Monday, July 16, 2007

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Coping with the global economy

In response to my last post on the rise of economic populism among Democrats (admittedly, one of a long series), Kevin Drum poses the following questions to yours truly:

  • Thanks to many decades worth of trade agreements, trade is pretty darn free already. So while trade agreements may not be huge sources of job loss, signing additional trade agreements to get that last 10% of free trade isn't a likely source of huge economic gains either, is it? It seems as though both sides may be making mountains out of molehills here.

  • How come free traders always yell and scream about, say, labor clauses or environmental requirements being inserted into trade agreements, but don't seem able to muster up the same passion when it comes to special treatment for favored industries? Seems to me that if it's a choice between forcing a trade partner to institute some kind of minimal child labor protection and forcing a trade partner to accept oppressive IP regulations favored by the U.S. content industry, the labor regulations are actually more justified and produce less economic distortion. Dan?

  • If Dems should be concerned about stagnant wages but shouldn't be demagoging it with trade, what should they be doing? That is, what should they be doing that conservatives wouldn't assault like mad dogs until the last breath was torn kicking and screaming from their bodies? Stronger unions? Higher minimum wage? Expanded EITC? More progressive taxation? Vastly increased assistance to help people displaced by trade agreements? Throw me a bone here. Anything?
  • Answers to these questions after the jump....

    1) The trouble with populism is (mostly) not about the remaining 10% of barriers to trade (though see below), it's about efforts to f$%& up the 90% of barriers that have been dismantled. The Baucus-Grassley-Schumer-Graham bill, for example, isn't about halting new trade openings -- it's about finding new ways to clamp down on existing openness.

    Furthermore, this is never going to go away. Protectionism is a great way to reward concentrated interests with diffuse costs, so members of Congress will always have an incentive to act in this way. The current populist mood makes it easier to do it out in the open, but as Daniel Kono has shown, it will also be done behind closed doors as well.

    This is why I'm so adamant about trade liberalization -- the status quo never stays the status quo, but creeps back ever so slowly towards economic closure.

    2) I'm pretty agnostic on "trade plus" kinds of agreements involving either IP or labor standards, and I challenge Kevin to find me a free trader who's been really gung-ho about intellectual property rights enforcement. I do understand, however, why U.S. trade negotiators care more about the former and not the latter. A general disregard for intellectual property protections across the developing world does blunt the incentive to innovate in the United States. The abuse of child labor, in contrast, plays a pissant role at best in the global economy, and has no direct effect on the United States.

    3) Policy proposals "that conservatives wouldn't assault like mad dogs until the last breath was torn kicking and screaming from their bodies"? Hmm.... let me offer four suggestions:

    a) Health care portability. Every poll I've seen suggests that workers are more scared of losing their health coverage than anything else... including their job. If the Democrats can propose something that's in the same ballpark as what Mitt Romney implemented in Massachusetts, it would go a long way towards alleviating public anxiety about globalization.

    b) Tax reform. In the current issue of Foreign Affairs, Kenneth Scheve and Matthew Slaughter propose a "New Deal for globalization" that includes making the payroll tax much less regressive:

    A New Deal for globalization would combine further trade and investment liberalization with eliminating the full payroll tax for all workers earning below the national median. In 2005, the median total money earnings of all workers was $32,140, and there were about 67 million workers at or below this level. Assuming a mean labor income for this group of about $25,000, these 67 million workers would receive a tax cut of about $3,800 each. Because the economic burden of this tax falls largely on workers, this tax cut would be a direct gain in after-tax real income for them. With a total price tag of about $256 billion, the proposal could be paid for by raising the cap of $94,200, raising payroll tax rates (for progressivity, rates could escalate as they do with the income tax), or some combination of the two. This is, of course, only an outline of the needed policy reform, and there would be many implementation details to address. For example, rather than a single on-off point for this tax cut, a phase-in of it (like with the earned-income tax credit) would avoid incentive-distorting jumps in effective tax rates.

