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

Have Cake and Eat It Too?

Some readers by now have probably picked up on the fact that I’m in favor of free trade. However, I am sympathetic to the concerns of those who oppose free trade on labor standards grounds, environmental grounds, and protecting domestic industry grounds. Nevertheless, free trade is a net positive for both trading partners, meaning that at the end of the day, when trade is liberalized, there is enough money to simultaneously compensate workers in affected industries while leaving society at large better off. Tying free trade to labor and environmental standards is justified on moral grounds and economic grounds (ensuring that the terms of trade actually reflect the production costs in each country). A few years back, Robert E. Litan (*) coauthored an editorial in the Financial Times (2/28/2001) describing what such a system would look like:

The main question centres on whether—and if so, how—the administration can craft an approach to free trade that somehow ensures any further trade agreements adhere to labour and environmental standards, primarily among less developed countries, without offending the business community or pure free traders.

Labour and environmental standards are important but they reflect an underlying anxiety that many Americans have about trade. Whether or not they work in trade-related industries, workers fear that expanded trade will cost jobs and suppress wages.

… No amount of supporting evidence is likely to ease workers’ growing concern.

… Mr Bush and the Congress should introduce programmes better designed to cushion the economic pain of job losses, in a way that encourages workers to find gainful training and employment quickly.

… The current unemployment insurance programme eases some of the pain but does not address two of the greatest concerns of workers: the decline in wages often associated with accepting a new job and the inability to pay for health insurance while unemployed.

… One way to allay fears is to take up a recent, but little publicised, recommendation by the bipartisan Congressional Trade Deficit Review Commission. This argued for a new, more comprehensive worker adjustment package that included “wage insurance” and that would be available to displaced workers regardless of the cause of the loss of employment.

…Robert Litan and Lori Kletzer of the Institute for International Economics have costed out such a programme on the assumption that the compensation equals half the drop in a worker’s income, is capped at $10,000 per year, and is paid for up to two years after the loss of the initial job.

Even if the unemployment level rises to 5 per cent (well above the current 4.2 per cent), the annual total cost of this programme would be just under $3bn. That compares with more than $20bn spent by the federal government each year on unemployment insurance.

For more on this, see “ A Prescription to Relieve Worker Anxiety: Wage and Health Insurance for Displaced Workers,” by Lori Kletzer and Robert E. Litan

AB

(*) Litan was on Carter’s CEA; under Clinton he was Deputy AG for Antitrust and then OMB associate director; Litan currently is a senior fellow in Economic Studies at Brookings.

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Do I Hear $500 Billion

420 billion, 420 billion! Going once, going twice, 450 billion! Do I hear 475? 450 billion going once, going–$480 billion! Do I hear $500 billion?

AB

P.S. Technically, the auction should have started around $250 billion, corresponding to the administration’s projections back in February.

P.P.S. And what’s this about: “To placate some lawmakers (Republicans as well as Democrats) worried about huge deficits in the years ahead, some tax cuts are supposed to expire a decade or so from now.” The sunsets are coming sooner than that. Many of the cuts — e.g., the estate tax and the educational savings account deduction (529 plans) — sunset in 2010 (so Bush could distort downward the 10 year cost of his 2001 tax cut), which is a lot nearer than a “decade or so”. The NYT lets too much slop like this through–give reporters access to Google and Lexis/Nexis and the make them use it.

P.P.P.S. What’s missing from the list in the concluding paragraph of the story?

As recently as early 2000, some economic experts foresaw surpluses for many years ahead. Then the stock market collapsed, the country was attacked by terrorists on Sept. 11, 2001, and costly wars unfolded in Afghanistan and Iraq.

It’s on the tip of my tongue, I feel like it rhymes with “bax mutts”, …

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From Angry Bear to the Front Page of the New York Times

Last Thursday, Guest-blogger Kash wrote about the rising issue of China, its currency, and the trade deficit with China (“2. There’s growing discussion about the value of the Chinese yuan against the dollar…[snip]…My prediction: these issues are going be HUGE in the not-too-distant future.”)

Now today, the NYT has a front page story, Currency of China Is Emerging as Tough Business Issue in U.S.. As Kash predicted, the issues are indeed looming large as manufacturing states increasingly pressure the administration to do something about the under-valued Chinese yuan.

AB

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More Free Trade

First, this issue is important. Second, it seems to generate a lot of action in the comments. So I’ll keep harping on the subject until I encounter diminishing returns.

