Topic: Trade and Immigration

Bhagwati vs. Bhagwati on Trade Liberalization

Jagdish Bhagwati, one of the world’s finest and most renowned trade economists, gave some of his thoughts on the Doha Round and prospects for trade liberalization in yesterday’s Cato podcast. Professor Bhagwati, who is also on the Board of Advisers of Cato’s Center for Trade Policy Studies, spoke more in depth on the subject at a Cato policy forum last month titled, “U.S. Trade Policy in the Wake of Doha: Why Unilateral Trade Liberalization Makes Sense.”

Unlike most trade policy observers, Bhagwati believes the Doha Round can still succeed. The key to success, he suggests, is for U.S. negotiators to embrace a concept he calls “relaxed reciprocity.”  Rather than seek a highly ambitious outcome by demanding all participants accept maximum “concessions,” U.S. negotiators should improve their own offer while accepting whatever level of reform other countries are willing to undertake.  The logic of this approach rests in the fact that most of the gains from trade liberalization come from opening one’s own market (access to cheaper inputs for business, greater competition and choice, productivity gains, lower prices for consumers), and thus, such reforms are not concessions at all.  Greater export market access for U.S. companies is just the icing on the cake, and the prospect of a lightly frosted cake is no reason to forego the entire dessert. His conclusion, then, is that U.S. negotiators should offer to open the U.S. market as wide as possible and accept minimal openings from abroad for the sake of achieving an agreement.

I concur with Professor Bhagwati that the United States should open its market without the condition that similar measures be undertaken abroad. Admittedly, my opinion is shaped in no small part by the arguments put forth by Bhagwati over the years.  But I think the United States probably has more to gain by doing so unilaterally and not partaking of an agreement that memorializes bold U.S. reform alongside marginal reform abroad. 

Any agreement, regardless of how minimalist foreign reform is, will be an invitation for the United States to bear the brunt of the blame for any adjustment costs or continued economic problems that persist in developing countries (even if those problems have nothing to do with the agreement).  Any agreement, no matter how bold or meager, will subject the United States to claims of arm twisting and bullying, regardless of the merits of those claims.  Such developments are precisely what the United States, with its tattered international reputation and credibility, does not need right now.  The costs of such fallout, although measured differently, could easily surpass any benefits associated with an agreement that requires nothing more than window dressing abroad.

Unless our trade partners are willing to agree to ambitious reform (which will undoubtedly cause adjustment costs but will also undoubtedly help spur economic growth and provide U.S. exporters with better terms) there is little point in the U.S. agreeing to a new deal.  On the contrary, by liberalizing independent of other countries, we reap the benefits of our openness, give the developing world better access, correct the reality and perception that U.S. trade barriers are a cause of developing world poverty, and remove the capacity for the United States to serve as a scapegoat for developing country stagnation.

The determinative calculation is whether the prospective net benefits of the marginal offerings of our trade partners exceed the net benefits of unilaterally liberalizing without any demands on our partners.  Of course that depends on how much reform is ultimately offered up abroad. 

In my view, the benefits from unilateral liberalization in terms of reversing growing hostility toward the United States and softening the ground for international receptivity to U.S. foreign and security policy objectives could be quite significant and could easily exceed the net benefits (marginal export benefits minus the costs of being perceived as an agreement’s strongman) of an agreement based on relaxed reciprocity.

Implicit in Bhagwati’s call for relaxed reciprocity is the idea that an agreement, regardless of the feebleness of the commitments it extracts, is valuable beyond the trade flows it may spur.  Agreements do produce greater certainty and without an agreement, the WTO and the verdicts of its dispute settlement system could lose crediblity among its member states.  After all, a multilateral trade negotiating round has never failed to produce an agreement.

