What is Socialism?

One of history's most important economists, Ludwig von Mises, writes in In Human Action: A Treatise on Economics about two patterns of socialism:

"There are two patterns for the realization of socialism. The first pattern (we may call it the Lenin or the Russian pattern) is purely bureaucratic. All plants, shops, and farms are formally nationalized (verstaatlicht); they are departments of the government operated by civil servants. Every unit of the apparatus of production stands in the same relation to the superior central organization as does a local post office to the office of the postmaster general.

The second pattern (we may call it the Hindenburg or German pattern) nominally and seemingly preserves private ownership of the means of production and keeps the appearance of ordinary markets, prices, wages, and interest rates. There are, however, no longer entrepreneurs, but only shop managers (Betriebsführer in the terminology of the Nazi legislation). These shop managers are seemingly instrumental in the conduct of the enterprises entrusted to them; they buy and sell, hire and discharge workers and remunerate their services, contract debts and pay interest and amortization. But in all their activities they are bound to obey unconditionally the orders issued by the government's supreme office of production management. This office (The Reichswirtschaftsministerium in Nazi Germany) tells the shop managers what and how to produce, at what prices and from [p. 718] whom to buy, at what prices and to whom to sell. It assigns every worker to his job and fixes his wages. It decrees to whom and on what terms the capitalists must entrust their funds. Market exchange is merely a sham. All the wages, prices, and interest rates are fixed by the government; they are wages, prices, and interest rates in appearance only; in fact they are merely quantitative terms in the government's orders determining each citizen's job, income, consumption, and standard of living. The government directs all production activities. The shop managers are subject to the government, not the consumers' demand and the market's price structure. This is socialism under the outward guise of the terminology of capitalism. Some labels of the capitalistic market economy are retained, but they signify something entirely different from what they mean in the market economy.

It is necessary to point out this fact in order to prevent a confusion of socialism and interventionism."

Mises goes on to elaborate on this confusion:

"The system of interventionism or of the hampered market economy differs from the German pattern of socialism by the very fact that it is still a market economy....these are isolated acts of intervention. It is not the aim of the government to combine them into an integrated system which determines all prices, wages and interest rates and thus places full control of production and consumption into the hands of the authorities."

Politicians among the right and the left will often obfuscate policy debates by confusing or modifying these terms.

Vaccines and the Knowledge Problem

 Below is an excerpt from the blog Marginal Revolution:

"Northam’s health department has also forbidden people from crossing county lines to get the vaccine. If the county next to you has an abundance of the vaccine, you can’t get it. Only residents of that county may get their vaccine.These new rules will result in many people either having their vaccination appointment canceled or delayed for months." 

https://marginalrevolution.com/marginalrevolution/2021/01/our-virginia-regulatory-state-is-failing-us.html 

Vaccination clearly represents a public good and arguably falls within one of the legitimate roles of government. That means socially planned vaccine distribution. Chic-fil-A knows how to distribute chicken sandwiches efficiently through their drive through during a once in a hundred year pandemic, but government bureaucrats do not (and fundamentally can not! ) know how to distribute vaccines during a once in a hundred year pandemic.

Socially planned vaccination will demonstrate all of the key characteristics of social planning and socially planned economies: delays, shortages, excess, waste, abuse, arbitrary rules etc. This is NOT a partisan anti-government rant, or even a subjective personal point of view. It is an objective quality of bureaucratic decision making that no economist can deny. It's as much the nature of social planning as it is the nature of dogs to bark.

Socialism Can't Calculate

At the root of these unfortunate consequences is what economist Frederick Hayek characterized as the knowledge problem. Governments allocate resources in a fundamentally different way than individuals do in through the price system. The result is a well coordinated spontaneous order guided by prices that reflect tradeoffs based on the knowledge and preferences of millions of individual decision makers. Governments (via democratic processes and social planning) allocate resources based on the limited knowledge and preferences of a few voters, elected officials, or appointed bureaucrats. The fundamental problem facing all forms of government including democracies is that centralized decision makers never have enough information or proper incentives to act on the information at hand. That's the knowledge problem. Its not just a problem for governments, its also one of the biggest challenges faced by firms too.