    This may sound like a radical proposal. But keep in mind the figure of $500 billion: the annual U.S. income gain from trade and investment liberalization to date and the additional U.S. gain a successful Doha Round could deliver. Redistribution on this scale may be required to overcome the labor-market concerns driving the protectionist drift. Determining the right scale and structure of redistribution requires a thoughtful national discussion among all stakeholders. Policymakers must also consider how exactly to link such redistribution to further liberalization. But this should not obscure the essential idea: to be politically viable, efforts for further trade and investment liberalization will need to be explicitly linked to fundamental fiscal reform aimed at distributing globalization's aggregate gains more broadly.

    Slaughter was a Bush appointee to the Council of Economic Advisors, by the way.

    3) Eliminate all tariffs on food products, footwear and apparel. Because they are concentrated in food and clothing, the remaining U.S. tariffs hurt the poor much more than the rich as a fraction of income. Don't take my word for it, this is the argument made by the Progressive Policy Institute: "tariffs appear at least on average to be the only major tax in which effective rates rise as incomes fall." [UPDATE: Kudos to Congressmen Joseph Crowley (D-NY) and Kevin Brady (R-TX) for proposing legislation that addresses this issue.]

    4) Finally, if you really, really need to go after China, go read this.

    I now officially triple dog-dare the Democrats to embrace any or all of these proposals.

    posted by Dan on 07.16.07 at 10:40 PM


    A few points.

    Protectionism is a great way to reward concentrated interests with diffuse costs, so members of Congress will always have an incentive to act in this way.

    Doesn't the fact that free trade has been 90% implemented indicate that public choice theory is much less important in action than in theory? Supposedly, there is this huge incentive to embrace protectionism, yet you still have free trade. I know that to think this, much less say it, goes against the modern day dogma that all that matters are incentives, but maybe incentives don't matter as much as is commonly assumed. If incentives are all that matters, it is a real puzzle why we have free trade at all, no?

    2) Child labor plays a huge role in the economy. No, not as measured in GDP, but as measured in ethics.
    There is more to economics that dollars and cents. I would say that it is far more important to prevent that abuse of child labor than it is to ensure that Zimbabwe pays pharmaceutical companies inflated prices for drugs. But that is just me.

    3) Conservatives never would go for shifting payroll taxes from the poor to the rich. Remember, they are for shifting taxes away from the rich with their tax shifts (err.. they call them tax cuts, but since they aren't paid for, everyone knows they are just tax shifts). I am 100% sure that liberals would go for this idea, however.

    posted by: Very Freaky on 07.16.07 at 10:40 PM [permalink]

    Shift America's 12 million illegal aliens to an island in the Atlantic, broker a free trade agreement, and then watch Kevin Drum complain that yet another free trade agreement is driving down American wages.

    posted by: bjk on 07.16.07 at 10:40 PM [permalink]

    "Protectionism is a great way to reward concentrated interests with diffuse costs, so members of Congress will always have an incentive to act in this way."

    So far those interests include politicians, lawyers, investment bankers, tenured professors, oil companies and etc., you know, those who struggle to make it in our society.

    But why do blue collar workers need pensions or healthcare - they aren't the choosen people. Maybe we can increase the EITC to shut them up.

    And besides, Exxon needs it subsidies.

    posted by: save_the_rustbelt on 07.16.07 at 10:40 PM [permalink]


    I think you underestimate the “plus” in these trade-plus agreements and how it serves the interests of American interests. It seems to me that, from American perspective, these FTAs are not really about the remaining 10% protected goods. Their primary goal is the opening important service sectors, like telecommunications, insurance, and finance. They also provide very strong protections to the properties of American investors (intellectual as well as physical). The trade part of the agreement is beneficial to the FTA partner, as it provides access to the U.S. market.

    posted by: YZH on 07.16.07 at 10:40 PM [permalink]

    Repeal the payroll tax as to 50% of all workers?

