The Lamppost Theory dominates economic policy-making: Politicians use economics the way a drunk uses a lamppost — for support, not for illumination. Perhaps the best illustration of the theory is the headlines these days: the starkly different economic versus political attitudes toward international trade.
Adam Smith and David Ricardo explained centuries ago why trade across national borders generally benefits all nations — though not every person in every nation. Since then, the arc of history has generally bent toward freer trade, though with numerous bumps and reversals along the way.
Then along came Donald Trump, and a big reversal. He pulled us out of the Trans-Pacific Partnership (or are we going back in?), insisted on rewriting NAFTA, and may have us on the verge of a trade war (are we?) — all in just 15 months as president. Sad. Even sadder, he has attracted a large following to protectionism. Apparently, we economists never really “sold” the idea of free trade to the public.
Why not? The reasons expose the stark differences between economic and political thinking that underpin the Lamppost Theory.
For openers, ideas that are counterintuitive or complex don’t sell in politics. Because they sound wrong to voters, they carry little appeal to politicians. Ricardo explained 200 years ago that free trade between two countries will provide jobs for workers in both countries even if one country is better at producing everything. But that sounds wrong. And people who have not studied economics don’t believe it.
The problem is compounded by what you might call the (Upton) Sinclair principle: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Businesses and workers with vested interests in limiting foreign competition will argue that their industries deserve protection. Political ears will resonate to such pleas because those who lose from protectionism typically constitute a large but amorphous bunch with no political muscle.
Why? A typical trade liberalization sprinkles small gains — mainly in the form of lower prices — on millions of consumers, where they will fall like a light rain, almost unnoticed. In stark contrast, the industries harmed by foreign competition suffer large, salient losses — more like a thunderstorm. Economists look at this combination, see many more gains than losses, and conclude that freer trade is good for the nation.
Politicians keep score differently. They see trade creating legions of politically dormant winners and a small but determined group of politically active losers. They understand that consumers won’t be moved to political action by paying a little less for what they buy. But the minority of the population that is seriously hurt by trade will be. That makes for an easy political call that’s made even easier because the blame for “unfair trade practices” and much of the losses from any tariffs or quotas on imports can be laid at the doorstep of foreigners. Blaming (and harming) the “other” is politically attractive. They don’t vote in our elections.
Speaking of harm, we Americans don’t do nearly enough to compensate the victims of trade. Here’s the simple logic: If the gains from more open trade exceed the losses, so the nation as a whole comes out ahead, the winners should be able to compensate the losers and still have something left for themselves.
The problem is that, while the arithmetic works, the politics often doesn’t. Who decides who gets compensation? And how much? And in what form? The United States has several Trade Adjustment Assistance programs. But they are small, complicated to access, and focused more on assistance than on adjustment. We need to do better.
Any proposal for a new trade agreement labors under additional political handicaps. Each presents a tempting political target because it is probably large, highly visible, and can be portrayed as a case of “us against them.” People tend to forget that trade across national boundaries is the natural state of affairs. You don’t need trade agreements to get trade. The profit motive will do the job — unless governments interfere. Trade between the United States and China is a marvelous example. The volume of trade is huge, even though we have no trade agreements with the PRC. Yes, we both belong to the World Trade Organization, but so do 162 other countries. And that’s it.
People also forget that more trade is a lot like better technology: You get more for less. In fact, over the broad sweep of history, technology has been one of the biggest drivers of global trade — much more important than, say, trade agreements. Think about innovations like ocean-going ships, containerization, jet cargo planes, and improved telecommunications. Technology facilitates trade. But most ordinary citizens, and therefore their politicians, think of technology and trade as quite different animals. People don’t band together to stop technological progress — as the Luddites did. But people do band together to prevent trade openings — as the mercantilists did.
However, the biggest reason why many people don’t buy the economists’ arguments for free trade may be that we economists take the consumer’s perspective. To our way of thinking, the main purpose of an economic system is to achieve a high standard of material well-being. That means low prices, relative to wages. Opening markets to trade helps achieve that.
But ordinary citizens seem to care more about their roles as producers than as consumers. They care more about their jobs about than the prices they pay at the store. For example, a 2016 Bloomberg poll found 82 percent of Americans saying they “are willing to pay a little more for merchandise that is made in the U.S.,” while only 13 percent “prefer the lowest possible price.”
With attitudes like that, policies that protect domestic firms — and therefore domestic jobs — can be political winners. Modern mercantilists can tout exports as good because they “create jobs” and imports as bad because they “destroy jobs.” That’s very bad economics. But it may be good politics.
Alan S. Blinder is an economics professor at Princeton University. His latest book is “Advice and Dissent: Why America Suffers When Economics and Politics Collide.’’