Socially planned economies could never achieve the level of knowledge coordination required to give us things we take for granted today like smart phones:

   

 Or even something as simple and basic as pencils:

   

So What is the Answer? Federalism.

The fact remains that vaccination is still a public good and falls squarely and solidly within the scope of government decision making. Operation Warp Speed is a great example of how the national government can achieve some success in this space. By incentivizing production and largely getting out of the way from a regulatory perspective the national government was actually able to facilitate ways for private firms to step in and solve the knowledge problem related to vaccine discovery and production. These kinds of public private partnerships are a model for at least reducing the information loss associated with social planning writ large.

So we are forced into a socially planned vaccination effort. The good news, in the United States at least, instead of putting everything at risk with a single national plan, we get 50 chances to get it right, one in each state. While no one state will be able to necessarily avoid the knowledge problem, some may do better than others and we can learn from successes and failures getting closer to an approximation of the feedback mechanisms provided by the price system. This is one of the strongest arguments for our constitutional republic and federalism that our founders envisioned. 

By flirting with the nirvana fallacy and we might claim that a single national plan would be better than 50 different inconsistent plans - especially if some states prove incompetent. While we might argue that one set of planners (or administration) at the national level could get better results than another (enter political partisanship) that doesn't change the fundamental nature of the knowledge problem. Maybe there are economies of scale that the national government can realize, or maybe it has access to better resources or leadership with more expertise. Would these gains make up for what is lost in the local knowledge that states and counties have that the federal government could never grasp? Devolve as much decision making as possible to the most local level possible. Cooperation between national government, private enterprise, and local initiatives is probably the better answer. In fact, the current approach of the federal government incentivizing the development and purchasing a large supply of vaccines while allowing the states to distribute according to their own plans is consistent with this federalist approach.

Diversification is our best hedge against the the many risks of socially planned decision making. And it's probably the greatest reason our system of government has been able to tolerate a mixed economy as well as it has the last 50 years or so. 

Milton Friedman said: 

"the ballot box produces conformity without unanimity, the marketplace produces unanimity without conformity."

Our experience with a socially planned vaccination effort should provide teachable moments we can point back to in the future when politicians propose planning other aspects of our economy that aren't necessarily national emergencies or public goods. We don't want to introduce unnecessary fragility into our lives by creating unnecessary dependencies on plans whose relative failure or success has to rely on who's in charge. 

Note: In no way should any point above be used as an argument to undermine the effort to vaccinate the public at large.  This is not intended to be a criticism of the current vaccine effort or government. In fact the current approach is largely consistent with the ideals of federalism discussed above. This essay is meant to be totally descriptive and comparative. Getting to 70% + herd immunity is vital to fighting the pandemic. It's a huge public good and every effort by state, federal, and local government agencies and private institutions and individuals deserve great applause. We cannot expect to hold the performance of socially planned efforts against the standards of the price system in terms of their relative ability to solve the knowledge problem. The above is not an attempt to do so, but to illustrate the fundamental differences in resource allocation under a system of social planning compared to the price system. The distribution of vaccines provides a palpable illustration. Neither should this in any way imply that government employees and bureaucrats are incompetent. Everyone responds to incentives. The issue is incentive alignment.

Reference:

The Use of Knowledge in Society. F.A. Hayek. The American Economic Review Vol 35 No 4 (Sept 1945) p. 519-530

More about markets and the knowledge problem:

Models and Assumptions: Efficient Markets, Imperfect Information, Rationality, and Prices 

Economics, Evidence, and High Causal Density

 

 Related:

The use of knowledge in disaster relief: http://www.independent.org/publications/tir/article.asp?a=628

The Government's Response to Hurricane Katrina- A Public Choice Analysis: http://www.peterleeson.com/hurricane_katrina.pdf

Does the Median Voter Theorem Hold Up in the Current Political Climate?

If anything, divisiveness and polarization would describe recent politics (2016-2020). This has made me question my understanding of what's known in public choice as the median voter theorem (MVT). In a post a few years back I wrote the following about the MVT:

"....the median point of the preference distribution will elicit the most votes. Only those laws or candidates with a centrist twist will get the majority of the votes. Only those voters with centrist views will be happy, and it makes it very difficult for candidates to be elected if they want to bring about major reforms. This phenomenon is referred to as the ‘median voter theorem."