Those are legitimate concerns.  However, I don’t believe U.S. unilateral liberalization would be an end in itself.  I believe such a policy, if commenced by the U.S., would inspire what Professor Bhagwati himself calls “sequential reciprocity.” If U.S. policymakers were to unconditionally open the U.S. market, others would likely follow suit.  Quite frankly, most countries have no choice but to open up well beyond what they are offering in the Doha Round.  In this highly integrated world of just-in-time supply chains, where countries are competing with each other for investment and markets, only the most transparent and efficient ones will succeed.  And it’s not like developing countries don’t know this conclusively.  Many are quite familiar with unilateral liberalization themselves.  In fact, the World Bank reports that between 1983 and 2003, developing countries reduced their weighted-average tariffs by 21 percentage points.  Nearly two-thirds of that reduction was achieved through unilateral reform.

Alas, unilateral liberalization or even relaxed reciprocity is unlikely to be embraced by this or the next Congress.  The concept remains foreign, even preposterous, to U.S. policymakers.  Last week, U.S. Trade Representative Susan Schwab acknowledged that even though imports are good for the economy, the winning formula does not entail convincing decision makers of that truth, but requires that the voices of those who will benefit from enhanced export access drown out the voices of those who will suffer from import competition, and that’s why an all-encompassing, ambitious agreement is the only one that will work politically in the United States.

We have a long way to go to change minds, but here’s the argument in a 24-page nutshell.

Our “Pig in a Poke” Farm Subsidies

Not content to lavish federal subsidies on farmers and landowners just because they grow certain agricultural crops, Congress is also in the business of subsidizing them even when they do NOT grow those crops. In a major expose, the Washington Post reports that the federal government pays out billions of dollars in subsidies to landowners based on past production of certain program crops, such as rice, even when the land is no longer used to grow the crops. As a result, federal farm subsidies are being paid to landowners who have no interest in farming. As the Post reported yesterday:

Nationwide, the federal government has paid at least $1.3 billion in subsidies for rice and other crops since 2000 to individuals who do no farming at all, according to an analysis of government records by The Washington Post.

Some of them collect hundreds of thousands of dollars without planting a seed. Mary Anna Hudson, 87, from the River Oaks neighborhood in Houston, has received $191,000 over the past decade. For Houston surgeon Jimmy Frank Howell, the total was $490,709.

Other federal farm programs offer “loan deficiency payments” to corn growers in Iowa and elsewhere when the price of corn falls below a certain minimum. Farmers collect the payments even if they eventually sell their corn at a higher, profitable price. According to a Post story today, the program has cost American taxpayers $4.8 billion in the current fiscal year, and $29 billion since 1998.

Federal farm subsidies are not only costly to the U.S. Treasury but they also distort global agricultural markets by encouraging overproduction. Those subsidies contributed to the demise of the current round of trade negotiations in the World Trade Organization. A Cato Institute study last year, titled “Ripe for Reform,” documented the many ways Americans are hurt by our own farm programs.

Of course, members of Congress from farm states refuse to give up these costly programs unless other countries agree to reform their own farm programs. As today’s Post story concludes: “Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) has warned U.S. trade negotiators not to bow to foreign pressure unless they win major concessions for U.S. agriculture. ‘We’re not going to buy a pig in a poke,’ he said.”

“Pig in a poke” sounds like a fitting description of our own farm programs.

Challenging the NEA: Priceless

To quote the old Mercedes Benz airbag commercial: “Some things in life are too important not to share.”

The National Education Association’s national convention begins today at the Orange County Convention Center in Orlando, FL. Outside, the Evergreen Freedom Foundation (a Washington State think tank) is parking a truck with a billboard highlighting some of the expenditures the NEA listed on its 2004 federal financial disclosure forms. 

The billboard is too important (and good) not to share:

You can read about the case Evergreen is making against the NEA (both in the court of public opinion and soon the U.S. Supreme Court) here and see some of the truck’s other displays here.

If teachers gain the freedom to decide how their own paychecks are spent, it will in no small part be due to the folks at Evergreen.

Have You No Respect for the Law (of Demand)?!

The law of demand is a bitter pill for defenders of labor market price controls. Noted economic theorist Matt Yglesias has grown weary of appeals to “Economics 101” in the minimum wage debate. “After all,” Yglesias writes, “there’s a reason they offer more economics classes and you don’t get your degree after taking just one.” His American Prospect colleague Ezra Klein says of the law of demand that “It’s a good guideline, but it’s got no end of exceptions.” The minimum wage, of course, is one those exceptions.

