Topic: Trade and Immigration

Expanded Trade Adjustment Assistance Passed in House

Following on from my earlier post, the U.S. House of Representatives just passed the Trade and Globalization Assistance Act of 2007, although with insufficient votes to override a veto, as threated in yesterday’s Statement of Administration Policy (available here). The new legislation would roughly double the level of federal spending on the trade adjustment assistance program, by expanding the income and health care benefits to new categories of workers and increasing training (keep in mind this is the same program that the Government Accountability Office has admitted was “ineffective”).

TAA moves on to the Senate next, where we might see a bit more of a fight: the Chair and Ranking Member of the Senate Finance Committee are at odds over possible changes to the program.

[Hat tip: Our crack Government Affairs team.]

Limited Government: Good for Thee, But Not For Me

An interesting, if not encouraging, piece today by Jonah Goldberg in the LA Times about how Americans, although all for limited government in theory, are all-too-fond of the goodies government throws their way in practice. People usually like stuff, especially if someone else pays for it. Consequently, according to Mr Goldberg, the constituency for limited government is small. That might explain the lack of advocates for a very limited government among the front-runners for the Republican nomination (Side note: I have often wondered how many of the Democrats I know would lose their enthusiasm for Ron Paul if they looked beyond his anti-war stance).

Things might get worse, too. A 2006 study from the Heritage Foundation shows that the number of people who receive some sort of assistance from the government grew two and a half times more quickly than the U.S. population as a whole between 1962 and 2005 (see graph 10). And although it does not measure the same thing, a recent report by the staff of the Joint Committee on Taxation shows that 42 percent of Americans didn’t pay any income tax in 2006 (hat tip: Chris Edwards).

It seems we may be reaching a crucial “tipping-point” of dependency talked about in the Heritage report, although obviously it can only go so far before those being looted pull the plug (Say, that sounds like a good idea for a book plot!).

When Protectionists Meet Welfare Kings

Yesterday the House Ways and Means Committee approved by a margin of 26-14 a bill (H.R. 3920) to expand and extend (until 2012) the Trade Adjustment Assistance Program, which provides extra welfare and training to workers who lose their jobs as a consequence of import competition or outsourcing. The new bill would expand trade adjustment assistance to cover more workers beside those who work in the manufacturing industry, including service employees, who currently cannot get benefits under TAA if their jobs are moved overseas. It also increases the benefits and training available to trade-displaced workers, and the “incentives” for states to increase unemployment insurance coverage. It is still unclear just when this bill will face the full House, or what any alternatives will be.

I have a trade briefing paper, forthcoming soon, on this topic and I wrote an op-ed yesterday, arguing that TAA should be cancelled rather than extended. Here’s why: first, fewer than 1 in 30 unemployed people can point to import competition or outsourcing as the reason for their unemployment. Changes in consumers’ tastes, changes in technology and increasing productivity is far more likely to be a cause of unemployment (more from my colleague Dan Griswold here). So TAA is yet another example of special interests receiving special treatment.

Second, while TAA for workers cost a “mere” $800 million or so in 2006, we can expect that cost to rise as more workers are included (more than 80 percent of American workers work in the services sectors, although many of those are non-tradeable) and Congress sees fit to spend more of your money on wage insurance, training and the like.

Third, although hints have been made that the preferential trade agreement with Peru is predicated on passage of TAA extention, the historical bargain between free-trade advocates and workers–that any trade liberalization would be accompanied by extra welfare benefits for those who lose their jobs– is no longer certain. For sure the bilateral deal with the most to offer economically, that with South Korea, looks all but doomed.

The moral case for TAA is dubious at best. A lack of prospects for commercially meaningful trade liberalization tips the balance.

The Draft: Way to (More) War

The United States’ increased military activity following the declaration of the “War on Terror” has inspired a growing movement to reinstitute compulsory service — that is, to bring back the draft. Perhaps surprisingly, the movement is largely on the political Left.