Similarly, in his primer article on public choice theory, Pierre Lemieux describes the MVT:

"a simple majority vote will be the ideal (or most favored) alternative that is at the median point of the preference distribution....This explains why, especially in two-party systems, political platforms are so similar"

This was probably my first reading about the MVT, and given the politics of the early 2000s it made sense and led me to believe American politics would most always produce 'moderate' candidates. Others seem to have made similar interpretations about the MVT producing moderates as winners of elections. Economist David Henderson writes in 2017:

"If the Democrats go far to the left of the median voter, what’s the Republicans’ best response if their goal is to win? It’s to go further left themselves"

Economist Tyler Cowen writes in the NYT a few years earlier in 2010:

"Any politician who strays too far from voters at the philosophical center will soon be out of office....In fact, there is a dynamic that pushes politicians to embrace the preferences of the typical or “median” voter, who sits squarely in the middle of public opinion. A significant move to either the left or the right would open the door for a rival to take a more moderate stance, win the next election and change the agenda."

In 2011 when I wrote my post, this all made sense. But recent events leave me with a number of questions about the MVT. Can the MVT explain political candidates as different as Donald Trump and Bernie Sanders? Or even Joe Biden for that matter? How different are voter preferences from the preferences of citizens in general? Are preference distributions bimodal? Maybe within each party the MVT holds but it breaks down at a national level if distributions are bimodal? 

In his piece, Tyler Cowen definitely helps remind us that the MVT has its limitations, and maybe recent politics are testing those limitations:

"Of course, the median voter theorem is far from a complete explanation of politics. Sometimes politicians lead public opinion and talk voters into accepting new ideas, as when President Bill Clinton promoted Nafta. And voters often favor conflicting or contradictory policies, like wanting to pull troops out of Iraq but also not wanting Iraq to explode into chaos."

I have not taken any deep dives in the recent literature, but I found a very insightful post on the London School of Economics blog post written by Richard Bronk. It seems to get to some of the questions I have had recently.

Why have moderate candidates been losing support (and elections)?

"When the financialised version of global capitalism enabled by this consensus ended in the financial crash of 2008 and long years of rising inequality and insecurity, voters were primed to look for radical alternatives to the status quo. Parties pursuing a median-voter strategy – along with the main institutions of the state and most market participants – were locked into what Wade Jacoby and I have called an ‘analytical monoculture’ that left them blind to problems that are not articulated in the language of standard economics and risk management."

How or why might the median voter strategy have failed?

"Only when all elements of the political centre had failed to address their concerns did electors risk voting for ‘anti-system’ alternatives"...[the MVT] assumed that political preferences could be placed on a single continuum (and that disparate underlying values could be converted to a single scale), so that governments could satisfy the preferences of a simple majority of the people and calculate the optimum set of policy trade-offs....[the MVT] underestimated how contested and unstable are the trade-offs between different goals – such as freedom and security, efficiency and equality, medical health and economic growth. There is no one right and rational set of trade-offs for an individual or society"

Is all lost in American (and global) politics? Not necessarily. We could see a return to moderation:

"it may follow that, as anti-system (and often populist) governments are in turn seen to flounder in their management of crises, anti-incumbency may work against the new players themselves.....Voters have noticed that what works to win electoral campaigns does not necessarily solve practical policy problems..."

If any economist might have ideas about how to handle social dilemmas, it would be Elinor Ostrom:

"crisis fatigue may cause voters to shun grand solutions with unknowable consequences and prefer the sort of incremental reform traditionally associated with moderate political parties of left and right. Uncertainty may also increase the voter appeal of the decentralised and ‘polycentric’ approach that Elinor Ostrom argued has the best chance of tackling urgent shared problems – by encouraging diverse experiments in living that engage and involve ordinary voters."