In practice, free trade is not an unmitigated good, but the world is better off when all goods and services are produced in the locations and by the people most able to efficiently produce them–all else equal. First an example, then back to the caveat.

Country A can produce either 20 units of food or 4 units of literature, or any linear combination in between (e.g., 10 food and 2 literature).

Country B can produce either 12 units of food or 2 units of literature, or any linear combination in between (e.g., 6 food and 1 literature).

Note that Country A can trade food for literature at the rate of 5 to 1–for every five units of food it gives up, it can get one more unit of literature. Similarly, Country B can trade six units of food for one unit of literature. Note immediately that Country A is the more efficient producer of literature. If Country A produces a unit of entertainment, the world loses five units of food, whereas if Country B produces the unit of literature, then the world would lose 6 units of food.

Does it make sense for Country B to produce literature? Not really. Country B should instead produce food and then trade between five and six (call it 5.5) units of that food to Country A, and receive a unit of literature in return. Both countries are then better off: Instead of getting only 5 units of food for a lost unit of literature, Country A gets 5.5 units of food. Instead of having to give up 6 units of food for a unit of literature, Country B only has to give up 5.5 units of food. Each country benefits by .5 units of food when they trade thusly!

It’s so simple, what’s the hold up? Well, there are losers in this trade, even though both societies benefit on balance. Literature producers in Country B are driven out of business, as are food producers in Country A. And history shows that, not surprisingly, they will vigorously oppose free trade. Nevertheless, there is a role for government in solving the transition to trade problem. Since after trade is established, each country has more of all goods (possibly the same amount of some and more of others, but less of none), both societies are wealthier after trade is established. Some or all of that extra wealth can then be directed to recompensating the affected sectors in each country–because of the increase in overall wealth, there is necessarily enough money to make them whole.

But this is a very stylized example, how might this work in the real world? First, the benefits from trade work out exactly the same if there are thousands, billions, or gazillions of different goods. So restricting the example to two goods does not limit the example’s relevance.

However, I did say “all else equal.” Perhaps one of the countries uses slave labor, child labor, sweatshops, or cheap but heavily polluting technology. Then, economics aside, there is a moral argument for tying free trade to environmental and working conditions standards. But there is also an economic rationale: each of these scenarios entail negative externalities (costs borne by society at large, rather than by those who engage in an activity). Countries will over-engage in activities that have negative externalities. In those cases, tying free trade to work and environmental standards can also increase economic efficiency (by reducing the over-production otherwise implied by the negative externality).

But what about the affected workers? Technological change is the engine of economic growth, but along the way, it renders once-thriving industries obsolete, to the detriment of workers in those industries. Can we have growth without misery among the workers in the declining industries? Possibly. A senior economist at Brookings (with what I find to be impressive credentials as a liberal) outlined what such a plan would look like. More tomorrow.

AB

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Tariffs and Trade

Volokh contributor Jacob Levy has a New Republic piece on protectionism, a subject that came up in one of Kash’s posts and the comments therein. Here’s Levy’s key paragraph, but read the whole thing:

Agricultural protectionism–the combination of quotas, tariffs, and subsidies for farm products–may be the purest example of destructive special-interest politics ever created. Rich countries–with a few exceptions, such as Australia–burden their own populations three times over. The policies cost taxpayers directly–the atrocious 2002 U.S. farm bill is slated to cost $180 billion over ten years. (Worse, annual unbudgeted “emergency” farm spending during the late 1990s accounted for a great deal of the spending boom that squandered much of the predicted budget surplus long before the first Bush tax cut took effect.) In return for their largesse, taxpayers get the privilege of paying higher prices as consumers (and, of course, inflated prices for basic foodstuffs hit the poorest proportionately hardest). And, by locking up an excess of labor and capital in an agribusiness sector that couldn’t turn an honest profit on its own, agricultural protectionism inhibits productivity growth, preventing shifts in employment and investment to more productive parts of the economy.

Liberals and Conservatives are mixed in their support of free trade. The extremes of both sides (think Buchanon and Nader) are generally against free trade; the center to near-extreme Right is generally for free trade unless (1) it’s with Cuba, or (2) it involves a swing state (Pennsylvania/Steel and South Carolina/textiles. Actually, SC isn’t a swing state, so why are the Republicans in favor of textile tariffs?). The moderate Left generally supports free trade, or perhaps free trade conditional on some minimum level of working conditions (with the minimum being the key issue of debate).