We could joke cynically that the new draft movement shows Democrats’ love of slavery is still strong nearly a century and a half after the 13th Amendment. But draft advocates have a serious motivation: They see the return of compulsory service as “a way to peace.”

Their thinking goes like this: If the draft were reinstated, then a cross-section of the public would be directly affected by U.S. military action — our children could be drafted. The public would thus develop a more critical view of military involvement than what they have now. They would pressure Congress and the White House to give greater attention to the troops’ well being, would prompt a withdraw from Iraq, and would decrease the likelihood of questionable missions in the future. As an Iraq war veteran wrote in a Sunday NYT op-ed:

[S]erious consideration of a draft could set off such a violent reaction from the American public that the pressure on politicians to abandon their cliché-ridden rhetoric and begin a well-considered withdrawal would be overpowering.

The draft advocates’ motivation is respectable. Unfortunately, their strategy is too clever by half — or, perhaps, not clever enough about the incentives and disincentives of political leaders who dispatch troops, and about 20th century American military history.

With no compulsory service, America’s military can only rely on volunteers to fill its ranks. If political leaders are overly aggressive in their use of the military, or if service members are poorly treated, poorly compensated, and poorly trained and equipped, or if they are exposed to unacceptable risk, then the Pentagon will have trouble with recruitment and retention. That’s why, when the United States abandoned selective service in 1973 after 25 years of paying conscripts poorly, training them minimally, and using them as cannon fodder in Korea and Vietnam, the Pentagon had to increase troops’ compensation significantly and reduce their risk of being killed or injured in combat (which was accomplished, in part, by developing and deploying advanced weaponry and improving troops’ skills and training).

Call this the “enlistment veto” — because the United States has an All-Volunteer Force (AVF), would-be volunteers act as a check on the politicial leaders who would send them to war and the military leaders who would command them. If those leaders are reckless and abusive in their use of the troops and miserly in the troops’ compensation, then the military will have trouble filling its ranks. As a result, the leaders would be less inclined to use the military because the understaffed force would be less likely to achieve military success.

Contrast the AVF with compulsory service, where there is no enlistment veto. With the draft, young people are forced to soldier for America’s political and military leaders regardless of the soundness of those leaders’ decisions, their treatment of the troops, and the troops’ level of compensation, training, and equipment. With the draft, U.S. politicians have an ample, cheap supply of military manpower to use as they see fit.

Put simply (and perhaps crudely): If political and military leaders were given a larger, cheaper supply of a vital input to war — namely, troops — would that result in less military involvement or more?

A look at selective service in the 20th century shows politicians can find all sorts of questionable uses for the military when young people are forced to serve. Following the expiration of the WWII draft in 1947, the United States adopted the peacetime selective service program for the period 1948–1973. In that quarter-century, the United States dispatched troops to the following foreign entanglements:

  • China (1948–1949)
  • Korea (1951–1953)
  • Egypt (1956)
  • Lebanon (1958)
  • Panama (1958)
  • Vietnam (1960–1975)
  • Panama (1964)
  • Dominican Republic (1965–1966)
  • Cambodia (1969–1975)

Did U.S. leaders show they more highly valued the cheap, forced labor of the selective service era than the more costly, more discriminating labor of the post–selective service era? Complete data on casualties for the two time periods are difficult to compile, but we can make a rough comparison by using fragmented data [sources]. The two major U.S. military involvements of the selective service era (Korea and Vietnam) saw 81,165 hostile action deaths of U.S. troops and 256,587 wounded. In contrast, for the period 1980–1999 (including the Gulf War and Somalia) plus the Iraq and Afghanistan wars (as of 10/06/2007), U.S. troops experienced a total of 3,927 hostile action deaths, and the three prominent post-1980 military conflicts (as of 10/06/2007) yielded a total of 30,290 wounded.