Additional References:

While they do not discuss the median voter theorem, David Beckworth discusses the possibilities of federalism for healing the nations divisive politics with David French: https://macromusings.libsyn.com/david-french-on-political-polarization-in-america-and-its-impact-on-the-2020-elections

Externalities, Coase, Ostrom & Demsetz http://economicsprinciplesandapplications.blogspot.com/2013/03/externalities-coase-ostrom-demsetz.html 

Public Choice Theory. http://economicsprinciplesandapplications.blogspot.com/2011/05/public-choice-theory.html 

Lemieux, Pierre, The Public Choice Revolution. Available at SSRN: https://ssrn.com/abstract=604046 

The Knowledge Problem in Firms

Micromanagement and many of the coordination and alignment problems within firms are actually manifestations of what Hayek characterized as the knowledge problem and was his major and most damning criticism of socialism. It's a limitation of planning and bureaucracy in general and applies to both profit and non-profit organizations. You could characterize Hayek's concept of firms as being 'little islands of socialism in a sea of markets.' The only saving grace for firms is that because bureaucracy and management don't scale so well in the long run the limits of irrationally are eventually tested by the external pressures of the price system which in a capitalist economy results in profit and loss, reorganizations, mergers, or bankruptcies. Creative destruction. Non-profits and government institutions have to rely on other kinds of institutional arrangements to work through these frictions. Better leadership and institutional arrangements can make things better but will ever only go so far solving the knowledge problem. 

Going to Bat for the Constitution

 In the Feb 4, 2013 EconTalk podcast Russ Roberts discusses the constitution with Louis Michael Seidman. Both agree on a really important observation about how we approach the constitution and originalism in practice in the United States:

"if you look at how the Supreme Court settles disputes about political morality in our country today, there's very little that ties that, or nothing that ties that to the Constitution. So, really, the important decisions, like the decision outlawing segregated schools or creating an abortion right or limiting affirmative action or protecting the rights of gay men and lesbians, those decisions have basically no grounding in the Constitution. They are some combination of the Justices' views of political morality, their views of our traditions, their interpretation of their own prior precedents; and if we are going to have a body act like that, I think we need to be honest with the American people and come clean and make clear that that's what it's doing."

That is a good point. Originalism in general is based on the idea that the constitution sets a floor or boundary around the powers of the government. Laws should be interpreted and applied under this view based on the the meaning of the text, as understood by the authors when discernible. Seidman argues in so many ways that this is moot, we aren't doing this now and never strictly did so from the very beginning, so why should we begin to do so today? Why should we pretend to hold ourselves to limits set by our founders some 250 years ago who would have known little about the world we live in today?

At risk of oversimplifying both an originalist view and Siedman's position I'll propose a fable. Suppose in a simple world a government writes a constitution and they only a few clauses. One clause relates to a single law. It states that they will have a speed limit set at 25 miles per hour. The second clause states that this law can be changed with a 4/5 majority of the legislative body or something like that. Now suppose over time it was largely ignored and was never really enforced, no fines no penalties etc.  People just drove at their own whim as fast or slow as they wanted. This seems to parallel loosely the world both Russ Roberts and Seidman agree exists today. 

Now suppose the day comes when a new regime starts a new initiative clocking speeders. A law enforcement officer tickets someone at 70 mph and they end up in court. The textual originalists might argue that according to our written law, this was a clear violation and the speeder should pay the fine. 

However, the legal advocates for the speeder argue that when that law was written few people owned automobiles and most cars were not capable of such excessive speeds on a normal basis especially given the state of the roads at the time. Their argument is that the case should be dismissed based on the view that laws should be interpreted with a more expansive, dynamic, evolving perspective and interpreted in light of changing social and political circumstances. The originalists push back in their opinion, recognizing that society has changed, and maybe 25 mph is no longer a reasonable standard, but it is the role of policy makers, not the court to update this law through the appropriate governing channels (the 2nd clause in our fictional constitution). 

Suppose the defendant wins and in its ruling the court states that speeds up to 70 mph are okay. The government could then post new signs with new speed limits. Citizens and law enforcement can be confident about the laws new meaning and the penalties involved.

Suppose the prosecution wins, and maintains the 25 mph speed limit. After much debate and pressure from voters policy makers go through the channels necessary to vote to change the law so that the new speed limit is 70 mph. 

One might argue, what's the difference if we get the same result? Critics of originalism might argue that its much more pragmatic and expedient to change outdated laws through the court system, because going through the necessary channels may be too time consuming and intensive. Going through the proper channels creates a sluggish and nonreactive government artificially constrained by ideals that may be outdated and irrelevant to current circumstances. 