They’re both right in general, if not about the minimum wage in particular. There are more economics classes, and they do teach exceptions. However, let’s not imagine that there is some advanced economic class in which you learn that the law of demand is false. (Well, no doubt there is somewhere. There is contradiction-friendly “paraconsistent logic,” after all.)

To use Yglesias’s misapplied example, Econ 101 principles do not stand to higher-level economics in the way that Newtonian physics stands to relativity and quantum machanics: as a useful, but literally false, simplification of reality. Economic laws are not strict laws of nature, codifying ineluctable relationships of necessity, and they do not pretend to be. So counterexamples are not ipso facto falsifying, and the law of demand is never replaced with a better, more empirically adequate, law. The law of demand is very, very empirically adequate as it is: It captures a ubiquitous regularity of human behavior that is abundantly comfirmed every moment of every day, and without which there would be no science of economics.

But it is just a regularity, like people flinching involuntarily when they hear a sudden, loud sound. It doesn’t have to happen, but it’s pretty surprising when it doesn’t. (“Is he deaf? Paralyzed?”) And when it doesn’t, there’s need for some special explanation.

Economic laws, like the principles of all the “special sciences,” are ceteris paribus generalizations: generalizations that are true other things being equal. Econ 101 lays out the basic laws and explains what follows from them ceteris paribus. Later, students learn about cases when other things are not equal – when there are exceptions to the generalization. So, it is always possible to argue that the law of demand does not apply in this or that kind of circumstance. A certain necessary auxiliary condition, which is almost always present, may be absent in a certain kind of case, causing the regularity to break down. But then, in order to predict an exception to the regular pattern, you need to cite the absence of the relevant auxiliary condition (e.g., “He can’t hear; that’s why he didn’t flinch”). I hope Yglesias is not also tired of Philosophy of Science 101.

Now, let’s note two things. First, you will be utterly hopeless in reliably identifying exceptions to a ceteris paribus law when you never grasped its logic in the first place. Exhortations to mind your Econ 101 generally aren’t exhortations to stop being so darn advanced. They are exhortations to actually comprehend the principles upon which advancement depends. And, second, the fact that a law is ceteris paribus does not mean you can deny its applicability whenever you want to. Political convenience tends not to be an appropriate auxiliary condition. You can’t wave your hands and just hope that a good argument is in some upper-level textbook you haven’t read.

If you want to say that a wage floor is not going to throw some low-wage workers out of their jobs (or prevent them from getting jobs), you’ve got to say, in a principled way, why not. The burden is on those who predict an exception to an immensely reliable regularity. The most popular principled explanation for the failure of minimum wage increases to create unemployment is a story about monopsony conditions for low-wage labor, i.e., imperfectly competitive labor market conditions in which there is a single buyer of low-wage labor (or a colluding band of buyers), that is able to set wages that workers have little choice but to accept. A simple model (Econ 101, even!) shows that under such conditions, an increase in the minimum wage, within a certain range, could even increase employment and raise efficiency.

Card and Krueger’s famed statistical work on minimum wage, which wage-increase advocates wave around as if it were proof of the Resurrection, tells a kind of very complex monopsony story. They recognize, unlike many of the people who abuse their findings, that their statistical results on minimum wage hikes, in isolation from further theory, can at best establish that other things were not equal at a certain place and time (e.g., fast food restaurants in Pennsylvania and New Jersy in the mid-1990s). This provides no basis for predicting the effects of future minimum wage increases unless it is accompanied by a principled theory of what general features of the situation were not equal.

Their theory, in a nutshell, is: “Turnover costs, imperfect information, search frictions, commuting costs, and inertia generate short-run, and possibly long-run, monopsony power for individual firms.” This is not exactly a simple condition, likely to apply uniformly across a huge, diverse country. That an increased minimum wage might not cause unemployment in some places where certain conditions apply does not provide a strong argument for raising it everywhere. And the monopsony story, as far as I understand it, establishes only that there is a range up to which the wage floor could be raised without creating a disemployment effect. In order to use Card and Krueger to support an increase to $7, you would need to provide evidence that the federal minimum is not already at the top of that range, and that $7 will not exceed it. Maybe somebody has done this, but I haven’t seen it.