Granted, the conflicts and geopolitical dynamics of the selective service era are different than the post–selective service era. But given the historical data, it’s very hard to accept draft advocates’ claim that reinstituting compulsory service would make the United States less aggressive militarily and would make political and military leaders more responsive to the troops’ concerns.

Draft proponents would respond that using compulsory service to supply troops for a politically unpopular war would lead to social unrest that would reshape U.S. politics. But is that unrest a stronger check on political and military leaders than the enlistment veto? Consider that there has been precious little change in Iraq policy despite protests and considerable public criticism of the war. And yes, the United States did change course in Vietnam after a lot of 1960s protests — but it took a very long time before that policy change happened. It is difficult to believe that the United States would have fought the Vietnam War the way it did, for as long as it did, if it had to rely on an all-volunteer military instead of being able to call on cheap, forced labor.

The “protests instead of enlistment veto” strategy becomes even more untenable when we consider U.S. demographics. The American public is aging, families are growing smaller and more fragmented, and it is older Americans with adult children — people who are not at risk to be drafted, and whose kids are not at risk to be drafted — who are increasingly dominating American politics. This older, less-connected American majority seems unlikely to take a stronger interest in the well-being of U.S. troops than the would-be volunteers themselves.

How to Argue against SCHIP

I like to open with this: “If your goal is to improve the health of low-income children, the State Children’s Health Insurance Program is a bad tool for achieving that goal.”

Then I make as many of the following points as possible.

  1. SCHIP does a bad job of targeting assistance. About 60 percent of children currently eligible for SCHIP already have private health insurance, while 77 percent of those targeted by this expansion (i.e., children between 200-300 percent of the federal poverty level) already have private health insurance.
  2. SCHIP covers four uninsured children for the price of ten. Economists Jonathan Gruber and Kosali Simon estimate that, in effect, 60 percent of children covered by SCHIP expansions already had private coverage.
  3. There is no evidence that SCHIP is the best way to improve the health of targeted children. Economists have found no evidence that SCHIP is a cost-effective way of improving health. Discrete health programs or policies that improve incomes or education could deliver as much or more health for the money.
  4. SCHIP discourages families from climbing the economic ladder. If a single mother of two earning minimum wage in New Mexico increases her annual earnings by $30,000, she pays an additional $4,000 in taxes and loses $26,000 in SCHIP and other government benefits. In other words, her net income would not change, therefore she has no financial incentive to climb the economic ladder. Expanding SCHIP would put downward pressure on even more families’ incomes, which could harm child health.
  5. Like Medicaid, SCHIP makes private coverage less affordable for people outside the program. Under Medicaid (and therefore SCHIP) rules, the government agrees to pay a percentage of what drug makers charge private payers. Economists have found that manufacturers respond by raising prices for private purchasers an estimated 15 percent.
  6. SCHIP would do nothing to address systemic quality problems. According to a recent study in the New England Journal of Medicine, “Expansion of access to care through insurance coverage, which is the focus of national health care policy related to children, will not, by itself, eliminate the deficits in the quality of care.”
  7. SCHIP’s self-interested advocates. Why do you suppose the physician, pharmaceutical, and health insurance lobbies are agitating for health care subsidies that lack any evidence of cost-effectiveness?
  8. This SCHIP expansion taxes the poor to benefit the middle class. Isn’t that just cruel?
  9. Eliminating SCHIP and letting people purchase coverage from out-of-state is a better alternative. The latter would enable families to avoid unnecessary regulatory costs, which the Congressional Budget Office puts at about 15 percent of health premiums. That would benefit SCHIP-targeted families most of all. And it would do so without raising anyone’s taxes, showering subsidies on non-needy families, pulling families into a low-wage trap, or increasing the cost of private insurance. As for eliminating SCHIP, when Congress cut non-citizen immigrants from the Medicaid rolls, contrary to all predictions the number of uninsured non-citizen immigrants actually fell. Why wouldn’t SCHIP families, who are more affluent, fare even better?

