Weekly Geopolitical Report – Reflections on Trade: Part IV (May 22, 2017)

by Bill O’Grady

(Due to the Memorial Day holiday, our next report will be published on June 5.)

This is the final report of our four-part series on trade.  This week, our discussion on trade continues with a look at the relationship between trade, employment and inflation.  We will also conclude the series with market ramifications.

What are the tradeoffs of trade?
Trade is part of a broader societal tradeoff between equality and efficiency.[1]  To function, societies need some degree of both.  Nations with a high level of inequality tend to become politically unstable.  At the same time, perfect equality tends to stifle initiative and prevent the building of productive capacity.  Efficiency helps an economy provide goods and services at reasonable costs.  Complete inefficiency makes everyone poor.

Okun’s insight is that societies balance equality and efficiency to maintain order.  What we observe in history is that there doesn’t appear to be a balance point; in other words, this isn’t an optimization problem.  Instead, we see broad periods of oscillation where one goal or the other is waxing or waning.

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[1] Okun, A. (1972). Equality and Efficiency: The Big Tradeoff. Washington, D.C.: Brookings Institute.