Greenspan's Inequality Fix: Free Trade for Lawyers and Doctors

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Tell you one thing, Alan Greenspan is way more fun now that he's no longer helming the Federal Reserve. One day he's telling rapt audiences that a recession is possible–helping roil global financial markets in the process–the next day he's actually giving odds. (About 33 percent, if you're keeping track.)

Then there are these comments on solving perceived income inequality offered up by The Maestro at the Treasury Department's competitiveness conference earlier this week. Greenspan's solution to America's wage disparity is thus: "Our skilled wages are higher than anywhere in the world. If we open up a significant window for skilled workers, that would suppress the skilled-wage level and end the concentration of income."

Now this may seem like a wacky solution, but if you are a free trader, it makes sense. After all, less-skilled and less-educated workers, primarily in the manufacturing industry, have been subjected to direct competition with lower-paid workers overseas. In return, the United States has received less-expensive goods at big box stores like Wal-Mart and Costco. (Eventually, of course, displaced workers should be retrained for higher-value-added work.)

Likewise, liberalizing trade for professional services–such as medicine and law–might not only suppress the dramatic income increases in those professions, as Greenspan suggests, but also make them more affordable. As economist Dean Baker, co-director of the Center for Economic and Policy Research, writes in The Conservative Nanny State:

"Trade pacts have done little or nothing to remove the extensive licensing and professional barriers that prevent foreign doctors, lawyers, economists, and journalists from competing on an equal footing with their counterparts in the United States ... If U.S. trade negotiators approached the highly paid professions in the same way they approached the auto industry ... they would also be asking the trade negotiators from Mexico, India, or China what obstacles prevent them from sending hundreds of thousands of highly skilled professionals to the United States ...
In fact, the exact opposite happens. In 1997, Congress tightened the licensing rules for foreign doctors entering the country because of concerns by the American Medical Association and other doctors' organizations that the inflow of foreign doctors was driving down their salaries. As a result, the number of foreign medical residents allowed to enter the country each year was cut in half.
... If free trade in physicians brought doctors' salaries down to European levels, the savings would be close to $100,000 per doctor, approximately $80 billion a year. This is 10 times as large as standard estimates of the gains from NAFTA."

And just think of the productivity benefits to the American economy if all those generations of future lawyers instead became engineers or industrial designers or some such. Of course, not everyone is thrilled with this possible solution. Here is what Mark Krikorian, executive director of the Center for Immigration Studies had to say about Greenspan's solution in The Corner, National Review magazine's group blog today:

"So, what's [Greenspan's] solution? Flood the skilled labor market with immigrants! You see, since immigration lowers wages, massive importation of skilled workers would drive down their wages and, presto, no more income gap! In his words ... Anyone want to run for office on that platform? Anyone? Anyone? Instead, how about reducing inequality by cutting immigration overall, so we stop flooding the low-skilled labor market, and let blue-collar wages increase? Think that would be a better way to shore up political support for capitalism among the poor?"