Threatening China with increased protectionism has become a hobby horse of both the populist Left and the populist Right, with predictably bad outcomes. Disdain for free trade is often couched in a fear that trade leads to rising inequality, despoiling of the environment, etc. And so it isn't surprising that fully twenty members of Congress that voted for trade agreements, turned against them when President Bush became elected. (Politics often trumps economics when the chips are down.)
Is Global Trade Actually Helping America's Poor?
Our friend, colleague, and blogging guest, Dane Stangler wrote this post In Defense of Consumption back in August detailing a new paper from U.Chicago that shows low income Americans benefit by cheap, imported Chinese goods and when the inflation of so-called luxury goods or services are taken into account, income inequality virtually disappears.
The American's guest columnist, Heather Wilhelm, has written a lengthy profile of the author of that study, Christian Brody, and his work. Here are some of the more fascinating take aways with especially relevant sections bolded:
In their newest study, Broda and Romalis contend that inequality has actually grown very little over the last decade. According to their research, the perceived rise in inequality—accepted as gospel by many economists and political figures—comes down to a simple measurement error, namely, focusing only on income, rather than on the prices of goods that particular groups consume.
“We are underestimating the gains from trade,” Broda says. “The current statistical interpretation ignores the fact that a poor household today can access goods that, in the 1960s, they could not—microwaves, DVDs—and, more importantly, that the prices of the staples that lower-income households consume have also gone down dramatically.”
Indeed, he claims that lower-income Americans, who tend to spend more on certain goods, have made impressive strides over the past decade, thanks largely to U.S. trade with China.
The Broda-Romalis paper, “Inequality and Prices: Does China Benefit the Poor in America?,” shows that from 1994 to 2005, much of the increase in U.S. income inequality was actually offset by a decline in the price index of the goods that poorer households consume. Inflation for the richest 10 percent of U.S. households, which tend to spend more on services, was 6 percent higher than inflation for the poorest 10 percent, which tend to spend more on nondurable goods, the type of goods often imported from China and sold at Wal-Mart.
Broda and Romalis found that in the sectors where Chinese imports have increased the most (especially nondurable goods such as canned food and clothing), prices have fallen dramatically. They estimate that about one-third of the price decline for the poor is directly associated with rising imports from China. “In the sectors where there is no Chinese presence,” Broda says, “inflation has been more than 20 percent.”
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