    This conservatarian generally favors of tax cuts, but eliminating all the underside to spiraling Fed spending would put the U.S. in a situation where 50% of the workers, plus just one trust funded limousine liberal, could vote themselves whatever largess they wanted from everybody else' pocket. Do you see any hazards arising from that proposal? Add in non-wage earning retirees and voting age students, and there would be a supermajority constituency in favor of infinitely increasing social benefits. Hey, what the hell, doesn't cost me nothin', right? P.J. O'Rourke has humorously noted that when 51% of the people figure out that the other 49% are basically a blank checkbook, your market democracy is pretty much done for. And since when was the 50th percentile in need of that kind of tax relief? I've lived in that percentile as recently as 7 or 8 years ago, and even then thought it was probably a pretty good idea that I be required to pay at least some taxes - the fact that the Dems' promises about student loan relief sound inviting to me now, even though I know better, backs up my intuition that it's possible to make wild increases in Fed spending *too* easy to vote for.

    posted by: Al Maviva on 07.16.07 at 10:40 PM [permalink]

    Dan, as a (very) small business owner, I like your proposals. Health care portability doesn't affect me so much, but fear of losing it is very real to most of my clientele. The payroll tax and tariff issues certainly appeal to anyone like me who's trying to stretch every dollar.

    Re. Very Freaky, public choice is in action every day at discount retailers. The public by and large will favor buying less expensive goods brought to them by free trade - clothing from Vietnam or Pakistan, toys from China - while playing lip service to protectionism. There is ambivalence in the political conversation, but not so much at the check-out counter.

    As for the statement "Conservatives never would go for shifting payroll taxes from the poor to the rich," maybe that should be qualified as "Elite politicians who sup with lobbyists" rather than "Conservatives". An awful lot of conservatives pay payroll taxes, and wouldn't mind sharing the payroll love a little more with their higher paid brethren. Payroll taxes, which are regressive in that they fall disproportionately on lower-income workers, aren't even in the same ballpark as income taxes, which many many payroll-tax-paying workers get back every year. I don't think the average conservative minds some progressivity in the payroll tax that much, and also doesn't resent letting the people who pay the vast majority of the income taxes get a moderate break. Similarly, the average conservative may not mind spreading the payroll tax burden out a little more by shifting the ceiling, if he gets a break at the lower end and if there seems to be a real purpose to it, other than giving the central government more money to waste. Can the average Liberal look at a tax change and resist the temptation to make it a hike rather than just a shift? When Liberals talk taxes, that is the root of the fear in the Conservative's eyes.

    But then, it probably doesn't matter what the "average" conservative or liberal thinks, anyway. They're not the ones making the policies and they're not the ones in bed with special interests. The term "Democrat economic populism" is an oxymoron if ever there was one.

    posted by: El Kabong on 07.16.07 at 10:40 PM [permalink]

    The free trade debate has been miscast from the beginning. It not about growth but about the rules of diverse political economies. It's not about wringing our the last 10% of comparative advantage, but about how to control factor-price equalization. It's not about competition, but about economic morality.

    We have spent the last century developing that morality, the rules and regulations governing our economy, only to see it cast to the winds of amoral globalism. If I suggested throwing away our democratic institutions because they were interfering in the growth of trade, people would be aghast at the cavalier manner in which I would treat our countries inheritance.

    Yet the idea that we are throwing away a century of economic morality bought by the sacrifices of our forefathers is hardly a consideration in our drive toward greater global growth and the need to compete.

    Economist harp on the benefits or comparative advantage, yet conveniently forget about the effects of price factor equalization on the wages of workers in developed countries. They conveniently forget about a century of economic morality, rules and regulations, that have been fought for by different interests groups. They appear to be blissfully willing to throw away a political economy that has been democratically stitched together in the name of competition with political economies that are fashioned by authoritarian regimes.

    When Chinese workers aren't allowed to assemble, or their wages are held down by the state, the equilibrium in price-factor equalization is held back and held down. Our economic morality is tested by the amorality of globalism.

    Without international governments to set the rules of the game or set the rules under which countries can play the game of free trade, the debate about free trade hasn't even begun. It's not at the end of its run where we worry about the last 10% of comparative advantage, but it's at the beginning where we worry about its effects on political economies democratically arrived at and the damage done to them by the political economies of dictatorships.

    posted by: wjd123 on 07.16.07 at 10:40 PM [permalink]

    Unless he has radically changed his views since his column of May 14th, Paul Krugman, one of the the favorite economists of Democrats, is very much a free trader.

    posted by: CRW on 07.16.07 at 10:40 PM [permalink]

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