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

Third Way trade agreements study leaves out a lot

Third Way (h/t TPM), a Democratic pro-trade think tank, has released a new study, “Are Modern Trade Deals Working?” It examines the various “free trade” deals the U.S. has signed since 2000 to conclude that 13 of 17 have led to an improvement in our goods (not including services; see more below) trade balance with the countries involved, giving a net improvement over the 17 agreements studied of $30.2 billion per year.

I did a similar analysis of this very question (though in less detail than the Third Way study) in 2012. Unlike the Third Way report, my post included all U.S. free trade agreements (rather than starting in 2001 like Third Way) as well as the effect of the 2000 agreement for Permanent Normalized Trade Relations (PNTR) with China. So, compared to the Third Way study, my post includes the FTAs with Israel, Canada, and Mexico, but did not consider the Panama FTA, which had not yet come into effect when I posted. My conclusion was essentially the same as Third Way’s, that the effects of the agreements on our trade in goods were usually positive, but of small size (the effect of the Israel FTA was also small). Because the Third Way study begins in 2001, however, it omits the impacts of NAFTA and PNTR with China. However, as my post showed, they are the most important by far.

This fact is not lost on opponents of the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Lori Wallach of Public Citizen Global Trade Watch told the Associated Press that “studies such as Third Way’s make a big deal out of modest trade improvements with countries like Panama, and gloss over huge trade deficits with major trading partners such as South Korea, Mexico and Canada.” She’s right.

In 1993, the year before NAFTA went into effect, the United States had a surplus with Mexico on trade in goods of $1.7 billion. In 1995, it went to a deficit of $15.8 billion, and in 2014 the goods trade deficit was $53.8 billion, down from 2007’s peak of $74.8 billion. This was in sharp contrast with the analysis of Gary Hufbauer and Jeffrey Schott, who predicted trade surpluses on the order of $9-12 billion through the 2000s, even as they admitted that the peso was overvalued (it collapsed in value in the December 1994 “Tequila crisis”).

Meanwhile, the balance of trade in goods with Canada went from a deficit of $10.8 billion in 1993 to $34.0 billion in 2014. Note that the U.S. had a peak deficit of $78.3 billion in 2008, which collapsed to  $21.6 billion in 2009.

In 2000, the year PNTR was adopted, the United States had an $83.9 billion goods trade deficit with China. In May of that year, the International Trade Commission (h/t David Cay Johnston) released a report estimating that the trade balance would worsen by a further $4.3 billion. According to the article, the U.S. Trade Representative and the White House both criticized this study strongly. And in fact, the 2001 deficit fell to $83.1 billion. However, in 2002 it was $103.1 billion, an increase more than four times the ITC prediction, and by 2014 it had grown to $342.6 billion.

By including trade in goods but not trade in services, Third Way is admirably the stacking the deck against its own position. It points out that the U.S. has a global surplus in trade in services of $232 billion in 2014, including a $45 billion surplus with Canada and Mexico. However, it doesn’t mention that the U.S. goods trade deficit was $737 billion in 2014, or that the country’s overall 2014 trade deficit was $505 billion, up from $477 billion in 2013.

The ultimate question is whether TPP and TTIP are going to be more like the U.S.-Australia Free Trade Agreement, or more like NAFTA and PNTR. Considering that the TPP includes all the NAFTA countries, Australia, Chile, Japan, and six others, comprising “nearly 40 percent of global GDP,” I think it’s safe to assume that it will have a much bigger impact than the FTAs with Australia or Chile, for instance. Similarly, since the European Union has an economy about the same size as the U.S. economy, I believe the TTIP will also have big consequences.

Moreover, we have to remember that these are much more than trade agreements. Both of them have increased protections for investors, patents, trademarks, and other intellectual property, and in both of them the U.S. is advocating the inclusion of investor-state dispute settlement so companies can sue governments through arbitration rather than courts, something that has proven more favorable for companies vis-a-vis both governments and consumers. So, in addition to the negative effects on U.S. workers that we would expect on the basis of the Stolper-Samuelson Theorem, all signatory countries are likely to suffer from higher prices for medicine and assaults on their regulations through investor-state dispute settlement.

