Topic: International Economics and Development

Politicians Seeking Pro-Growth Tax Cuts to Lure Successful People Back to France

The International Herald Tribune reports on the tax-cut battle in France. The President and his Finance Minister are seeking to cut taxes and change the French attitude about wealth creation. In another sign that tax competition is a valuable tool for better policy, the articles explains that a key selling point is the need to make the country attractive once again to the numerous French tax exiles living and working in nations with lower tax rates:

In proposing a tax-cut law last week, Finance Minister Christine Lagarde bluntly advised the French people to abandon their “old national habit.” …Citing Alexis de Tocqueville’s “Democracy in America,” she said the French should work harder, earn more and be rewarded with lower taxes if they get rich. …The government’s call to work is key to its ambitious campaign to revitalize the French economy by increasing both employment and consumer buying power. Somehow it hopes to persuade the French that it is in their interest to abandon what some commentators call a nationwide “laziness” and to work longer and harder, and maybe even get rich.
France’s legally mandated 35-hour workweek gives workers a lot of leisure time but not necessarily the means to enjoy it. Taxes on high-wage earners are so burdensome that hordes have fled abroad. (Sarkozy cites the case of one of his stepdaughters, who works in an investment banking firm in
London.) In her National Assembly speech, Lagarde said that there should be no shame in personal wealth and that the country needed tax breaks to lure back the rich. “All these French bankers” working in London and “all these fiscal exiles” taking refuge from French taxes in Belgium “want one thing: to come back to France,” she said. “To them, as well as to all our compatriots who are looking for the keys to fiscal paradise, we open our doors.”

Sarkozy, France’s Busy CEO

It must be exhausting to be the chairman and CEO of a nation-state-firm that runs everything from retirement plans to universities to energy firms. Steven Pearlstein reports on France’s “hyperactive new president, Nicholas Sarkozy”:

There he is lunching with student leaders at a local bistro to win their support for reform of the nation’s under-funded and under-performing university system.

Here he is on the phone with Russia’s President Vladimir Putin, sealing the deal for the French oil company, Total, for a 25 percent stake in the management of the giant Shtokman gas field.

Now he is in Toulouse, with German Chancellor Angela Merkel, announcing a new governance structure for Airbus that puts a loyal French technocrat in charge.

And there’s Sarko in Brussels, criticizing the European Central Bank for keeping the euro too high and demanding more leeway for France’s ballooning budget deficit.

Rupert Murdoch probably delegates more than this. But Sarko is determined to prove that he can singlehandedly reform the operations of a production-and-distribution entity far larger and more complex than the notorious business conglomerates that eventually displayed significant diseconomies of scale. He’s like a real-life version of the classic Saturday Night Live sketch of a hard-charging President Reagan driving his aides to exhaustion as he masterminds international financial transactions around the clock and around the world.

But as many of the conglomerates found, it might be easier to focus on the French state’s core business — protecting the life, liberty, and property of French citizens — if it sold off some of its peripheral lines, like universities, gas fields, health insurance, airlines, telephones, gambling….

Meet the New Farm Bill

Prepare to pay more for your food. The House Agriculture Committee on Thursday unanimously passed a 2007 farm bill that, in the words of a committee press release, “makes historic investments in conservation, nutrition and renewable energy while maintaining a strong safety net for America’s farmers and ranchers.”

For “investments,” read “spending increases,” and for “a strong safety net,” read “subsidies and trade barriers to keep commodity prices and production artificially high.”

Sadly, the new 2007 farm bill looks a lot like the old 2002 farm bill that is due to expire on September 30. No real changes were made in the Title 1 commodity programs that lavish production subsidies on farmers who grow corn, wheat, cotton, and other program crops. Trade barriers remain against imports of lower-priced sugar, rice, and dairy products.

As we have pointed out in a number of recent Cato studies on farm policy, tens of millions of American families will continue to pay for these programs through taxes and higher prices at the grocery store. Once again, members of the House Agriculture Committee, Democrats and Republicans alike, have demonstrated that they represent a small number of farmers rather than the general interests of the American people.

A Scolding from the EC

The bureaucrats in Brussels may not be able to solve Europe’s demographic problems. They may not be able to promote economic liberalization in Europe’s welfare states. And they may not be able to provide any guidance to nations failing to assimilate large numbers of immigrants. But they can scold European men about not doing the housework.

The EU Observer reports on the latest farce from Brussels:

The European Commission is calling on Europe’s menfolk to help out more at home as a first step to improving women’s career prospects and ending the gender pay gap across the bloc. …EU employment commissioner Vladimír Spidla said, addressing a press conference in Brussels on Wednesday, “It is not possible to reduce the gender pay gap if we do not help out more at home.”

…In the communication, the Commission sets out ways in which the EU can bridge the gender pay gap. It wants the 27 member states to set objectives and deadlines to eradicate the gap, and will also push for equal pay to be made a condition for winning public contracts.

Inside a Chinese Factory

Via Tom, here’s a fantastic series of posts by the guy who’s setting the Chinese supply chain to manufacture the Chumby, an Internet-enabled alarm clock. Here you can see videos of a Chinese factory floor, with workers assembling sneakers. Here is a story about the fanatical level of dedication he has seen among the workers at the factory—dozens of employees stayed at work until 3 AM while he debugged a flaw in the first run of devices, and then showed up again at 8 AM to resume assembly. And finally, here are some videos of Chinese workers doing extremely detailed work quickly and accurately.

Some peoples’ instinctive reaction to this story is no doubt to wring their hands about the exploitation of Chinese workers. It’s not hard to see why; wages are only about $0.60/hour, and the jobs are tedious. And indeed, when I was in college in the late 1990s, there were a lot of activists who did just that, agitating for the shutdown of “sweatshops” in China and elsewhere. But I think this suggests a better way to look at the situation:

The amazing part is that the Shenzhen factories were complaining that labor rates were way too high. Apparently, minimum wage for factories in other regions is much less, so they are seeing contracts migrate away from their factories and inland where labor is cheaper. Think about it–Americans complain about work going to Hong Kong, Hong Kongers complain about work going to Shenzhen, Shenzheners complain about work going inland China, and to Vietnam (apparently Vietnam is the new hotness for cheap skilled labor).

The low wages and tedious work of the early sweatshops were a temporary condition. The author reports that the minimum wage in Shenzhen has been increasing by about 30 percent per year in the last couple of years. As the workers in Shenzhen become more skilled and the companies develop better business relationships with Western companies, demand for the area’s manufacturing facilities rise. The companies expand their facilities and hire more workers, and the competition for workers then pushes up wages. And that, in turn, will lead companies to increasingly transition to more complex and lucrative activities. Firms in Shenzhen will specialize in manufacturing more and more complex products, and eventually some of them will begin designing and building their own products.

That’s what happened in postwar Japan, South Korea, and Taiwan, all of which have since achieved Western levels of affluence. The anti-globalization activists meant well, but in reality, the opportunity to become integrated with the global economy will do far more to help the average Chinese worker than anti-sweatshop laws could possibly have done.

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.