On balance, it seems that a greater portion of the Left than the Right oppose free trade, with the Left usually arguing that tariffs and subsidies are needed to protect agricultural workers or blue collar workers in declining manufacturing industries. A regime of tariffs and subsidies actually does protect workers in the industries that are being supplanted by foreign suppliers. But, as Levy explains, the costs far exceed the benefits. Who gets the benefits? Domestic farmers, be they family or corporate. Who bears the costs? Domestic consumers (in particular, the poor, since so much of protectionism centers around food and textiles), domestic taxpayers (in higher taxes and lost productivity), and foreign producers (in particular, the Third World Poor, who get lower crop prices as a result of subsidies of U.S. farmers and tariffs on U.S. farm imports).

This last point bears repeating, particularly to the anti-trade Left, a group is generally in favor of increased aid to developing nations: propping up U.S. industries that cannot compete on their own prevents those industries from migrating to countries where they can be profitably undertaken (poorer nations), taking jobs from the would-be workers of those same poor nations. As an added bonus to reducing Third World living standards, we all get to pay more for our goods.

AB

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Stop Watching Ads

I’m think that Salon is worth the price, Sully and Horowitz notwithstanding. Right now, they’ve got a great deal:

Get “Lies” for free. Get a FREE copy of Joe Conason’s new book “Big Lies” when you subscribe to Salon Premium today. Hurry, quantities are limited

AB

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Life and Liberty (.gov)

In the car yesterday, I caught the tail end of a radio editorial by a guy named Dave Ross, who apparently has a talk show in Seattle and also does syndicated commentary for CBS radio. This particular editorial was on the government’s relax, don’t worry about your civil liberties site, www.lifeandliberty.gov, which is devoted to defending the USA PATRIOT Act.

Ross argued that if you’ve done nothing wrong then you don’t have to worry (loosely paraphrasing, “if you don’t like the idea of the government auditing your library records, check out different books”). He also argued for the converse: law enforcement officials would only be looking into your actions if you’ve done something wrong. Therefore, ordinary Americans have nothing to fear from this substantial expansion of police power. Not defined is who counts as ordinary, nor where the Constitution and Bill of Rights distinguish between the subset of rights afforded to all citizens and the full set of rights available only to special group of ordinary. When he argued that the “sneak and peak” provision that allows a search without notification was a good thing when used on ordinary Americans because they wouldn’t have to undergo the stress of knowing they were searched, I thought Ross was joking but then came to realize that he was not. (I can see reasons why such searches might be very useful, but this is surely not one of them).

Also in the L&L.gov website is a FAQ devoted to “Dispelling the Myths“. Each of the myths uses a complaint by the ACLU as the starting point. The first alleged myth includes this: “They [the ACLU] also claim that it [PATRIOT Act] includes a “provision that might allow the actions of peaceful groups that dissent from government policy, such as Greenpeace, to be treated as ‘domestic terrorism.” The government’s response to this allegation is that

Peaceful political discourse and dissent is one of America’s most cherished freedoms, and is not subject to investigation as domestic terrorism. Under the Patriot Act, the definition of “domestic terrorism” is limited to conduct that (1) violates federal or state criminal law and (2) is dangerous to human life. Therefore, peaceful political organizations engaging in political advocacy will obviously not come under this definition. (Patriot Act, Section 802)

Maybe it’s just me, but a broad range of activities not related to terrorism seem to satisfy criteria (1) and (2). Even marching without a permit could violate the law and be construed as dangerous to human life (causing traffic accidents or something like that). While I believe the Patriot Act was not specifically invoked, the Department of Homeland Security has already been used to track domestic politicians (Texas House Democrats). If the powers can be used against elected officials, is it really a stretch to envision their usage against less popular groups like ANSWER or Greenpeace?

In any event, for a quick laugh and a bit of a scare, take a look at www.lifeandliberty.gov and see if you’re convinced.

While we’re nowhere near this stage (although the government can now arrest and detain citizens indefinitely, without council or a hearing in federal court), this is worth remembering:

“First they came for the Jews and I did not speak out because I was not a Jew.
Then they came for the communists and I did not speak out because I was not a communist.
And then they came for the trade unionists and I did not speak out because I was not a trade unionist.
And then they came for me and there was no one left to speak out for me.”
— Pastor Niemoeller, arrested by the Nazis during World War II

The point, I suppose, is that non-Jews probably considered themselves “ordinary Germans,” with no need to be concerned about expanded police power.

AB

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