Topic: International Economics and Development

Economics and Values

A recent NYT article has roiled the economics blogosphere by spotlighting several prominent economists who ostensibly challenge the “fundamental assumptions” of their field. A snippet:

“Economists can’t pretend that the consensus for free markets and free trade that existed 30 years ago is still here,” said Robert B. Reich, a public policy professor at Berkeley who served in President Bill Clinton’s cabinet.

Part of the reason is the growing income inequality and dislocation that global markets and a revolution in communications have helped create. Economists who question the free-market theories “want to speak to the reality of our time,” Mr. Reich said.

The article references some interesting material, including Alan Blinder’s criticism of offshoring and David Card’s provocative work ($) with Alan Krueger on employment and the minimum wage. However, contrary to its tone, the article is not (for the most part, anyway) about disagreements in economics — it’s about disagreements over values.

Consider, for instance, this bit from Blinder’s recent Washington Post op-ed:

And if the jobs do move offshore, displaced American workers may lose not only their jobs but also their pensions and health insurance. These people can be forgiven if they have doubts about the virtues of globalization.

We economists assure folks that things will be all right in the end. Both Americans and Indians will be better off. I think that’s right. The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest.

Blinder does not dispute (and indeed endorses) the economic orthodoxy that trade materially benefits participants. Instead, he notes that a change in trading partners produces both winners (the new trading partners) and losers (displaced partners), and that change can often be painful for the loser — a notion that most all economists would endorse.

Given this economic analysis, Blinder offers a values judgment: the United States should implement public policies to aid displaced workers caught in such change (but he expressly eschews protectionist measures that would prohibit change). Libertarians may disagree with Blinder’s policy proposals (perhaps on the grounds that such policies are not appropriate for limited government, or are economically inefficient, or would create perverse incentives and unintended consequences). But this disagreement is not about economics, it’s about competing values (e.g., limited government is preferable; economic inefficiency is undesirable, perverse incentives and unintended consequences are to be avoided).

Like “hard” science, economics is a non-normative field that attempts to determine certain types of relationships — in this case, economic ones (e.g., what is a minimum wage’s effect on employment; what market power effects result from industry regulation?) — and use those determinations to predict the future. Economic analysis often leads to policy recommendations, but those recommendations are the product of value judgments: Should the well-being of one group of workers (e.g., domestic, unionized, members of a particular group) be promoted over another? Should the harm experienced by displaced workers be mitigated, and if so, how?

From a policymaking perspective, it is useful to distinguish what part of economic policy is about economics and what part is about values. Economic analysis of U.S. farm subsidies and trade protections reveals their effect on farmer and consumer behavior, but good policy ultimately comes from answering such values questions as whether the tradeoff of higher consumer food prices for higher producer revenues is acceptable, or whether ag subsidies are a good use of the public fisc.  Or, concerning Prof. Reich’s comment above about income inequality, good policy would come from answering the values question of whether it is a problem that some people are rich or, instead, that some people are poor.

All of this is not to say that we should not question whether neat, simple economic theory plays out cleanly in this messy, complicated world. The debate ($) over Card & Krueger’s minimum wage findings is one of the most interesting in economics, and the burgeoning field of behavioral economics is reinvigorating long-simmering questions about the rationality of market actors — though those questions may not support the values judgments that the apostates and heterodoxoi presume. But I would argue that economics is not so different from the hard sciences — the core tenets are quite solid (though revolution does occur). What remains (appropriately) shaky is a pluralistic society’s attempts to apply its many values (as well as its hopes, fears, grievances, immediate concerns, and political aspirations), to economic phenomena.