But this oversimplified fable illustrates perfectly that focusing on the policy outcome completely misses  a much more important question. The most important question is not about policy, or about how time consuming or difficult it is to make policy. Or how much society has or has not changed. And while it is absolutely important to think about the incentives created by decisions and the consequences, there is still a more important question. The most important question is about who makes these decisions. Who is in the better position to recognize that society has changed and we need new laws? Is it the role of unelected judges to make these decisions? Do we send our judges to the bench to go to bat for the policies we like and pitch against the policies we find appalling? Do we really want to leave such important decisions up to an elite bench of unelected jurors that will always have a much more limited pool of knowledge and preferences than the population at large? Or do we send judges to the bench to go to bat for the constitution? 

In Judicial Activism Reconsidered, Economist Thomas Sowell describes our Constitution this way:

“The federal Constitution is "the supreme law of the land," not because it is more moral than state constitutions or state or federal legislative enactments, but because it represents a larger and more enduring majority.Minorities receive their constitutional rights from that enduring majority to which transient majorities bow, not from whatever abstract moral rights are imagined to exist as a brooding omnipresence in the sky.”

Letting judges decide policy represents a transfer of power away from the people. It is undeniably undemocratic. It may certainly seem more expedient to bring about change through the courts but this does not come without serous tradeoffs. Once we start making heroic interpretations of the meanings of words in the constitution it is weakened, and minorities are forced to give up their liberties to whatever transient majority takes power (either in the legislature or as appointed to the court). The short term gain from being able to bypass the amendment process (and shunning consent of the governed) in order to pass some much needed legislation to help some worthy cause comes at a long term cost to our liberty and national well being. This increases the incentives and opens the door for large corporations and special interests to influence our lawmakers, and provides the means for ever more concentration of power and the entrenchment of social classes. While the incentives created by an individual decision are important, we must think more globally about the incentives created when the courts are governed by a philosophy that favors policy making. Elections and politics become more divisive as more and more social norms are being set  by policy at the federal level by both 'conservatives' and 'progressives.' As Pierre Lemieux states in his article The Public Choice Revolution:

“The entire federal budget,” writes Mueller, “can be viewed as a gigantic rent up for grabs for those who can exert the most political muscle.”

Letting judges 'decide' also makes supreme court nominations the circus they have become. Hearings become opportunities to score political points as each party sends their nominees to bat for the policies most aligned with their base. Letting judges decide based on the whims of an ever changing political climate can further lead to bad precedent challenging the doctrine of stare decisis when questions of constitutionality would require overturning previous decisions.

Reforming the Way We View the Courts

We may hear a lot about judicial reform but just as important is reforming the way the public actually views the courts. One of the greatest mistakes by the left and the right is attempting to set social norms at the national level instead of local levels of government where consent is more easily ascertained. The constitution represents the social compact that we as a society agree to live by until it is changed. Until we are able to give it proper deference with regard to policy and our view of the role of the courts, we will not be able to achieve any meaningful reform and the courts as well as the judicial nomination process itself will remain in chaos subject to the changing whims of political climate.

Viewing the constitution as a 'living' document makes supreme court nominations and elections much more contentious and contributes to the increasingly divisive climate we have seen in society over the years. When circumstances arise, we can always escalate policy decisions to the federal level via the amendment process. This allows ultimate flexibility and breathes new life into the constitution. In this sense, it can be viewed as a living document. 

Perhaps there is an argument to be made about having justices on the benches with a diversity of philosophies. Doug Linder makes the point that a court without dissenters is a Court that will not adequately inform us of the costs of and consequences of different rulings. This would certainly be an argument against extreme measures like court packing. If there is an argument for expanding the number of seats on the court, then we should do it in a way that in a worst case achieves some sort of balance of judicial philosophies and possibly a larger pool of justices that rotate on and off the bench in a way to maintain balance.

Finally, we should stop referring to justices as either 'conservative' or 'liberal.' While used in their proper context these terms are meant to refer to an originalist or non-originalist judicial philosophy. But more commonly they give the impression that a justice will decide cases based on the political philosophy closely related to that of the president that may have nominated her. Continuing to refer to justices as 'conservative' or 'liberal' perpetuates the misunderstanding that judges are in a position to make policy decisions and not interpret statute or apply the constitution.