Thus, while the Third Way study is right as far as it goes, what it leaves out is far more significant and worrisome.

Shortages of prescribed drugs..topical thread

The number of newly reported drug shortages (mostly generic) has been growing:

  • There were 74 newly reported drug shortages in 2005.
  • The number dipped slightly to 70 in 2006, then rose to 129 in 2007, 149 in 2008, 166 in 2009, and 211 in 2010.
  • In mid-2011 there were about 246 shortages.

NPR had a special on this about a month ago, but increasing numbers of people in Boston area report inability to easily fill prescriptions is on the rise, and hospitals report shortages that affect their abilities to deliver services, even surgery.

How do you get it right?…

Mike’s response to a short note from me I lifted and summarized from an advertisement/advice for investors on Brazil. Mike’s response below the fold:

Today, Brazil moved aggressively to ensure that the widening global financial crisis will not reach its shores, taking several measures to stimulate consumption and investment in the world’s seventh largest economy. Finance Minister Guido Mantega estimates that the moves will help Brazil’s GDP reach 5 percent next year.

The following will take effect immediately:

– Producers of 8,500 manufactured products will receive tax credits of up to 3% for sales abroad

– The IOF transaction tax will be eliminated on foreign purchases of Brazilian stocks (previously 2%) and on corporate bonds with maturities of more than four years (previously 6%)

– Stock receipts of Brazilian companies traded abroad, such as American Depositary Receipts (ADRs), will be cancelled

In fairness, Brazilian trade policy has often been poorly designed and managed even worse. When I was growing up there were 500% tariffs on imported electronic goods, the idea being to protect the burgeoning Brazilian electronics and computer industries. (Needless to say, it didn’t work.)

On the flip side, protection of aircraft has led to Embraer making some pretty good planes. Similarly, as I noted before (this isn’t exactly trade policy, but it is economic policy) actions by the Brazilian government in the late 1970s, 1980s and 1990s are responsible for the fact that a Brazilian can walk into a car dealership today and buy a tri-flex vehicle that runs on any combination of gasoline, ethanol or natural gas. I doubt Americans will be able to do the same thing before my 17 month old son is able to drive, and perhaps not for decades later.

The trick, I guess, is… how do you get it right? To come back to the US, how do you increase the ratio of Arpanets to Solyndras?

More on Repatriation–WIN America corporatist lobbying group’s strike back on Heritage

by Linda Beale

More on Repatriation–WIN America corporatist lobbying group’s strike back on Heritage

In a recent posting, I commented further on the lack of arguments supporting the corporatist lobbying drive for another “repatriation tax holiday” for multinational corporations that have stashed more than a trillion abroad (often through gimmicky transfers of intangible property such as rights to patents developed in the United States).  See  Repatriation Holiday Lobbying–Money Speaks (Oct. 3, 2011).

The reasons are manifold.  Corporations today are not cash-strapped–they’ve got lots of cash in the US too.   And even if they need cash that is currently offshore, they can borrow against that cash at exceptionally low rates today. So they aren’t investing in expansion that would create new jobs for lack of cash–they are not investing in expansion for lack of customers.  The middle class is collapsing, after four decades of reaganomics have steadily worked to erode unions and the empowerment they offer workers, leaving worker wages in decline while their bosses roll into the ranks of the superrich on their newfound ability to take an undue share of the companies’ productivity gains.  Even when money is actually brought back (rather than already resting in US bank accounts), it is most likely to be used to pay even higher performance bonuses to top managers and to pay for dividends and share buybacks for shareholders.  And those shareholders are most likely merely to use it to make new secondary market share purchases–resulting merely in a net change in their portfolios–not direct funding of new enterprises.  Much of those secondary market investments are likely to be in emerging markets rather than in the United States.