Norway’s Hypocritical Statists

The socialist government of Norway is leading a new campaign against tax havens. Norwegian workers can be thankful, though, that the state pension fund is not consumed by the same big-government ideology. According to a Norwegian newspaper, the oil-enriched fund invests billions of dollars in tax haven companies, thus ensuring that more money actually winds up in the hands of retirees rather than politicians. But if the Norwegian government’s anti-tax competition campaign is successful, all workers will be hurt since politicians all around the world will be more likely to raise taxes if they think the geese that lay the golden eggs cannot fly away:

Norway’s center-left government coalition has made an issue of battling offshore tax havens. Both Finance Minister Kristin Halvorsen and the minister in charge of foreign aid, Erik Solheim, have harshly criticized companies, both Norwegian- and foreign-owned, that avoid taxes by registering themselves in countries with low or non-existent tax obligations. At the same time, however, the state’s massive pension fund that’s fueled by Norway’s oil revenues has been investing billions in companies that are registered in tax havens. This includes companies “based” in places like the Cayman Islands, Bermuda and Cyprus. … Finance Minister Halvorsen has characterized Norwegians who invest in tax havens as a “provocation against Norwegian taxpayers.” She’s not demanding, though, that the state pension fund blacklist tax haven investments.

Food Safety and Imports

Unhealthy products from China have been in the news lately. First it was poisoned pet food, then contaminated toothpaste, toy trains with lead paint, and now farmed fish containing unauthorized chemicals. For skeptics of trade, the news offers yet another reason to beware of imports in general but especially those “Made in China.”

Consumers have every right to be concerned about the safety of the products they buy, but the problem of potentially harmful products is not unique to China or even imports. As a New York Times story points out today, U.S. customs officials routinely intercept more potentially harmful food imports from Mexico and India than they do from China. Federal inspectors have turned away hundreds of shipments of produce from the Dominican Republic and even candy from Denmark.

Safety concerns are not confined to imports. Americans have been poisoned by beef from Nebraska, spinach from California, and peanut butter from Georgia. The same safety standards apply to imported food as to domestic food. The right response is not wholesale restrictions on imports, but to find better ways of keeping harmful products out of stores no matter where the products originate.

The large majority of food products imported to the United States, like those grown domestically, are safe and healthy. In fact, imports improve our health by making fresh produce available year around. Imports also keep prices down at the grocery store, which benefits low-income families most of all. Raising tariffs on imported food would certainly do more harm than good.

Is England Becoming a Nation of Big-Government Snitches?

According to Tax-news.com, about 200,000 Brits have tattled on their neighbors to the tax authority. It is unclear whether this has generated more revenue for the
UK’s bloated public sector, but the more interesting aspect of this story is that the snitches do not get any reward. At least Russians who ratted out family members to the KGB might get a pair of jeans from the West. And Cubans who turn in their colleagues might get their meat ration upped to twice monthly:

Almost 200,000 Britons have shopped their friends, family and colleagues to the tax man in the year since HM Revenue and Customs set up a confidential hotline for taxpayers to inform on those they suspect of dodging their taxes. … However, it is difficult to gauge the effectiveness of the HMRC initiative, as the Treasury reportedly refused to divulge to the Times how many successful prosecutions had resulted from such informants, nor how much extra tax had been brought in. …informants in the UK receive no monetary rewards for shopping tax evaders. …HMRC has said that it needs additional powers and deterrents to extract money from non-payers, in order to reduce the cost and effort of pursuing around 200,000 people through the court system every year.

Gordon Brown’s Finance Minister Defends UK’s Status as Tax-Haven

The United Kingdom has extremely favorable rules for “non-domiciled” residents, a policy that enables highly productive people to live in London while avoiding most taxes on capital income and foreign-source income. The left in Europe hates this policy, especially since entrepreneurs and investors are escaping high-tax nations to live in London, but the new Chancellor of the Exchequer seems content to leave well enough alone. The Observer reports:

London, the great global financial centre, has another claim to fame: it has become the fastest growing destination for international tax avoiders. The world’s super-rich and an elite cadre of financiers working in the Square Mile are increasingly using non-domicile tax status to sidestep paying tax on their fortunes. …Those benefiting from non-dom status have rocketed over the last five years. The Treasury…confirmed that 112,000 individuals indicated non-dom status in their self-assessment returns in the tax year to April 2005. This is a 74 per cent increase over 2002’s figures. …Unlike UK citizens, non-doms escape tax on income from property or capital gains. It is not only the international jet set who claim non-dom status; it is also available to some of the most powerful figures in the City. …Non-domicile status is self-assessed. Forms are easy to download from the web and there are just 19 questions. One tax expert says it is easy to convince the Revenue that a claimant is based overseas, whether it is through a relative or a series of overseas investments. In addition, the Revenue makes very few checks on status. Many senior City figures qualify for non-dom tax exemptions, including Dominic Murphy, the UK boss of private equity giant KKR. And it is widely thought that the Chancellor’s City adviser Sir Ronald Cohen and a large collection of Labour Party donors do too.  …Earlier this week, new Chancellor Alistair Darling made it clear that nothing must harm the international pre-eminence of the City and he warned against ‘knee jerk’ reactions to calls to amend the regulation.

Mr. Frank Gets Mixed Up

In an article today in the Boston Globe, Rep. Barney Frank (D, MA) commented on the closure of a fabric maker located in or near (the article is unclear) his district:

These working-class people are bearing the brunt of a policy of globalization that benefits the few and damages the many,” Frank said. (my emphasis)

Mr. Frank has the problem precisely backwards. Open trade benefits the many — through more competition and lower prices — even though it takes away the protection of a chosen few. It is tariffs that impose (relatively small) costs on many dispersed consumers, but benefits concentrated interests (and harms the economy overall). In this case, the closure of a 900-employee textile plant is a highly visible manifestation of a phenomenon that has been largely postive on net. It is sad for those losing their jobs, to be sure, but millions of American consumers benefit every day from opening the U.S. market to cheaper imports.

As a Wall Street Journal article yesterday pointed out (and my colleague Dan Ikenson blogged about here last week), the power of organized labor in the Democratic Party has probably spoiled any further trade liberalization in the near future, despite the month-old and much-hyped “bipartisan deal” on trade. This backtracking comes after the administration agreed to Democrats’ demands for stronger labor and environmental provisions in trade agreements.

The recently-inked deal with Korea — the biggest trade deal for the United States since NAFTA, and one that promises large market opportunities for American farmers and service providers, not to mention deals for U.S. consumers — is probably off, all because of American automobile makers who fear competition from Korean imports and assert that the Korean market was not going to open enough for their liking. (Of course, if the deal fails, then the market probably won’t open further at all, but that logic is apparently unconvincing.) Talk about benefiting the few and damaging the many.

The ‘Pseudo-Dictatorship of the Market’

Some people hoped that new French president Nicolas Sarkozy would liberalize France’s economy and reduce the burden of government. But all the evidence points in the other direction.

The International Herald Tribune reports on Sarkozy’s statist choices:

[C]riticism of Sarkozy’s interventionist language…is mounting. The question that Eurocrats, central bankers and fellow politicians are asking is the same they asked three years ago: Is the man who wants to shake up France’s labor market and ignite economic growth with a flurry of tax cuts the liberal European he claims? Or is he an old-style Gaullist in modern disguise?

“Institutions, procedures, directives and rules are not ends in themselves,” Sarkozy declared in Strasbourg, calling for a Europe “that does not submit itself to the pseudo-dictatorship of the market….

Sarkozy has shown little willingness to abandon certain nationalist instincts of past French leaders. He has defended EU agricultural subsidies against demands for greater trade liberalization. He has shown little inclination to withdraw from France’s aim of creating national champions, particularly in the energy sector. On Thursday, he debated the future of the state-controlled gas company Gaz de France with his prime minister and finance minister. And rather than encouraging globalization, he has appeared to reinforce French fears of unfettered capitalism — for example, by fighting to remove a largely symbolic affirmation of EU competition policy from the revamped treaty agreed last month in Brussels.

“Sarkozy talks right but rules left. Portrayals of him as a French Thatcher who will shake things up are vastly exaggerated,” said one EU official in reference to the former British prime minister Margaret Thatcher. “He is, after all, French.”