References:

Regulation, vol. 27, no. 3, The Public Choice Revolution. Pierre Lemieux.

Judicial Activism Reconsidered. Thomas Sowell. 1989

Economics, Evidence, and High Causal Density

How do we form our beliefs about the solutions to societies most complex problems? Do we trust data? Theory? Both? What does it mean to base policy on science and evidence?

According to Manski:

"Social scientists and policymakers alike seem driven to draw sharp conclusions, even when these can be generated only by imposing much stronger assumptions than can be defended. We need to develop a greater tolerance for ambiguity. We must face up to the fact that we cannot answer all of the questions that we ask."

I think Russ Roberts puts it well in his EconTalk Episode with Noah Smith:

"Can you think of a study that was so decisively performed in terms of the crossing of t's and dotting of i's that the identification and all the econometric challenges were met with such impressiveness that people on the other side of the debate had to throw up their hands and say, 'Well, I guess I was wrong. I've got to change my view.' Because I can't think of one. I can't think of one. And if that's true, then I would suggest that economics has some serious problems in claiming it's a science."

When it comes to evidence there are lots of challenges. For the most part, in economics and the social sciences it's often impossible to implement randomized controlled trials to identify treatment effects related to policy changes. For the most part we have to leverage observational data using quasi-experimental designs. The challenge for both approaches as Jim Manzi discusses in his book ''Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics, and Society'  is the issue of 'high causal density.'

In an environment of high causal density "the number of causes of variation in outcomes is enormous, and each has significant potential effects compared with those of the potential cause of interest. We don't know enough to list each of them and hold them constant, but if we randomly assign patients to the test and control groups, then these hidden conditionals won't confound our estimate of treatment causality."

Unfortunately in the social sciences, causal pathways are extremely complex. There are always hidden conditionals we may not be able to measure or don't have sufficient knowledge to even consider. Given that hidden conditionals are always present, a well entrenched proponent of a given policy can always find a reason to explain why it has failed to prove itself out in the face of evidence.

But Jim does more than offer criticisms of theory and methods. He introduces the concept of 'Liberty as Means.'  Embracing the concepts of evolutionary economics, he promotes a flexible system of government that sounds a lot like federalism. As he discusses, the mistake we often see from both the right and the left is enforcement of social norms at the national level vs. fostering numerous experiments at the local level.

While economic theory and applied econometrics are useful and powerful tools for policy analysis,  these tools will not necessarily help provide clear cut  always defensible evidence to improve public policy. These methods will never discover a 'Polio vaccine' for policy. It is in fact their shortcomings that provide the strongest argument for our constitutional republic and federalism that our founders envisioned.

Reference: Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics, and Society, by Jim Manzi https://www.amazon.com/Uncontrolled-Surprising-Trial---Error-Business/dp/046502324X/ 

See also: EconTalk: Manzi on Knowledge, Policy, and Uncontrolled

*this is cross posted at: https://ageconomist.blogspot.com/2019/01/economics-evidence-and-high-causal.html?m=0 

Trade, Jobs, and Political and Economic Disruption

 Two podcasts I listen to often include EconTalk with Russ Roberts, and Masters in Business, with Barry Ritholtz. No one could have called the election based on these episodes, and none of the guests  made any projections about it specifically, but each of the these guests below discuss issues that could have been informative about what's been going on in the minds of the electorate. And why non-conventional candidates like Bernie Sanders and Donald Trump had so much appeal. They also question conventional wisdom about the distributional effects of comparative advantage and free trade.

In a past podcast, just over a year ago, Gary Shilling offers some interesting thoughts on trade:(paraphrasing not quoting).

Basically globalization has led to income polarization, with 8 years of zero to no real income growth for a segment of the population and this frustration has been expressed politically through Bernie Sanders and Donald Trump. With regard to Trump, when you strip away the blustering, he may actually be more like an old school centrist politician. When you take the impacts of globalization, the recession, and the slow recovery, conventional politicians don't know how to react. 

I think this is the kind of environment in which it was possible for the 'blue wall' on the electoral map to crumble.