Card and Krueger’s empirical work would constitute some evidence in favor of their monopsony hypothesis. But how well does the evidence support the theory? For a taste just from the Cato archives, try Douglas K. Adie and Lowell Gallaway’s review of C&K’s book Myth and Measurement in the Cato Journal, or “Sense and Nonsense on the Minimum Wage ” by Donald Deere, Kevin Murphy, and Finis Welch, in Regulation Magazine. Yglesias cites a petition of economists in favor of raising the minimum wage. Probably more informative is this serious 2002 NBER research summary by UC Irvine economist David Neumark, in which he reports that “although there may be some outlying perspectives, economists’ views of the effects of the minimum wage are centered in the range of the earlier [than Card & Krueger] estimates, and many of the more-recent estimates, of the [significantly positive] disemployment effects of minimum wages.” That is, C & K’s position is an “outlying perspective.”

But consensus tennis is a very silly game. Better is Neumark’s analysis of the state of play (in 2002) regarding the C & K studies:

More recent studies have used panel data covering multiple states over time, exploiting differences across states in minimum wages. This approach permits researchers to abstract from aggregate economic changes that may coincide with changes in the national minimum wage and hence make difficult untangling the effects of minimum wages in aggregate time-series data.

Evidence from these “second generation” studies has spurred considerable controversy regarding whether or not minimum wages reduce employment of low-skilled workers, with some researchers arguing that the predictions of the standard model are wrong, and that minimum wages do not reduce and may even increase employment. The most prominent and often-cited such study uses data collected from a telephone survey of managers or assistant managers in fast-food restaurants in New Jersey and Pennsylvania before and after a minimum wage increase in New Jersey.

Not only do these data fail to indicate a relative employment decline in New Jersey, but rather they show that employment rose sharply there (with positive employment elasticities in the range of 0.7).

On the other hand, much recent evidence using similar sorts of data tends to confirm the prediction that minimum wages reduce employment of low-skilled workers; so does earlier work with a much longer panel of states. Moreover, an approach to estimating the employment effects of minimum wages that focuses more explicitly on whether minimum wages are high relative to an equilibrium wage for affected workers reveals two things: first, disemployment effects appear when minimum wages are more likely to be binding (because the equilibrium wage absent the minimum is low); second, some of the small or zero estimated disemployment effects in other studies appear to be from regions or periods in which minimum wages were much less likely to have been binding. Finally, a re-examination of the New Jersey-Pennsylvania study that I conducted, based on payroll records collected from fast-food establishments, finds that the original telephone survey data were plagued by severe measurement error, and that the payroll data generally point to negative employment elasticities.

That is to say, C & K’s findings have been challenged.

Meanwhile, studies continue to appear emphasizing the hazards of minimum wage laws. I find Neumark’s recent paper with Olena Nizalova especially unsettling. They find evidence that minimum wage laws discourage teenagers and young adults from acquiring the human capital they need in order to get better jobs and higher wages later in life. That is, minimum wage laws work to ensure that those who already have the fewest opportunities to develop their capacities, have even fewer still. They say this baleful effect is strongest for young blacks.

Progressives find grand, symbolic political importance in the minimum wage. But isn’t their most important concern the welfare and prospects of the poor?

Build a Wall around the Welfare State, Not around the Country

Most of the members of the conference committee on the immigration bill seem to have forgotten our own heritage.

Compared to the present, the United States had a higher rate of immigration just prior to World War I when we had no significant immigration controls (except against the Chinese) and no federal welfare programs. Most of these immigrants were from Ireland, Italy, Hungary, Poland, and other poor European countries; most spoke no English and had only crude manual skills. Many Americans from families who had been here for more than a few generations were prone to speak disparagingly about the status and prospect of the new immigrants. For all that, almost all of these new immigrants (including my grandfather) were work-oriented, family-oriented, no burden to others, and, within a generation, fully assimilated Americans.

