. Lots of market watchers and pundits wring their hands over a poorly defined set of concerns, ranging from hyperinflation to wounded American pride. A number of economists respond that actually, the dollar is looking overvalued against a number of currencies at the moment, and an orderly depreciation of the dollar would go a long way toward improving America’s internal and external economic balances. And then some public official acknowledges that the economists are making sense, only to be chastised into a retraction of the statement by the market watchers and pundits. End scene.

And Martin Wolf points out that the crisis has made a subsequent fall almost inevitable:

We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

The desirability of such a decline is debated (follow the links), but the Free Exchange post accurately describes the conventional wisdom amongst economists.

Counterproductive efforts against child labor

Matthias Doepke &  Fabrizio Zilibotti say international boycotts and sanctions against child labor actually exacerbate the problem:

In our analysis, we find that international interventions weaken domestic support for child-labour restrictions because they reduce competition between children and unskilled adult workers in the labour market. Unskilled workers then have less incentive to push for child-labour regulation.

When effective, trade sanctions or consumer boycotts move child workers from formal employment in the export sector to informal production, often in family-based agriculture. In the export sector, particularly in factories, children and adults perform similar tasks and therefore compete directly for jobs. In the informal sector, children and adults usually have different work responsibilities.

For example, on family farms children often specialise in tasks such as tending small animals, allowing adults to work in areas where they are most productive. Once adult and child labour become complementary in this way, restrictions on child labour no longer raise adult wages, which removes unskilled workers’ (and their unions’) incentives for supporting child-labour regulation.

Chris Rock’s trade statistics

Chris Rock says that “human hair is India’s biggest export.” That seems unlikely to be true, glancing at the US data. The US imported $1.3 million worth of human hair (HTS code 050100) from India last year, while importing $126 million worth of shrimps and prawns (HTS 030613) and $100 million worth of milled rice (HTS 100630) [USITC Dataweb]. And the World Factbook profile of India doesn’t list hair as a top export. But Indian firms do dominate the Google search results for human hair exporters. Apparently the supply comes from Indian women who shave their heads in religious ceremonies and donate their hair to the priests without compensation.

Dave Donaldson’s “Railroads of the Raj”

Another paper applying trade theory to India’s intranational trade? You bet! It’s Dave Donaldson’s “Railroads of the Raj: Estimating the Impact of Transportation Infrastructure.” The model is a multi-industry version of Eaton & Kortum (2002), and the data come courtesy of the British Empire’s meticulous recordkeeping:

How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, I collect archival data from colonial India and use it to estimate the impact of India’s vast railroad network. Guided by six predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) eliminated the responsiveness of local prices to local productivity shocks (but increased the transmission of these shocks between regions); (4) increased the level of real income (but harmed neighboring regions without railroad access); (5) decreased the volatility of real income; and (6), a sufficient statistic for the effect of railroads on welfare in the model accounts for virtually all of the observed reduced-form impact of railroads on real income. I find similar results from an instrumental variable specification, no spurious effects from over 40,000 km of lines that were approved but never built, and tight bounds on the estimated impact of railroads. These results suggest that transportation infrastructure projects can improve welfare significantly, and do so because they allow regions to exploit gains from trade.

What does Paul Krugman really think about trade theory?

Last week, I attended the Intelligence Squared debate on Buy American/Hire American provisions. It pitted Jagdish Bhagwati, Doug Irwin, and Susan Schwab against Leo Gerard, Rick MacArthur, and Jeff Madrick; the transcript is available online (pdf).

Rick MacArthur, who wrote The Selling of Free Trade and called his debate team “the protectionist side”, opened his speech with an attack on the credibility of international economics. He said Thomas Carlyle labeled economics “the dismal science” because it was not a hard science (not even close), and that free traders cling to David Ricardo “with Marxist fervor.” He then quoted a paragraph from Paul Krugman’s Geography and Trade (1991), which says:

[T]he tendency of international economists to turn a blind eye to the fact that countries both occupy and exist in space — a tendency so deeply entrenched that we rarely even realize we are doing it — has, I would submit, had some serious costs. These lie not so much in lack of realism — all economic analysis is more or less unrealistic — as in the exclusion of important issues and, above all, important sources of evidence.

It’s immediately obvious to anyone familiar with Krugman’s body of work or who notices the link between the phrase “occupy and exist in space” and the word Geography in the title that MacArthur has pulled this quotation out of context. Paul Krugman would likely be one of the last people on earth to say that trade theorists don’t have useful contributions to make. In fact, he says so on the very same page of Geography and Trade:

There is nothing wrong with simplifying assumptions — on the contrary, it is only through strategic simplification that we can hope to make any sense of the buzzing complexity of the real world. The particular simplifying assumptions of conventional trade theory have led to an impressive and very useful intellectual construct. For some purposes it does no harm to ignore the fact that countries are not points and that some pairs of countries are much closer than others — that California is farther from New York than any place in the European Community is from any place else, or that London and Paris are much closer to each other than are New York and Chicago, or for that matter that Canada is essentially closer to the United States than it is to itself.

Yet the tendency of international economists to turn a blind eye to the fact that countries both occupy and exist in space — a tendency so deeply entrenched that we rarely even realize we are doing it — has, I would submit, had some serious costs. These lie not so much in lack of realism — all economic analysis is more or less unrealistic — as in the exclusion of important issues and, above all, important sources of evidence. As I hope I will be able to show, one of the best way to understand how the international economy works is to start by looking at what happens inside nations. If we want to understand difference in national growth rates, a good place to start is by examining differences in regional growth; if we want to understand international specialization, a good place to start is with local specialization. The data will be better and pose fewer problems of compatibility, and the underlying economic forces will be less distorted by government policies.

No intellectually honest person would claim that these paragraphs are ammunition for protectionists against unscientific trade theory. Shame on whomever provided the quotation to MacArthur — he’s been using it out of context for almost a decade now.