Most telling is that the very fact of one tax holiday means that corporations will inevitably plan for and conduct business assuming future tax holidays.  It is ikely that planning for this current lobbying effort began on the day Congress passed the 2004 Jobs Act!  What that means is that the tax holiday itself encourages even more of the very offshoring activity it claims to be amerliorating.  Corporations will use gimmicks to move and stash away even more money offshore to avoid even more current taxes, in the hopes that there will be a further tax holiday that will allow almost zero taxation on those repatriated profits.  That certainly happened after 2004–the companies that had been good citizens and had regularly repatriated cash found themselves losers compared to the bad citizens that had used offshoring to avoid taxation.  More of the good citizens then became bad citizens, and the amount of offshore cash has grown much faster since the 2004 repatriation holiday than before.

And our experience with repatriation tax holidays was a telling one.  Corporate lobbyists worked hard to get the misnamed 2004 “American Jobs Act” passed with a very low tax rate for repatriated funds.  Yet it resulted in very little job creation.

(This is not surprising, since (i) corporate tax cuts don’t create jobs; consumer demand does and (ii) Congress didn’t put any real teeth in the job creation end of the legislation, such as demanding that any corporation repatriating cash and expecting the low rate establish that it had created substantial new jobs with the repatriated funds that were not on the planning board at the time repatriation was first introduced or when it was passed and that those jobs were permanent full-time domestic jobs.)

In fact, a new study by the Institute of Policy Studies addresses what it calls the “dangerous myth” that “corporate tax cuts create jobs” and the “disastrous results” of the 2004 tax holiday.  It reminds us that a government report found that 12 of the top repatriators brought home $100 billion (a third of the total repatriated under the earlier provision) and yet laid off 67,000 workers in the two years after the windfall.  Further, the 2004 holiday allowed 843 companies to use $312 billion in repatriated funds while avoiding $92 billion in taxes.  The worse factoid of all is the one that shows that U.S. taxpayers  “provided a huge subsidy to corporations that destroyed jobs”:  58 corporations that accounted for about 70% of the repatriated funds  cut almost 600,000 jobs.  Report at 6-7.  See America Loses: Corporations that Take ‘Tax Holidays’ Slash Jobs, Institute for Policy Studies (Oct. 3, 2011) (summary, with link to full report).

The report is clear in its description of the way US corporations shift profits overseas and then lobby for even lower taxes.

Drug companies — and many other companies as well, especially in the technology sector — don’t just make profits overseas. They shift  profits overseas. The process has become lucratively routine. One example:  A U.S.-based corporation begins the process by having a foreign subsidiary register its patents in countries like Luxembourg that do not tax income from intellectual property. The subsidiary then charges its U.S counterpart a high price for use of the patents. These high royalty fees, coupled with the costs of research, marketing, and management, allow the U.S. operation to report to the IRS an artificially small profit — or even no profit at all. With no appreciable profit to report, the U.S. operation has no appreciable corporate income tax to pay. The company’s actual profits sit undisturbed with the overseas subsidiary.  Report at 11.

The report also scorns the lobbying efforts of WIN America, which has spent more than $50 million lobbying for the tax break, which would cost the fisc around $80 billion in lost revenues.  Report at 9-11.   WIN America–a coalition of 18 publicly traded corporations and 24 trade associations, including the U.S. Chamber of Commerce–has “hired 42 former congressional staffers who worked for the House Ways and Means Commitee or the Senate Finance Commmittee”.  Report at 9.  It goes on to rep9ort on the way individual members of the coalition have lobbied for the tax break (e.g., Pfizer’s sponsoring a favorable section on 60 Minutes) and cut jobs (e.g., Duke Energy’s cutting 10,000 jobs, probably as a result of its 2006 merger with Cinergy in the U.S., contributing to the North Carolina Democratic Party and then, shortly after getting support for repatriation from the Democratic governor of North Carolina and its Democratic Senator Kay Hagan).

