Will Protectionist Policies Maintain Inequality Throughout the Decade?

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Thursday, 25 October 2012 04:41

Adam Davidson's NYT magazine piece featured the views of a number of economists as to what the U.S. economy will look like at the time of the next presidential election in 2016. Two of the experts seem to be describing a world in which the United States has become increasingly protectionist:

"by 2016, Frieden and Bremmer noted  [Jeffrey Frieden, a professor at Harvard and Ian Bremmer, president of the Eurasia Group], the U.S. will be adjusting to an economy in which inequality is a structural fixture. There will be millions who are unable to get work, and tens of millions more who will have to adapt to lower income. Meanwhile, those with college and advanced degrees will experience a country that has rebounded. Their incomes will grow."

Of course the main reason that workers at the top of the income distribution have seen their wages rise is that they continue to be largely protected from international competition. Our doctors are paid roughly twice as much as their counterparts in wealthy countries like Canada and Germany and several times as much as doctors in India, China and elsewhere in the developing world. Doctors from these countries would be happy to train to U.S. standards and work for half the pay that U.S. doctors receive, but are prevented from competing with our doctors by professional barriers. If protectionists did not dominate economic policy, the country could save hundreds of billions of dollars each year in health care costs and in the cost of other highly paid professional services. Frieden and Bremmer may well be right that protectionists will continue to control policy due to their outsized political power, but it is worth noting that this is political outcome, not a result driven by economics. (It is worth noting that rising wages for college grads would be a change. They have seen stagnant or declining wages over the last decade.)

It is also worth noting that the growth story in this piece might not prove accurate. It points to foreign pharmaceutical sales as a major growth sector for the U.S. economy, noting that the domestic market is likely to diminish in importance. This is very questionable. Drugs are actually very cheap. There are few drugs that would sell for more than $10 in a free market. The reason that drugs are expensive is because of patent protection and other restrictions on competition such as data exclusivity.

The United States has been able to get other countries to accept these extremely costly forms of protection as a quid pro quo for gaining access to the U.S. domestic market. However if the U.S. domestic market is no longer seen as a big prize internationally (a main thesis of the piece), then other countries are unlikely to go along with paying U.S. drug companies patent protected prices. There would be no offsetting gain to compensate for this huge drain on foreign economies.

It is also worth noting that the main reason that we have a dispute over currency values with China is because they want to be able to sell their goods at a low cost in the U.S. market. If China no longer cares about the U.S. market as a main export destination for their goods, it will presumably have no objection to the value of the dollar dropping against the yuan. This should be a boon for the manufacturing sector in the United States since it will mean that our goods are far more competitive in the world economy.

The piece also says that China will probably not surpass the size of the U.S. economy until the 2020s. The latest projections from the I.M.F. show China's economy exceeding the size of the U.S. economy on a purchasing power parity basis by 2017.