Topic: Trade and Immigration

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.

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.

Trade Telltale

Since the “Great Compromise” on trade policy between the administration and Congress last spring, I have been outspokenly skeptical about prospects for further trade liberalization before 2009.  In that deal, the administration bowed to the wishes of Congressional Democrats to include enforceable labor and environmental provisions in pending and prospective trade agreements. 

For that accommodation, the Congressional leadership was supposed to help secure passage of the pending bilateral agreements with Peru, Panama, Colombia, and Korea.  Almost immediately, though, the leadership voiced additional concerns about Colombia and Korea, which are widely considered to be very long-shots at best.

But after visiting Peru last month and getting his own fingerprints on the final details of the deal, House Ways and Means Committee Chairman Charles Rangel of New York returned home and voiced his support for the agreement.  And, it appears, there is support for the Peru agreement among members of Ways and Means and Senate Finance.  Several Congressional staffers have suggested that if the Peru vote garners relatively strong Democratic support, there may be hope for the others.

The problem, however, is that the House Democratic Caucus may not be prepared to follow.  Remember all of those freshman Democrats who campaigned in ’06 on an anti-trade message?  It seems they won’t go quietly into the night.  Whereas the veteran Democratic trade leadership may be inclined to use protectionist rhetoric to shift the terms of the trade debate in their favor, the new blood in their caucus is more inclined to believe it.  In that regard, the Rangels and Levins and Baucuses on the Hill (guys that probably know better) have helped create a potential Frankenstein.

On Friday, rank and file Democrats addressed a letter ($) to their Caucus Chairman, Rahm Emanuel of Illinois, asking that the next caucus meeting be devoted to the U.S.-Peru Agreement.  The letter notes that there isn’t much support for the agreement among Democrats and that the Ways and Means Committee markup scheduled for tomorrow will prove divisive.

There were only seven signatories to the letter and it is unclear how representative it is of Democratic sentiments.  But if the topic proves divisive and rancorous – a development Nancy Pelosi wants to avoid – it will be interesting to see which side the House Speaker chooses to rein in.  The outcome of this potential impasse will tell much about the direction Democrats want to go on trade.