More recently, Aswath Damodaran touches on this: (again paraphrasing)

Brexit should be a warning sign that we've lost perspective. In the aggregate, trade and globalization can be good for the country, but the 55 year old steel worker in Pennsylvania gets little consolation out of the fact that free trade is going to create more world wealth when he says where the heck am I going to get my paycheck next month. 

"We are paying a price for almost deliberate blindness in the financial capitals of the world to the kind of costs that are being created sometimes."

Again this echoes Shilling above. In his paper, "The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade", David Autor takes a very detailed look at these issues and investigates them empirically. David was guest this past year on EconTalk with Russ Roberts. Some highlights:

• one of the standard arguments for free trade and globalization is that it makes the pie bigger, and sometimes the story sounds like some people get larger slices than others, but everyone gets a bigger slice, so on the net everyone is better off. 
• Another way of thinking about this is that trade increases aggregate wealth, and this increase more than offsets the losses for those that are displaced in the labor force.
• Autor points out that yes, gains can offset losses, but the gains are going to different people
• Example: sure consumers gain by saving 5 cents on the broom they buy at Wal-Mart, and if you add up all of those nickels its more than the total losses for people whose lives are ruined.
• But this is little consolation to those whose lives are ruined, it takes years to find alternative opportunities and often at a fraction of the salary they earned before
• In the past, maybe these distributional effects were of less concern because trade largely reflected differences in comparative advantage across different types of manufacturing- for example maybe we would lose jobs manufacturing electronics but make up for it with other jobs building tractors-And balanced trade resulted
• In the past, skillsets were much more congruent across different industries with changing comparative advantages- i.e. it was not extremely difficult to move from manufacturing one good to another if your former job was displaced by trade
• More recently, with globalization, things changed. Instead of reallocating across sectors of manufacturing, countries like China just supplanted manufacturing on a much larger scale. And instead of paying for imports with different exports for which we had a comparative advantage we ran trade deficits (of course with surpluses in capital accounts)
• However, the kinds of investments being made with the new wealth created by global trade are in areas and sectors where skills are not congruent for many workers supplanted by the trade outcomes
• Ultimately we have experienced a sharp decline in demand for labor that has been contractionary

Hence this is the 'stagnation' in real wage growth that so many have been talking about. Could it also be why conventional stimulus and monetary policy has not really moved the needle in terms of economic growth? Is this because our comparative advantage is in services, technology, marketing, research, and engineering and these sectors are not soaking up the excess labor freed up when manufacturers shut down or relocate overseas?

The conventional wisdom has always been with trade, labor and resources that were once tied up in lower valued uses are reallocated to higher valued uses creating more wealth making everyone better off. But Autor is arguing that this just isn't happening or is taking too long. Maybe its the next generation or two that reaps the rewards. But not necessarily. If you've got a good gig and lose it, you may end up living in an area with bad schools, or may not have the resources to provide your children or the next generation with the education and training required to take advantage of the new economy jobs where the gains more than offset the losses from globalization. 

This also makes me wonder...supply side policies designed to promote economic growth and  aggregate wealth (under the terrible misnomer 'trickle down economics' ) might not work quite as well as they used to either given the structural environment depicted by Autor in his paper. But that probably goes the same for fiscal stimulus related to infrastructure. It might boost those sectors related to construction, but the traditional multiplier working its way through manufacturing and labor demand just likely won't work the way the Keynesians believed it would 30 years ago. 

So what is the answer? Surely a world with trade is in aggregate better than one without. Does this mean renegotiating NAFTA? Should we put the brakes on future globalization and phase in tariffs and trade restrictions and slowly fade them out so that sectors can readjust over a few generations? (things Donald Trump may seem in favor of) Or more aggressive and progressive policies called for  to provide a soft landing for those future displaced?  Some combination?  This gets to more spending on a number of programs, healthcare, and education. (things Hillary Clinton would have supported)

I'm not sure what the answer is after considering the incentive effects and the impacts for long term economic growth and development. Not to mention government spending. However, it was the lack of policy response to these questions that made this past election what it was. 

References:

"The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade," by David H. Autor, David Dorn, and Gordon H. Hanson. National Bureau of Economic Research Working Paper, January 2016.