Relevant and even prescient commentary on news, politics and the economy.

The Road to Hell is Paved With Good Intentions

Reader Jon H. emailed me Tom Friedman’s latest NYT Op/Ed piece, 30 Little Turtles. The editorial is about Indian call centers and what those jobs mean for the Indians who get them. It’s definitely worth reading, but that’s not the point of this post. In my response to Jon’s email, I wrote this (slightly edited for posting):

More generally, I strongly believe that the labor market problems stem from the overall state of the economy, not from outsourcing and free trade. Insofar as protectionism will harm the overall state of economy, and it would, it’s more likely to make things worse, not better.

I think I’ve made this point before, but never so starkly: protectionism will cost, not create, US jobs. This is true irrespective of cross-country asymmetries in labor and social conditions (more to come on this issue).

Now the ubiquitous and important caveat: both trade and technological progress harm specific sectors of the economy while benefiting both the average and the median citizen (and the other deciles too). Thus, it is vitally important to use some of the gains from trade to offset those sectoral losses — as Paul Krugman recently wrote, “free trade is politically viable only if it’s backed by effective job creation measures and a strong domestic social safety net … there’s a reason why the two U.S. presidents who did the most to promote growth in world trade were Franklin Roosevelt and Harry Truman.”

AB

P.S. Brad DeLong recently made roughly the same point:

“… I can and do blame Democratic politicians for not resisting temptation: every day that Americans are told that trade destroys jobs–rather than that it shifts jobs from one industry to another, hopefully from lower-paying to higher-paying–is a day that makes it harder to pursue good policies to enrich America. Blame Bush for failing to take out the obvious insurance against a slack job market–for pursuing tax cuts for the upper class rather than fiscal policies that would provide an effective stimulus to demand and employment. But don’t you dare imply or state that the U.S. would be a richer, more productive, and faster-growing economy if we turned our back on the world market.”

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The Politicization and Bastardization of Science, Continued

Via CalPundit, this news from the WaPo:

President Bush yesterday dismissed two members of his handpicked Council on Bioethics — a scientist and a moral philosopher who had been among the more outspoken advocates for research on human embryo cells.

In their places he appointed three new members, including a doctor who has called for more religion in public life, a political scientist who has spoken out precisely against the research that the dismissed members supported, and another who has written about the immorality of abortion and the “threats of biotechnology.”

Never adjust policy in response to information. Simply pick and choose scientists so as to adapt the information to policy.

AB

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The Other Danger of Protectionism

Typically, if one country engages in protectionism, others will respond in kind. That’s exactly what’s about to happen:

Four years after the WTO ruled against the United States, Congress has still failed to repeal export subsidies, known as the extraterritorial income exclusion, that the trade organization determined to be illegal. The WTO gave the Europeans permission to impose sanctions totaling $4 billion a year, and the EU responded last April with a long list of targets politically sensitive to President Bush, including Florida citrus, Carolina textiles, Wisconsin paper products and iron and steel from Ohio, Pennsylvania and West Virginia.

… The tariffs will start at 5 percent of the products’ value, or an estimated $16.5 million in March, but will climb a percentage point each month that Congress fails to act, Lamy said. That could bring the sanctions to about $315 million for 2004.

.. [European Union Trade Commissioner] Lamy said that by slowly ratcheting up the pain, the EU will “focus the mind on the necessity to repeal.”

With free trade, jobs are lost but the economy overall benefits (however, not every sector benefits — hence the need for programs like wage insurance); prices are also lower, which benefits consumers. With trade wars jobs are also lost, but GDP falls and consumers get to pay more for the goods they buy.

Thanks to mega mike for the link to the story.

AB

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Even the Well-Off Don’t Like Trade These Days

Via Dan Drezner, I see that Tuesday’s USA Today reported that

The poll shows that among Americans making more than $100,000 a year, support for actively promoting more free trade collapsed from 57% to less than half that, 28%.

As Dan says, it’s not so much the direction of the shift among the well off as the magnitude of that shift.