Then I like to close with this: “If you’re not interested in the best way to promote child health, not interested in targeting government assistance to the needy, and not concerned about trapping families in low-wage jobs…exactly what is it you are hoping to accomplish?”

Here [audio file] is what happened after I made just a few of these points to left-wing talk show hostess (and frequent Alan Colmes stand-in) Leslie Marshall.

Why the Mechanisms of Inequality Matter

Atlantic blogger Matthew Yglesias argues that it doesn’t matter why income inequality is increasing. According to Matt, as long as higher top tax rates and more downward redistribution won’t much hurt economic performance, then we ought to just go ahead and raise taxes and increase transfers, never mind the mechanisms of rising inequality.

Oftentimes, though, liberals act as if the thing that needs to be done is to prove somehow that inequality has exploded because people are in some sense “cheating” – so you get these long stories about corporate governance and corrupt compensation committees, etc. The problem here, though, is that even if this is true, it could still also be true that the cure – policy interventions into the operation of the market – would be worse than the disease. And, conversely, if you could prove that the rise in inequality was all above board – really was driven entirely by globalization and technological change – nothing about that causal analysis would debunk the idea that we ought to make our tax system more progressive.

The relevant debate isn’t about how we got here, it’s about what would happen if we tried to change things. Some people, of course, think changing things would be immoral. Indeed, there are some people I know who adhere to the bizarre view that one source of injustice in the contemporary United States is that our richest citizens aren’t rich enough. But beyond those people, you have a lot of people who take the view that raising taxes would have dire economic consequences, whereas lowering them would have large benefits. That’s the only debate that really matters in this regard. If the costs to the non-rich of higher taxes on the rich would be small (as I believe), then higher taxes on the rich to provide more benefits to the non-rich makes sense irrespective of why inequality has grown so much whereas if the costs would be high then it doesn’t make sense – again, completely apart from the causal issue.

I think Matt and I agree that the pattern of national incomes is largely morally irrelevant, but for quite different reasons.

From the classical liberal perspective, if today’s pattern is less equal than yesterday’s, but both patterns emerged from billions of individual transactions, each one of which took place on terms agreeable to the parties involved, then there is really nothing left over to evaluate morally. The relevant questions about the distribution of the gains from trade have already been settled in both cases.

Additionally, once we notice that many of these billions of transactions take place between parties of different nationalities – Americans trading with Canadians trading with Chinese, etc. – it becomes obvious that it is extra arbitrary to focus on national patterns of income, as if the nation were a giant factory with profits in need of equitable distribution. Many liberals, even extremely gifted professional liberal economists like Paul Krugman, seem congenitally incapable of thinking carefully about why nation-level equality matters, partly due to the blithe assumption of a fundamentally fallacious economic nationalism that afflicts both popular politics and academic economics.

That said, many welfare liberals are at some level quite sensitive to the fact that if the pattern of national incomes emerged from fair processes, then the argument for taking some people’s money and giving it to others is extremely weak. That is why many of Matt’s fellow travelers are keen to show that the pattern of incomes did not emerge from fair processes. The emphasis in some quarters on the importance of unions is a good example. If you think that strong unions are required to bargain laborers a fair share of their firms’ profits, and that the power of unions has eroded, then it will be natural to think that labor is now receiving an unfairly low wage, which will likely be reflected in nation-level inequality measures. In this case it should be obvious why this mechanism of rising inequality matters: because it matters for both morality and policy. If the problem is labor’s diminishing share of profits due to diminishing bargaining power, then the appropriate response will be measures designed to improve the bargaining position of unions. An increase in taxes and transfers will simply miss the structural cause for moral concern.

I take it (both from his blogging and from personal conversation) that Matt is some kind of utilitarian who really couldn’t care less about matters of fairness or justice – or equality. What Matt cares about is utility. The reason Matt thinks we ought to redistribute “irrespective of why inequality has grown so much,” is simply that he doesn’t care about inequality per se, and so he doesn’t care what caused it. He just suspects that if it were lower, national utility would be higher. If the marginal utility of money is greater for people with less money than for people with more, then we should take money from people with more and give it to people with less, period. Whether or not people acquired their money through fair processes, whether or not they are entitled to it, or have some “right” to it, is simply irrelevant to the question of whether someone ought to take it away from them and give it someone else.

