Topic: International Economics and Development

Regulatory Competition Leads to Better Policy in France

The Financial Times reports that France is deregulating and cutting taxes in hopes of competing with London in the financial services market. The article also notes that Switzerland and Germany also are trying to attract business by reducing the burden of government. Needless to say, these positive reforms would not happen if the bureaucrats in Brussels had the authority to create a continent-wide regulatory regime. Another threat to deregulation and better policy is IOSCO (the International Organization of Securities Commissions), which wants to impose one-size-fits-all regulation on all jurisdictions - particularly ones with a more laissez-faire approach:

The French government yesterday unveiled its plans to boost Paris as a financial centre, proposing a more lightly regulated market for companies and funds on the Euronext exchange. Several of the measures are closely modelled on UK structures, as the French capital seeks to make up ground lost to London. The new market segment would operate according to European Union minimum standards in terms of listing and disclosure. …Switzerland’s leading financial services companies launched their own campaign last month for tax cuts, a relaxation of immigration rules and other measures to turn their country into the world’s third largest financial centre after London and New York. Frankfurt launched its own more lightly regulated market segment two years ago… Ms Lagarde said the government had already shown serious commitment to financial services by cutting taxes, particularly for higher earners. France’s high taxation is one reason why so many young French bankers flock to London.

Shockingly Bad

Cato adjunct scholar Tyler Cowen takes on Naomi Klein’s book Shock Capitalism in the New York Sun:

Rarely are the simplest facts, many of which complicate Ms. Klein’s presentation, given their proper due. First, the reach of government has been growing in virtually every developed nation in the world, including in America, and it hardly seems that a far-reaching free market conspiracy controls much of anything in the wealthy nations. Second, Friedman and most other free market economists have consistently called for limits on state power, including the power to torture. Third, the reach of government has been shrinking in India and China, to the indisputable benefit of billions. Fourth, it is the New Deal — the greatest restriction on capitalism in 20th century America and presumably beloved by Ms. Klein — that was imposed in a time of crisis. Fifth, many of the crises of the 20th century resulted from anti-capitalistic policies, rather than from capitalism: China was falling apart because of the murderous and tyrannical policies of Chairman Mao, which then led to bottom-up demands for capitalistic reforms; New Zealand and Chile abandoned socialistic policies for freer markets because the former weren’t working well and induced economic crises.

My old friend Steve Horwitz asks Klein a couple of pointed questions:

1. You say that crises are opportunities for free market ideologues to force their preferred policies through in violation of democratic processes. However, in the gravest crisis of the 20th century, the Great Depression, it was government that grew enormously, and the free market was restricted, in ways never before seen in the US….How do you reconcile the main thesis of your book with the historical evidence that government has grown and markets have been made less free in almost every crisis of the 20th century? …

2. In the aftermath of the biggest crisis in the US of the 21st century (9/11), government spending has grown enormously, government regulations have expanded, and civil liberties are threatened. Each of these are results that people like Milton Friedman and many other classical liberal free market economists not only oppose, but oppose precisely because they are antithetical to the very free market reforms they would like to make. … What gives? It certainly seems like crises produce a lot more government and a lot less free market reform.

Horwitz is making the same point Justin Logan made recently; as Bruce Porter and Robert Higgs have shown, much of the growth of government throughout American history (and elsewhere) has been a result of crises like wars and depressions. Sometimes, it’s true, an economic crisis may precipitate economic reforms, as in New Zealand in the mid-1980s. But the historical record shows that states usually seek more power, not less, when confronted by a crisis.

Pinochet’s economic reforms in Chile, of course, are a centerpiece of Klein’s argument. Pinochet was a military dictator, the argument goes, and he implemented the policies of Milton Friedman. QED. But there are lots of military dictatorships – Wikipedia counts 34 in Latin America – and Pinochet’s junta seems to have been the only one to pursue free-market policies. It’s an exception, not a rule. Which is hardly surprising: military men tend to be attuned to hierarchy and control, not to the undirected diversity of a market economy.

How Do Americans Really Feel about Trade?

As it turns out, it’s pretty difficult to tell! Much, apparently, depends on how the question is phrased.

Today, the Washington Post reports findings from the latest Pew Global Attitude Project report, which was released yesterday. The Pew study finds that 59% of Americans have a positive view of trade, while 36% have a negative view. The results differ to some extent by demographic characteristics like age, income, and political party affiliation. Pew found that 64% of Republicans believe “the impact of trade on our country is good.”

That figure differs vastly from the result of the WSJ/NBC poll (about which I wrote yesterday), which found that 59% of Republicans believe that foreign trade has been bad. What explains these nearly diametrically opposite conclusions? A very significant factor appears to be the question phraseology.

In the WSJ/NBC poll, the respondent was asked to identify the statement that came closer to his/her point of view.

