Thursday, January 4, 2018

Optimistic Leftist Book Club: Straight Talk on Trade by Dani Rodrik

The Optimistic Leftist Book Club isn't much of club (I'm the only member!) but I thought I'd start sharing some particularly fine recent reads. Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik is a must-read if you want to get your head on straight about where our economic world is headed--and how we might be able to make it better.

Rodrik is a good, clear writer who never lets economic jargon substitute for explanation when he's analyzing economic problems and trends. His general stance is heterodox though in the sense of eschewing dogmatic interpretations of neoclassical economics and prizing methodological flexibility, rather than, say, being a proponent of Modern Monetary Theory. He first came to attention back in 1997 with his refusal to sign up to the "Washington Consensus" that completely open economies and the free movement of capital was the key to prosperity for all developing countries. Rodrik pointed out that this approach was not supported by the data and reflected more a commitment to a selective set or economic principles--really dogmas--than to finding what works for individual countries (these views are nicely-summarized in his 2007 book, One Economics, Many Recipes). 

Rodrik continues to research and write widely on the problems of the global economy, including the connection between these problems and recent rise of populism. The Straight Talk book contains much useful material along these lines since it is based partly on a long-running series of columns for Project Syndicate where he has repeatedly grappled with populism and other hot contemporary issues. For example, here's Rodrik on why working class voters might vote against what appears to be their economic self-interest :
Many elites are puzzled about why poor or working-class people would vote for someone like Trump. After all, the professed economic policies of Hillary Clinton would in all likelihood have proved more favorable to them. To explain the apparent paradox, they cite these voters’ ignorance, irrationality, or racism.
But there is another explanation, one that is fully consistent with rationality and self-interest. When mainstream politicians lose their credibility, it is natural for voters to discount the promises they make. Voters are more likely to be attracted to candidates who have anti-establishment credentials and can safely be expected to depart from prevailing policies.
In the language of economists, centrist politicians face a problem of asymmetric information. They claim to be reformers, but why should voters believe leaders who appear no different from the previous crop of politicians who oversold them the gains from globalization and pooh-poohed their grievances?
In Clinton’s case, her close association with the globalist mainstream of the Democratic Party and close ties with the financial sector clearly compounded the problem. Her campaign promised fair trade deals and disavowed support for the Trans-Pacific Partnership (TPP), but was her heart really in it? After all, when she was US Secretary of State, she had strongly backed the TPP.
This is what economists call a pooling equilibrium. Conventional and reformist politicians look alike and hence elicit the same response from much of the electorate. They lose votes to the populists and demagogues whose promises to shake up the system are more credible.
Framing the challenge as a problem of asymmetric information also hints at a solution. A pooling equilibrium can be disrupted if reformist politicians can “signal” to voters his or her “true type.”
Signaling has a specific meaning in this context. It means engaging in costly behavior that is sufficiently extreme that a conventional politician would never want to emulate it, yet not so extreme that it would turn the reformer into a populist and defeat the purpose. For someone like Hillary Clinton, assuming her conversion was real, it could have meant announcing she would no longer take a dime from Wall Street or would not sign another trade agreement if elected.
In other words, centrist politicians who want to steal the demagogues’ thunder have to tread a very narrow path. If fashioning such a path sounds difficult, it is indicative of the magnitude of the challenge these politicians face. Meeting it will likely require new faces and younger politicians, not tainted with the globalist, market fundamentalist views of their predecessors.
It will also require forthright acknowledgement that pursuing the national interest is what politicians are elected to do. And this implies a willingness to attack many of the establishment’s sacred cows – particularly the free rein given to financial institutions, the bias toward austerity policies, the jaundiced view of government’s role in the economy, the unhindered movement of capital around the world, and the fetishization of international trade.
I always find Rodrik's views refreshing....and highly educational! Pick up the book if you can. Bonus: John Judis recently conducted a very nice, lengthy interview with Rodrik that showcases many of his most interesting perspectives.  

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