For other commentary, see also John Carney, Corporate Tax Holidays Might Not Create Jobs, CNBC (Oct 4, 2011) (commenting on the IPS report as well as the Heritage Foundation report discussed below).

The WIN America coalition was undoubtedly taken by surprise when the right-leaning Heritage Foundation came out with its own report, a “backgrounder” on taxes that condemns the repatriation tax holiday idea as not doing much to create jobs: J.D. Foster & Curtis Dubay, Would Another Repatriation Tax Holiday Create Jobs? (Oct. 4, 2011).    The Heritage Foundation report acknowledges that “if another repatriation tax holiday were enacted, one should expect a similar result as last time: specifically, a surge in repatriations and little appreciable increase in domestic investment or job creation.”  And it cites the reasons one would expect–today’s multinationals that have money to repatriate are not cash-strapped:  any investments that they need to make for business expansion purposes (that would create new jobs) they can do readily without needing a repatriation tax holiday to grease the skids.

By the way, the Heritage Foundation is resisting repatriation because it wants the big prize–an overall cut in the corporate tax rate and a shift from our current system of taxing worldwide income (after tax credits for taxes paid elsewhere) to a territorial system–and it doesn’t think repatriation will be treated as a step in that direction.  Those Heritage-supported tax policies would result in even more offshoring and even less corporate tax contribution to the fisc, which is already terribly low at around 2-3% of GDP.

For additional commentary, see Heritage Foundation Reverses Position on Repatriation Tax Holiday, Huffington Post (Oct. 4, 2011) (

Not surprisingly, the WIN America coalition struck back today, with a press release attacking its ordinary ally for not supporting the repatriation tax holiday drive: Fact Check: Heritage’s Flawed Study Ignores Their Previous Support for Repatriation (Oct. 4, 2011).  The coalition has three arguments: (1) Heritage said something different back in December 2010, (2) other studies say repatriation will create millions of jobs, (3) the 2004 Jobs Act really did work in spite of what these other studies claim because the firms themselves say they created jobs, and (4) lots of people support repatriation.  None of these arguments hold water.

The coalition first complains that a December 2010 Heritage study concluded that repatriation would “provide additional liquidity” that would increase shareholder wealth allowing them to make “new investments” and would permit the firms to finance current operations, reducing their need to borrow working capital.  Let’s parse this out.  The  primary reason that doesn’t make sense today (if it ever did, which is dubious) is, as the Heritage Foundation’s current report points out, that US firms are not cash strapped.  They don’t need more liquidity to be able to make investments or finance their current operations.  They probably don’t even want to reduce loans that are at historically low interest rates any more than they are doing.  And shareholders’ “new investments”, as noted above, are just a move from one portfolio investment to another–they are not investments that encourage entrepreneurs or go to the working capital of companies but just a result of secondary market purchases.  Very little of that does much for the US economy or anything for creating new U.S. jobs.

WIN America counters that the August 2011 study done for the U.S. Chamber of Commerce by Douglas Holtz-Eakin, The Need for Pro-Growth Corporate Tax Reform, claims that a repatriation tax holiday will “speed the pace of economic recovery, increasing GDP by roughly $360 billion and creating approximately 2.9 million jobs” because repatriation tax holidays are “a private-sector approach to stimulus.”  That’s quite simply balderdash.  These same kinds of pie-in-the-sky claims were made about the disastrous 2004 repatriation tax holiday, and they were proven wrong then.  They are based on the same bad economics now, the economics that says that “the high U.S. [corporate tax] rate harms economic growth, the amount and quality of U.S. investment, and the wages of U.S. workers.”  That claim is simply unsupported–the U.S. is a tax haven, a reasonable amount of taxes will never discourage a business from expanding its business when it thinks that expansion is going to be profitable and it has the money to do it.  It is in fact this same school of economic thought that has given us the Laffer curve, the “rational man” calculations, and the rest of the Hocus-Pocus economics enterprise that treats rigidly unrealistic assumptions as God’s Truth to justify an ever-increasing share of corporate profits going to managers rather than workers.