Speaking of trade, wandering through the grocery store today, I noticed that they were selling tax software. This naturally lead me to wonder why it’s viewed as a great thing when people can do their taxes quickly and cheaply using a computer and software, but a bad thing when people can do their taxes quckly and cheaply using Indian accountants. (For more, see Kash’s classic Trade with China as Technological Revolution.)

AB

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Debt Mountain

In a post that relates to Kash’s Monday post on the current accounts deficit, Karsten, a European blogger who follows finance, explains why massive US deficits haven’t lead to soaring interest rates:

As we all know that no saving of note takes place in the US we could assume that most of last years government deficit was financed by foreigners. This assumption is correct – those shifty little foreigners (some of whom even speak foreign languages) bought almost all of the new paper issued by the US Treasury last year. The marketable debt held by the public … increased by around 325$bn last year. Foreigners bought around 290$bn of that (and most of that was snapped up by foreign central banks)!

… A look into the future can be pretty scary: the huge current account deficit means that foreign countries are selling lots of shiny doodads to US consumers and earning dollars from those sales.

If foreigners keep financing the US deficit with those dollars, then interest rates will stay down; likewise, if foreigners buy more US goods then that will be a good thing as well. But what if they simply decide to start selling those dollars (e.g., in anticipation of inflation)? Read the rest of the story. (More generally, if you like finance and investing, you should probably be reading Karsten’s CurryBlog more often.)

AB

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Income Inequality in the US

Following up on AB’s post about how well the wealthiest have done in recent years, here’s a graph showing the share of aggregate income earned by high-income households in the US. Unfortunately we don’t have 2003 data yet (other than Forbes’ data on billionaires), but I think it’s a safe bet that the upward climb has continued in both lines since 2002.

(Source: Census data, available here.)

Of course, the interesting question is what’s the cause of this remarkable upward trend. After a very heated (by economists’ standards) debate throughout most of the 1990s, the consensus seems to have emerged that most of this increase in inequality can be attributed to technological change. Specifically, over the past 20 years we’ve seen technological advances (read computers) that give well-educated workers an increasing advantage over poorly educated workers. Put another way, technology has been more and more able to substitute for low-skill workers. There are other factors as well, but the lion’s share of the blame seems to belong to technology.

What do we do about it? I’m not sure. However, I have a feeling that cutting taxes for people at the top of the income scale is exactly NOT the way to fix the problem.

Kash

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Make the Tax Cuts Permanent! Now!

Quick, before this trend stops:

All told, it was a fabulous year to be very rich.

[Forbes magazine] counted some 587 billionaires around the world, up from 476 in 2003. Their total net worth jumped to $1.9 trillion from the $1.4 trillion the magazine counted in 2003.

“After two years of significantly falling fortunes, we really saw an uptick for just about everybody on the list,” said Luisa Kroll, an associate editor at Forbes who oversaw the project….

… In the United States, billionaires likely gained last year not only from a 20 percent rise in stock prices, but also from reductions in taxes on dividends, capital gains and estate taxes, according to Mark Zandi, chief economist at Economy.com.

“High income, high net-worth households have done very well under the Bush administration,” said Zandi, adding that technological advances and trends toward globalization also tend to benefit the rich.

Nice to see that that .000001% of the population is doing quite well.(*) What about the nation’s poor? (2003 data not yet available):

But that’s just the poor, and there were only about 3 million or so more of them in 12/2002 than in early 2000, so who cares? What about the median household? Surely they are faring well? No, not them either. In 2002 dollars, median household income (Table A-1, p. 17) was $43,915 in 1999; $43,848 in 2000; $42,900 in 2001; and $42,409 in 2002.

Maybe we should just pass an amendment giving everyone the constitutional right to a billion dollars. Except the gays. They can stay poor.

AB

(*) Note: While I don’t know any personally, I have nothing against billionaires, and I respect many of them. Indeed, risking the ire of my readers, I’ll say Gates, Buffet, Allen, even the Waltons, and surely many others on the Forbes list earned their wealth, created tens and tens of thousands of jobs, helped spur economic growth, and generated wealth for shareholders. But they did so in the 1990s, in the face of both Clinton’s tax rates and estate taxes. What I do disapprove of, however, is the administration’s using regressive tax cuts to augment that wealth.