Statement A: “Foreign trade has been good for the U.S. economy, because demand for U.S. products abroad has resulted in economic growth and jobs for Americans here at home and provided more choices for consumers.” (32% of Republicans agree)

Statement B: “Foreign trade has been bad for the U.S. economy, because imports from abroad have reduced U.S. demand for American-made goods, cost jobs here at home, and produced potentially unsafe products.” (59% of Republicans agree)

In the Pew poll, the respondent was asked the following question:

What do you think about the growing trade and business ties between the
United States and other countries — do you think it is a very good thing, somewhat good, somewhat bad or a very bad thing for our country?

Pew tallied the “very good” and “somewhat good” responses and found they represented 59% of total respondents, and 64% of Republican respondents.

What does this all mean? It means that respondents provide answers to questions as asked, and that it is the data interpreters who give too much meaning to the responses elicited by their questions. Neither the Pew question nor the WSJ/NBC question probes peoples’ comprehensive views about trade (and it is evident to me, as I wrote yesterday, that the phrasing of the WSJ/NBC questions biased the results). Nevertheless, the written summary of the results of each poll would have the reader believe that each poll is dispositive of the issue.

That the question phraseology appears to be a determinant of the answer suggests that a better way to discern Americans’ views about trade would be to ask a multitude of questions — including redundant questions phrased differently.

Two figures that appear to be credible from the Pew report are a bit disconcerting. The same question asked of Americans was also asked of citizens in 46 other countries. Positive views of trade were lowest in the United States. And the 59% holding positive views constitutes a huge drop off from 2002, when the same question from Pew found 78% of Americans holding positive views on trade.

Thus, while it appears that Americans are souring on trade, it is hard to tell how many Americans are how sour.

Correction to Yesterday’s Post, (Lies, Damn Lies,…)

Yesterday on this blog, I posted my criticisms of a WSJ/NBC poll and a WSJ article that was based on that poll. Although I firmly stand by my central criticism that there was a clear bias in the phraseology of Question 10 that was completely unnecessary, I made a factual error in my post that I wish to correct.

In paragraph four, I assert (about the poll) that “no questions were asked about whether the respondents would agree with a Republican candidate who favors tougher regulations to limit foreign imports.” But it was subsequently brought to my attention that such a question was asked at question 7.7 of the poll. I stand corrected.

Had I not overlooked that question, I would not have criticized the author for reporting a “phantom result.” I apologize to John Harwood for the assertions and implications related to that point.

With the exception of the second and third sentences of paragraph four, the entire blog post, with the same tone and same conclusions, remains valid.

Lies, Damn Lies, Statistics, and a Media Happy to Abuse Them

The Wall Street Journal reports ($) today that support for free trade is fading among Americans who are likely to vote Republican.  Perhaps that’s true.  It certainly wouldn’t be surprising given the way most Americans are misled by their political representatives and the mainstream media about how to measure trade’s impact on the economy.

But something really smells about today’s lead article in the WSJ.  The WSJ/NBC News poll upon which the article is based simply doesn’t support the author’s conclusions.  In fact, the article is misleading in ways I find inexcusable for a newspaper of that caliber.   If you weren’t already, you should be highly skeptical of polling results (at least as reported second hand).

The third paragraph in the article reads: “Six in 10 Republicans in the poll agreed with a statement that free trade has been bad for the U.S. and said they would agree with a Republican candidate who favored tougher regulations to limit foreign imports.”  Next to that paragraph is a graphic box with a bar chart showing responses to the question: “Is foreign trade good or bad for the U.S. economy?”  The “Good” bar showed 32%; the “Bad” bar showed 59%.

Here’s the first problem.  That question (“Is foreign trade good or bad for the U.S. economy?”) was not asked in the poll.  The second problem: no questions were asked about whether the respondents would agree with a Republican candidate who favors tougher regulations to limit foreign imports.  But that didn’t stop the author from reporting that phantom result in paragraph three.

Here is a link to the subject WSJ/NBC poll.  Question 10 is the only question about trade, which gives two statements and asks the respondent to reveal which statement comes closer to his/her point of view.

Statement A: “Foreign trade has been good for the U.S. economy, because demand for U.S. products abroad has resulted in economic growth and jobs for Americans here at home and provided more choices for consumers.” (32% of Republicans agree)

Statement B: “Foreign trade has been bad for the U.S. economy, because imports from abroad have reduced U.S. demand for American-made goods, cost jobs here at home, and produced potentially unsafe products.” (59% of Republicans agree)

From these results, John Harwood concludes that “six in 10 Republicans in the poll agreed with a statement that free trade has been bad for the U.S. and said they would agree with a Republican candidate who favored tougher regulations to limit foreign imports.”

But as you can see, there is a clear bias in the manner of phrasing the questions.  You’re not agreeing that foreign trade is good or bad, but that it’s good or bad because… And respondents are more likely to be familiar with one of the offered consequences of trade.  Certainly, the issue of “potentially unsafe products” is fresh on our minds, thus respondents are basically escorted to that answer.