Most current immigrants, other than being Hispanic, are very much like those who chose to make their future in the United States a century ago. The record of recent immigrants is impressive: a relatively high employment rate, a relatively low rate of birth to single mothers, and an unusually low incarceration rate. So far, the one major difference from prior immigrants is that the Hispanics are less education-oriented. Given the opportunity, there is every reason to expect them to be good workers, good neighbors, and fully assimilated Americans within a generation. 

The one major difference from a century ago that affects this issue is that the United States is now a substantial welfare state. Illegal immigrants appear to be net taxpayers to the federal government but net tax burdens to state and local governments, especially if they have children in school. 

The primary solution to this problem is to build a wall around the welfare state, not the U.S. nation-state. For new immigrants, access to social services could be limited to emergency health care. Access to public schooling could be limited to those children born in the United States. Access to the full range of social services could be limited, for example, to those who have four years of legal work experience, a record of full payment of taxes, and no felony conviction. 

A supplementary solution to this problem would be a federal transfer to those states and local governments with an unusual number of immigrants. This approach should substantially reduce the opposition to immigration by residents of the border states.

Building a wall around the country, in contrast, is unnecessary, futile, and offensive.

Minimum Wage Wizardry

Ezra Klein over at TAPPED, the American Prospect blog, takes William Niskanen to task for his opposition to the minimum wage below. “[W]hile reasonable people can disagree on the impact of minimum wage laws,” Klein writes, “it’s time they stopped.”

Wow! Why? What’s the debate stopper?! Klein says, “Just crosscheck this list of state minimum wage laws with this rundown of state unemployment rates.” Turns out that there is an inverse eyeball correlation between high minimum wage and high unemployment rates. QED? Well, no. This factoid might help Klein’s case if it wasn’t totally meaningless in isolation from auxiliary assumptions.

That pattern is perfectly consistent with Niskanen’s claim, which is, after all, just an application of the bedrock Economics 101 principle that if the price of something goes up, consumers will tend to buy less of it. In fact, Klein’s pattern might be evidence in favor of Niskanen’s claim. Here’s some more Economics 101 to explain why high minimum wages and low unemployment rates might be expected to go together.

A high unemployment rate indicates a significant oversupply of labor relative to available jobs. In that case, you expect the price of labor to be low, since it is so abundant. If there is already a minimum wage—a lowest legal price—high unemployment will tend to drive wages toward that floor. Let’s say it’s $4 an hour. Now, if there is already high unemployment, and you raise it to $5 an hour, lots of people will have to get a raise, since lots of workers are probably being paid something close to the lowest legal wage. Employers will not be able to afford to give all those people raises. So unemployment would increase further. Now, the effect is quite different in places that have low unemployment rates. In a tight labor market, wages will be higher. So fewer people’s wages will be near the price floor. And so if you raise the floor, fewer workers will be affected. If the labor market is tight enough, and almost no one is getting a wage even close to the floor, raising the floor a little may have no detectable effect at all—like a law mandating breathing.

Now, suppose legislators more or less understand this (or that key constituencies pressure them to act like they do). You’d then expect that states with high unemployment rates and low wages to be least likely to raise their minimum wage, since it would have a relatively large adverse effect for them. And you’d expect states with low unemployment and high wages to be most likely to raise their minimum wage, since it is least likely to make a difference for the worse. And so you end up with high unemployment states with low minimum wages, and low unemployment states with high minimum wages.

Now, I have no idea whether this reasoning in fact explains the pattern Klein observes. But then, neither does he. He’s just a victim of confirmation bias, seeing what he wants to see in an inkblot of ambiguous data. But the pattern he points to might be evidence in favor of the idea that minimum wages increase unemployment. Hardly a debate stopper, is it? Perhaps Klein will grant reasonable people the privilege to continue disagreeing.

It’s worth nothing that Klein admits “And yes, if you jack the wage up to $16 an hour, jobs will be lost. But up to $7 over a period of years?” So what weird science reveals the “no effect” point between $7 and $16? $16 an hour? Unemployment for sure. But not at $7! So what about $8? How about $12? $15.75?

Of course, a bump up to $7 will push fewer people out of the legal labor market than a bump up to $16. But why Klein thinks that a bump up to $7 will push zero people out, when he has already conceded the general point, is mysterious.