WIN America then argues that 23% of the 2004 repatriated funds went to job creation and should be considered a great benefit to the economy.  That number is derived from a survey of tax executives–essentially self reporting on the result of the company-favorable tax repatriation holiday, so it is not only a very low return on the high tax cost of the repatriation tax holiday, but also one that must be evaluated with some acknowledgement of the fungibility of money and the ability of firms to claim that job creation and investment that they would have done anyway was done “because of” the repatriated funds.

WIN America concludes with quotes from lots of people (probably written by WIN America or one of its army of lobbyists, don’t ya think?).  These quotes just repeat the desired sound bites — “bringing the money home” will “create jobs and re-invest in America” (GOP representative Gregory Meeks, Sept. 9, 2011); “let’s bring those dollars back”… and “companies outght to put it into workforce training or they ought to put it into research and development” (GOP Ohio Gov. John Kasich, Sept. 14, 2011).  And so on.


Tax Havens in Reverse

Reuters provides a synopsis of a report by the OECD on tax-avoidance strategies by multinational corporations:

30/08/2011 – Due to the recent financial and economic crisis, global corporate losses have increased significantly. Numbers at stake are vast, with loss carry-forwards as high as 25% of GDP in some countries. Though most of these claims are justified, some corporations find loop-holes and use ‘aggressive tax planning’ to avoid taxes in ways that are not within the spirit of the law.

This aggressive tax planning is a source of increasing concern for many countries and they have developed various strategies to deal with it. Working cooperatively, countries can deter, detect and respond to aggressive tax planning while at the same time ensuring certainty and predictability for compliant taxpayers.

Corporate Loss Utilisation through Aggressive Tax Planning [report is gated], which builds on Addressing Tax Risks Involving Bank Losses (2010), looks at a number of commonly used schemes and identifies three key risk areas: corporate reorganisations, financial instruments and non-arm’s length transfer pricing.

David Cay Johnson presents his interpretation of the data:

The latest evidence of this tax after-the-factism comes from an eye-popping global tax avoidance study by the Organization for Economic Co-operation and Development.

What makes the study by tax authorities in 17 major countries so astonishing is not just the size of the losses, but when they were booked.

Country after country showed corporate losses equal to a 10th or more of an entire country’s economic output.

In Germany, corporations list 576.3 billion euros of tax losses on their books one year, equal to one quarter of German economic output that same year. What matters there is not just the stunning size of these losses, but also that they were booked before the global meltdown. The German data are from 2006.

Water, Rights and Privileges, and Global Markets

An article about famine in the Horn of Africa by Maude Barlow appeared today. It is worth your consideration. (h/t coberly) My own response is in comments. Following are excerpts:

Most Westerners see the crisis in the Horn of Africa as a combination of a large population, chronic poverty, corruption on the part of African government officials, failed states and no rain, and that none of this will ever change so giving money to this self perpetuating crisis is throwing it away. But I offered another narrative that I believe is closer to the truth.

I believe the water and food crises in the Horn of Africa are the direct result of old-fashioned colonial exploitation: land grabs by foreign hedge and investment funds and wealthy countries setting up large foreign-based agribusinesses that are guzzling the lion’s share of the water resources and using them to grow crops and biofuels for export and drive up speculation.

Foreign acquisitions are forcing small farmers and peasants off the land depriving them of access to food and water. The food and water of the region is being used for export for profit and not being used for local people. As a result, food prices in the region have gone up 200 per cent in less than a year and the price of water has risen 300 per cent. The foreign minister of Ethiopia defends his government’s actions with the neo-liberal explanation that these foreign “investments” will make the country wealthy enough that it can stop producing food and start buying it on the world market.