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Even More on Greenspan

A staffer at The Century Foundation, about which I know little other than that Ruy T. is affiliated with it, alerts me to a short article by Bernard Wasow on Greenspan. The article concludes with

So Mr. Greenspan would pay for massive tax cuts, about half of which go to the richest one percent of Americans, by reducing Social Security benefits from their current princely level of about $10,000 per beneficiary per year. All retirees would face benefit reductions, but his proposals would particularly burden those who die young and those who die very old. Now we know.

I suspect most of my readers agree with this.

I do have one quibble, however. Wasow says that “[we’ll pay for the Bush tax cuts] by reducing spending on one of the lowest income groups in the United States, retirees.” That statement is true, but misleading. Retirees, precisely because they are retired, are in fact one of the lowest income groups. But they are also the highest wealth group, so don’t pity them too much. Not to say that I don’t think SSI is a good program; it is. Nor even to say that all low income retirees have significant wealth; they don’t.

However, a reasonable case for means-testing SSI benefits exists. After all, it’s insurance, and insurance is generally designed to pay off in the event of a bad outcome (fire, theft, early death, retiring poor, …) But it would only make sense to means test SSI based on wealth, not income. Given current interest rates, a retiree with $1m in assets would only have income of $30,000-$50,000 (less if a big chunk of that $1m is in their home.)

Means testing based on wealth carries its own risks, however, as it encourages profligate spending just before retirement. A very slow and gradual phase out of the SSI benefit is one possible solution to this problem. In any event, this post is not about means-testing. My point is that wealth and income are different things and, particularly in the context of retired persons, the distinction is important.

AB

CLARIFICATION: Skimming this post, I should clarify that by “A very slow and gradual phase out of the SSI benefit is one possible solution to this problem,” I mean phase out the benefit as income rises, not over time. Don’t end SSI, just decrease the payment as wealth increases and either use the savings to increase benefits to the remaining retirees, to lower the regressive payroll taxes, or to keep the program solvent.

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More Trouble for Blair

Source: Britain Spied on U.N.’s Annan. Highlights:

  • LONDON – British intelligence agents spied on U.N. Secretary General Kofi Annan (news – web sites) in the run-up to the Iraq (news – web sites) war, a former member of Prime Minister Tony Blair (news – web sites)’s Cabinet said Thursday.
  • Short, who resigned her post after the campaign to topple Saddam, said she had read transcripts of Annan’s conversations while she was a Cabinet member.

    “The U.K. in this time was also getting, spying on Kofi Annan’s office and getting reports from him about what was going on,” she said in an interview with British Broadcasting Corp. radio.

  • Asked explicitly whether British spies had been instructed to carry out operations within the United Nations on people such as Annan, she said: “Yes, absolutely.”
  • [Claire Short] resigned in May, complaining the United Nations did not have a large enough role in reconstruction. Since then, she has called for Blair to resign, accusing him of misleading the country about the threat posed by Saddam.
  • Reacting to the Gun case and Short’s allegations, Blair told reporters: “We are going to be in a very dangerous situation as a country if people feel they can simply spill out secrets or details of security operations — whether false or true actually — and get away with it.”

AB

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Conservative Economists Write a Letter

A group of economists, including “the presidents of the Progress and Freedom Foundation, the Pacific Research Institute and the Competitive Enterprise Institute as well as scholars at the Hoover Institution and the Manhattan Institute all signed the letter” are annoyed at the pro-regulation position of a certain political strategist:

“Your position on telecommunications deregulation is contrary to the views of the vast majority of free-market economists and policy analysts,” the letter states. “Your continuing advocacy of the pro-regulation position is destructive to the cause of limited government. To the extent your efforts are successful, the effect will be to reduce capital formation, slow job creation, impede productivity growth and stifle individual liberty and economic freedom.”

Question: To whom is the letter addressed? If you don’t already know the answer, you won’t guess in ten tries (it’s not Greenspan.)

Answer here.

AB

UPDATE: An answer that doesn’t require registering for the WaPo site is here.

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