But surely Matt understands that the inability of utilitarianism to acknowledge principled constraints on the way people may use one another is the main reason why most moral philosophers believe utilitarianism to be false. Perhaps Matt thinks these philosophers confused. But if so, then they share their confusion with most Americans, who also don’t believe utility maximization is a good justification for the appropriation of their property. As a matter of practical politics, philosophers don’t matter, but the public does. Which is why Yglesias-style utilitarian arguments for redistribution are non-starters in American politics, while arguments based in structural unfairness have the potential to be powerfully persuasive. If the system is rigged at a deep level against some people, then some redistribution may seem like a good way of balancing the scales. As matter of practical politics, his welfare liberal colleagues are right to keep sniffing around for “cheating” in the system.

Now, as I like to point out, the problem with structural injustice is structural injustice, not the nation-level inequality it may help produce as a side-effect. Which is why I think national Gini coefficients are a distraction, and why programs that lower the national Gini coefficient simply by moving money around make it all-too-easy to ignore the real, hard problems. I suppose a virtue of Matt’s argument for redistribution is that it doesn’t even pretend to be fixing a problem.

Paul Craig Roberts Misses the Mark

In an opinion piece published this week, Paul Craig Roberts takes exception to a conclusion in my recent Cato paper about the state of U.S. manufacturing.  I usually welcome disagreement as an opportunity to elaborate or persuade.  But it’s quite evident that Roberts is not interested in elaboration and is beyond persuasion.  The purpose of his dissent was to construct a straw man against which he could present his skeptical, and empirically refutable, views about trade.  

In my paper, Roberts identifies what he believes is an “extraordinary mistake [which] results in an incorrect conclusion.”  He argues that my failure to distinguish imports produced by U.S. companies abroad (offshored production) from imports produced by foreign firms abroad (import competition) leads me to the erroneous conclusion that “the health of U.S. manufacturing [is attributable] to import competition.”  

First of all, nowhere in my paper do I attribute the health of U.S. manufacturing to import competition.  The only passage from which such an interpretation might be drawn (by a careless reader, I would add) is this one: “Revenues, profits, output, value added, and even compensation rose the most for industries most exposed to import competition, and they rose the least for those industries experiencing the smallest increases in imports.”  That is just a statement of fact, as gleaned from the data.  It assigns no causation to import competition.   

I also write: “Exposure to trade, as evidenced by the relationship between imports and exports and operating performance, has been an important component of the success of U.S. manufacturing industries.”  This statement at least implies some degree of causation, which is supported by the fact that profit growth (operating performance) is a function of revenue growth (expanding exports) and cost reduction (increasing imports of production inputs). 

Second, my failure to distinguish between sources of imports in no way undermines the central points of my paper.  The purpose of my paper (“Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade”) was simply to evaluate the health of the U.S. manufacturing sector.  The conventional wisdom holds that U.S. manufacturing is eroding, the country is de-industrializing, and that import competition is the driving force behind this trend.  We hear this all the time.  Politicians tell us.  Op-ed page writers remind us.  Lou Dobbs warns us.  And members of Congress have proposed all sorts of punitive trade legislation under the banner of arresting and reversing manufacturing decline. 

I set out simply to assess the credibility of the premise.  My approach was straightforward, honest, and devoid of ideology.  There was no shell game or sleight of hand.  I found the most relevant, comprehensible, comprehensive, objective statistics that speak to the health of the sector, presented those data, and offered conclusions that are easily verifiable (i.e., not confused by economic modeling or econometrics or the debatable assumptions upon which such approaches often rely). 