But exactly the opposite is happening when you drain the land of its water, as is being done by this agribusiness industry, and the rains stop coming. The drought is directly related to both climate change and the resulting desertification of a land stripped of its water sources. Here is what is essential to know: deserts can arise because humans treat land and water badly.

Desertification is taking place in over 100 countries in the world, as we strip the land of land-based water from aquifers and rivers, sending it to thirsty mega-cities (who dump it untreated into oceans), or using it to grow food and other goods for the world market, where it is transported out of local watersheds in the form of “virtual water exports.”

[end of excerpts. feel free to research the subject yourself. if Barlow is right, she provides a much more reality based understanding of what is going on in the world than the usual politicized and politicized economics analyses we usually see… coberly]

Corporations pushing for job-creation tax breaks shield U.S.-vs.-abroad hiring data

The Washington Post points us to a thought that needs to be included in public debate. (h/t Stormy)

Corporations pushing for job-creation tax breaks shield U.S.-vs.-abroad hiring data

Some of the country’s best-known multi­national corporations closely guard a number they don’t want anyone to know: the breakdown between their jobs here and abroad.

So secretive are these companies that they hand the figure over to government statisticians on the condition that officials will release only an aggregate number. The latest data show that multinationals cut 2.9 million jobs in the United States and added 2.4 million overseas between 2000 and 2009.

Some of the same companies that do not report their jobs breakdown, including Apple and Pfizer, are pushing lawmakers to cut their tax bills in the name of job creation in the United States.

Apple, by the way, is at the top or close to the top, in recent profits. GE has deceased its per centage of US workers from 54% to 46% in the last decade. Few contenders in the presidentail elections or Congressional elections make this notion a part of their campaigns. The debate in regular media usually stops at words like ‘protectionism’. The next time you read about tax cut money flowing to create jobs, hold in mind global trade demands that companies actually respond to, and do not think US jobs are a priority. The rhetoric merely implies a vague ideal…not company policies.

Perhaps multi-national companies need to be lean and mean to thrive, and raising the overall living standards of the world has trememdous benefits for people in general, and of course some problems that go with it. Just don’t think that election political rhetoric has US public benefit in mind overall as a priority high on the list.

Is the President Reading Angry Bear?

AB, late Thursday:

If you want to stop a dictator from killing his people, freeze any of his personal assets that are held out of the country.

In cases where the dictator is likely to fall, it sends a clear signal to other countries. (In cases where the dictator is likely to succeed, the worst case scenario is that banking relationships will be damaged, a consideration that the domestic government would have considered before making the decision to freeze the assets in the first place.)

The purpose of financial in lieu of military intervention is to balance the tradeoff. A dictator whose funds will remain unencumbered no matter how many of his people he kills will not change his behavior. A dictator who stands to lose a large (and increasing) portion of $70 billion faces a scenario where extending his time in office may well appear too costly.

Treasury, Friday night:

On Friday evening, President Obama took decisive steps to hold the Qadhafi regime accountable for its continued use of violence against unarmed civilians and its human rights abuses and to safeguard the assets of the people of Libya.

The President issued an Executive Order freezing the assets of Muammar Qadhafi and four of his children, as well as the Government of Libya and its agencies, including the Central Bank of Libya and the Libyan Investment Authority – the country’s sovereign wealth fund.

I report. You decide.

What IR can learn from the NHL

Both Gary and Rebecca cited Marc Lynch recommending “intervening” in Libya:

The appropriate comparison is Bosnia or Kosovo, or even Rwanda where a massacre is unfolding on live television and the world is challenged to act. It is time for the United States, NATO, the United Nations and the Arab League to act forcefully to try to prevent the already bloody situation from degenerating into something much worse.

I petulantly asked whether Mark Lynch had ever seen an intervention he didn’t like.

The answer, of course, is yes, which a moment’s thought about pseudonyms would have made clear. My social radar remains a perfect contraindicator.