What bugs me most about this is that the competing statements: foreign trade has been good for the U.S. economy vs. foreign trade has been bad for the U.S. economy would have been perfectly objective phraseology.  Why introduce subjective perspectives?

That a professional polling agency would introduce such obvious bias into its polls and a major newspaper would ignore the obvious problems with the results is troubling.  For all we know, Ron Paul and Mike Gravel are the leading candidates for their respective parties’ nominations.

CORRECTION: The poll did ask about a Republican candidate who favored tougher regulation. See here.

Which Part of “Not Green Box” Does the USDA Not Understand?

After a long wait, the United States finally notified the other members of the World Trade Organization of its spending on agricultural programs today. Although timely notification is supposedly a key requirement (and benefit) of the WTO, the U.S. had left members in the dark as to the true nature and extent of its farm subsidies since 2004, and that notification covered only the years up to 2001.

Today’s notification asserts that U.S. spending on so-called “Amber-box” domestic support (that which is linked to production and/or prices of agricultural commodities, and thus is the most market-distorting) was well below its limit of $19.1 billion in every year between 2002-2005 (the period covered by the latest notification). However, sources tell me that the administration admitted in a telephone press conference today that direct payments were classified as “green box” (spending which is at most minimally trade-distorting and therefore not subject to reduction commitments) in their calculations, in direct contravention of a 2005 WTO Appellate Body ruling on U.S. Cotton programs, which stated (at para. 342) “[P]roduction flexibility contract payments and direct payments … are not green box measures exempt from the reduction commitments by virtue of Annex 2 of the Agreement on Agriculture.” (my emphasis)

Seems pretty clear to me.

In other words, if direct payments are properly classified as amber box measures, the United States’ spending might look very different, and may not be below the legal ceiling after all, especially in years 2004 and 2005 (see more here). Members of Congress currently writing a new farm bill might want to keep the threat of WTO litigation (including pending challenges by Canada and Brazil) in mind.

Klein Slanders Friedman

A video interview of Naomi Klein, who’s promoting her new book, has some truly vicious slander of Milton Friedman. Klein says:

I start the book with a quote from Milton Friedman saying only a crisis, actual or perceived, produces real change. And you know Milton Friedman lived by this. His first laboratory was Chile under Augusto Pinoche, where the crisis was the coup and an economic crisis and it was after that that you had the economic shock therapy. And you also had another kind of shock which is torture, which was a way of enforcing these policies.

Klein seems to be insinuating that Friedman somehow orchestrated, supported, or encouraged the coup in Chile, or at least that he was an important Pinochet advisor. She also makes it sound like torturing people was one of Friedman’s policy recommendations. But here’s how Friedman tells the story:

MILTON FRIEDMAN: While I was in Santiago, Chile, I gave a talk at the Catholic University of Chile. Now, I should explain that the University of Chicago had had an arrangement for years with the Catholic University of Chile, whereby they send students to us and we send people down there to help them reorganize their economics department. And I gave a talk at the Catholic University of Chile under the title “The Fragility of Freedom.” The essence of the talk was that freedom was a very fragile thing and that what destroyed it more than anything else was central control; that in order to maintain freedom, you had to have free markets, and that free markets would work best if you had political freedom. So it was essentially an anti-totalitarian talk.

INTERVIEWER: So you envisaged, therefore, that the free markets ultimately would undermine Pinochet?

MILTON FRIEDMAN: Oh, absolutely. The emphasis of that talk was that free markets would undermine political centralization and political control. And incidentally, I should say that I was not in Chile as a guest of the government. I was in Chile as the guest of a private organization.

It’s true, of course, that Pinochet employed some of the economic policies Friedman had been advocating for decades, that some of Pinochet’s advisors had studied economics at the University of Chicago, and that Friedman subsequently cited the success of those policies. But just as Michael Moore’s endorsement of Cuba’s health care system doesn’t constitute endorsement of Castro’s dictatorial rule, so Friedman’s endorsement for Chilean tax or pension policies don’t constitute an endorsement of coups, purges, or torture.

There’s also some ideological slander at the heart of Klein’s argument, which she lays out later in the video. Klein seems to believe that Haliburton and Blackwater—companies that thrive on wartime corporate welfare—represent Friedman’s ideal society. Not only is this obviously wrong on a theoretical level, but it’s also flatly at odds with Friedman’s stated views. Milton Friedman was an opponent of the Iraq war and has been vociferous critic of corporate welfare for decades. Conflating Friedman’s advocacy of limited government with Bush’s interventionist foreign policy and profligate domestic spending illustrates either a failure to grasp the basics of Friedman’s position or a calculated attempt to play to the prejudices of her intended audience, many of whom will lump together anyone they don’t agree with as “right wingers,” even if they have little in common with one another.