What the data show very clearly is that U.S. manufacturing is far from declining; it is, in fact, thriving.  Output, revenue, profits, profit rates, return on investment, and exports have all been trending upward since the nadir of the manufacturing recession in 2002 and all reached record highs in 2006.  If that doesn’t constitute “thriving,” I’d be interested to learn what does. 

Since data and trends pertaining to the sector as a whole might mask different conditions in particular industries, I drilled down to explore the health of individual U.S. manufacturing industries (broadly defined at the 3-digit NAICS level).  Out of 18 broadly-defined industries, I found that 12 are doing very well and that 6 are struggling, according to the same metrics used to assess the sector as a whole.  With the exception of the auto industry, those industries that are faring poorly are generally low-technology, low-wage, and labor-intensive. 

With the manufacturing sector and the majority of its component industries found to be doing very well, the purpose of the paper was fulfilled.  The conventional wisdom was refuted.  If manufacturing is thriving – and not declining – then it is moot to demonstrate that trade has not been an important cause of manufacturing decline.  But since trade is so demonized, and the data so exonerating, it was pertinent to describe the relationship observed between trade and the various performance metrics. 

Here are some of my observations:  

  • “the rising level of U.S. imports and exports has been associated with positive developments in key manufacturing performance indicia”;
  • “As manufactured imports declined in 2001 and 2002, manufacturing output, exports, and revenues declined as well.  When imports began to pick up again as the manufacturing recession was ending, all of those real variables tracked upwards, adding more data points to the line that confirms a strong positive correlation”;
  • “As manufacturing imports have achieved new heights, manufacturing output, revenues, exports, and profits have all set records, too.”
  • “The premise that U.S. manufacturing is under duress from imports is not supported by the data”;

It is noted in the paper that industries that experienced higher levels of import growth fared better than industries that experienced lower levels of import growth.  I suggest that access to imported raw materials, components, and capital equipment helps keep the lid on costs of production for U.S. producers.  I mention that 55 percent of all 2006 import value was of intermediate products – precisely those products consumed by industry in its own production processes.  I mention that manufacturing export growth has been strong in recent years and that foreign markets are likely to be even more important to U.S. manufacturers in the year’s ahead since that’s where the dynamic growth is.  All of those conclusions (implications, if you prefer) counsel in favor of treading lightly on the trade protection front. 

The fact that some proportion of U.S. imports might have been offshored U.S. production making its way back to the United States in no way undermines any of the key points in my paper.  Even if all imports were of U.S. offshored production, the fact remains that trade has been an important part of that success story.  To the extent that the import figures reflect offshored U.S. production, rising profitability affirms the wisdom of that decision.  But the proportion of imports attributable to offshored production is likely quite small, and not “substantial,” as Roberts suggests. 

Third, my failure to distinguish between offshored U.S. production and foreign production in the import data is insignificant because other data presented affirm the limited importance of offshored production.  Roberts asserts that offshoring simply substitutes imports for domestic production.  If that were the case and if offshoring constitutes more than an insignificant portion of U.S. imports, then we should see that in the data.  But we don’t.   

Instead, we see that U.S. factory output and U.S. value added increased the most for industries that also experienced the largest increases in imports.  In other words, if those imports are offshored U.S. production, they aren’t having a discernible substitution effect, as U.S. output, value added, and profits are rising too.  We also see that U.S. factories accounted for 21.1 percent of the world’s manufacturing output in 2005 (2.5 times greater than Chinese factories), which is virtually unchanged from the 1993 figure of 21.4 percent.  In absolute terms U.S. manufacturing output and value added have been rising virtually year-after-year, as has world manufacturing output.  Yet, the United States has somehow managed to preserve its share of world manufacturing output for at least 13 years.  If Roberts’ concerns about my data presentation had any merit, we would not observe the correlation between imports and output, nor would we see U.S. share of world output that has been remarkably stable. 

I usually don’t mind disagreement with my point of view.  It happens frequently.  But I find it offensive when someone disparages and dismisses my work without a coherent basis for doing so.