But that leaves several questions, not the least of which is “with what Army”? Certainly not the U.S. one, which is overextended in battles of—let us be polite&dubious optimal cost.

NATO and The United Nations suffer similar issues, along with “institutional inertia” (unlike the U.S., they do not jump into wars without a strategy, a purpose, and a plan).

This leaves the Arab League, which has several members—Egypt, Lebanon, Somalia, Bahrain, Iraq, Libya (being the issue at hand), Yemen, the Sudan, Tunisia, and possibly Saudi Arabia and Jordan come immediately to mind—that are rather preoccupied themselves.

It’s not just that the very sharp Mr. Lynch conflates genocides with civil war; it’s that he chooses the wrong strategy for ending the process.

Watch NHL fights. Here’s a good example (fight starts ca. 0:55):

Note that the fight isn’t ended until half a minute later. The referees (especially the one on the left side of the screen) are paying attention the entire time—fallen gloves get picked up or kicked out of the way—but they don’t even attempt an intervention until the players are on the ice.

The corrolary is that as soon as a player falls to the ice, they intervene.

The question for those advocating military action should be seen in that light: how can we quickly and efficiently get the battle to the point where intervention does not involve getting in the middle of two moving targets.

This is an economics blog, so, yes, you can bet that my answer will be economics-related.

If you want to stop a dictator from killing his people, freeze any of his personal assets that are held out of the country.

In cases where the dictator is likely to fall, it sends a clear signal to other countries. (In cases where the dictator is likely to succeed, the worst case scenario is that banking relationships will be damaged, a consideration that the domestic government would have considered before making the decision to freeze the assets in the first place.)

The purpose of financial in lieu of military intervention is to balance the tradeoff. A dictator whose funds will remain unencumbered no matter how many of his people he kills will not change his behavior. A dictator who stands to lose a large (and increasing) portion of $70 billion faces a scenario where extending his time in office may well appear too costly.

(There is the added signalling benefit of the proliferation of asset-freezings that occur. Since each country and institution that freezes the assets is weighing their decision based on political outcomes, the more places that freeze his assets, the more clear it becomes that his efforts are not expected to succeed.)

Again, I premise this on the idea that Tom Friedman’s basic premise is correct: that economic activity mitigates the chance of military activity. But the idea here is much easier to implement uni-, bi-, or multilaterally than managing the logistics of moving soldiers, machinery, and rations to an area that may have ended activities by the time you can start to have an effect. (Even ignoring if the effect will be negative.)

IR recommendations should follow the lead of NHL referees: make it as easy as possible for the fighters to be separated, but don’t put your body between them until then.

Compensating the Losers from Trade

Uwe Reinhardt’s post the other day, “How Convincing is the Case for Free Trade?“, helped to kick-start a fair bit of discussion recently about the impact of international trade on the US economy. Mark Thoma and William Polley have shared their thoughts about the importance of compensating the losers from trade, while others (e.g. Tim Worstall) have questioned that need.

I’d like to add 3 points to this discusssion.

1. International trade is not substantially different from trade between two people within the same country. Both types of trade are voluntary agreements between the two parties to the transaction. And both types of trade may negatively impact other people in the economy who had nothing to do with the transaction. The main difference is simply that with international trade, the transaction happens to cross an international boundary.

2. Just because trade leads to an efficient outcome, that doesn’t mean it’s a good outcome. I think that a parable about a punch in the nose helps make that point. But even very bright economists often confuse “efficient” with “good”.

3. I see the problem of adequately compensating the losers from international trade as just a part of the larger question of how we treat people in our society who, through no fault of their own, have fallen on hard times. International trade is just one of the many enormous, inexorable forces that constantly reshape our economy. Technological change, demographic change, or the fluctuations of the macroeconomic business cycle may devastate millions of families each year just as surely as international trade. An important measure (to me) of the type of society we live in is how we treat those individuals who are on the losing end of those impersonal economic forces that, in the long run, often help to make the world a more prosperous place.