Fed Chairman Explains Benefits of Free Trade, Warns against Protectionism

Federal Reserve Board Chairman Ben Bernanke delivered an important speech Tuesday on the benefits of free trade to our economy and workers. Speaking to an audience in Butte, Montana, Bernanke explained why trade raises our standard of living and backed up his economic logic with up-to-date evidence.

He acknowledged that some workers and companies lose out, at least temporarily, from more vigorous global competition, but he warned that protectionism would be the worst possible policy response.

As the Fed chairman told his audience:

Restricting trade by imposing tariffs, quotas, or other barriers is exactly the wrong thing to do. Such solutions might temporarily slow job loss in affected industries, but the benefits would be outweighed, typically many times over, by the costs, which would include higher prices for consumers and increased costs (and thus reduced competitiveness) for U.S. firms. Indeed, studies of the effects of protectionist policies almost invariably find that the costs to the rest of society far exceed the benefits to the protected industry. In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers.

Rather than closing U.S. markets, Bernanke wisely recommends “policies and programs aimed at easing the transition of displaced workers into new jobs and increasing the adaptability and skills of the labor force more generally.”

If you want to understand what free trade really means for Americans, I recommend the full text of his illuminating speech.

Sarkozy Is the Conservative Candidate?

The political spectrum in France is so distorted that a candidate who calls for new taxes, tax harmonization, expanded trade barriers, and restrictions on capital flows is the supposed conservative candidate. The UK-based Times reports on the anti-market views of Nicolas Sarkozy:

At his first EU summit, in Brussels in June, a President Sarkozy would push hard for a new tariff on imports from outside the European Union to protect jobs and discourage firms from moving production outside the area, he said. …Mr Sarkozy said that he would also press for harmonised business taxes — a project long rejected by Britain and other states. It was time to reduce the power of the national veto in such areas, he said. His proposal for a protective “European preference” in trade is also opposed by Britain and conflicts with the Union’s free-trade policies.

Scandalous Pensions for European Parliamentarians

While the US Congress is infamous for its taxpayer-subsidized perks, US lawmakers are amateurs compared to the scammers in Brussels. Members of the European Parliament have a lavish taxpayer-financed retirement scheme that enables them to get $2 of taxpayer money for every $1 they put into their pension fund. But this immense perk does not even require them to necessarily use their own money. As the UK-based Telegraph reports, some MEPs – perhaps most MEPs – use office administrative funds:

The European Parliament’s bureau, the body that oversees the assembly’s administration, has voted to prevent publication of a list naming the 475 MEPs who benefit from a pension scheme worth more than £1,400 a month to Euro-MPs with the taxpayer matching every euro personally contributed with two from the public purse. Payments are controversial because, for “administrative reasons”, the MEP’s personal contributions are taken automatically from office expenses. No one checks whether the politician actually pays anything into the fund from his own salary. Many in Brussels believe that a “large proportion” of Euro-MPs are using their office payments to get a free second pension on top of national schemes.

New Report Unwittingly Reveals Small Impact of China Trade on U.S. Jobs

Our friends and ideological rivals at the Economic Policy Institute in Washington are releasing a report this week that supposedly documents that trade with China has cost more than 2 million Americans their jobs. The report is illuminating, but in ways its author did not intend.

Here’s how EPI’s press release on the study describes its results:

The dramatic rise in the United States’ trade deficit with China from 1997 - 2006 has cost jobs in every region in the country.  In a new report, Costly Trade with China, to be issued May 2, 2007 by the Economic Policy Institute, economist Robert Scott reports the growth of the trade deficit with China in this period has displaced production that supported 2,166,000 U.S. jobs, with New England being the hardest hit region of the country. 

For reasons I’ve explained in detail before [.pdf], EPI’s methodology for calculating job losses from trade is fundamentally flawed. Its model ignores the dynamic effects of trade on U.S. economic growth, the beneficial effects of foreign investment, and the tremendous and healthy “churn” of the U.S. labor market.

Even if we accept EPI’s calculation of 2.2 million jobs lost, that is a drop in the bucket in an economy that employs almost 150 million people. Note that EPI’s number is spread over a decade, meaning that the actual number of jobs lost each year on average would be 216,600.

Compare that to the 320,000 or so Americans who line up EVERY WEEK to claim unemployment insurance after being displaced from their jobs–mostly because of technology, and domestic competition. In other words, trade with China, even by EPI’s exaggerated measure, accounts for about three business days’ worth of unemployment claims in a typical year.

More than compensating for the relatively small job displacement caused by trade with China are the huge benefits it delivers through lower prices at the store, lower interest rates, growing export opportunities, and greater peace and stability in East Asia.

For more on trade with China, check out our research at www.freetrade.org.

Auerswald on “The Irrelevance of the Middle East”

Philip E. Auerswald of the George Mason University’s Center and Science and Technology Policy has an interesting piece in the current issue of The American Interest (sub. req’d). In it, Auerswald argues that

the long-term importance of the Middle East is roughly proportionate to the share of the world population for which the region accounts–less than 5 percent. The time is long overdue for policymakers and analysts alike to put the many urgent issues that confront the people of the Middle East in the context of dramatic and unprecedented global transformations in process today. …Any country that persists in focusing intently on peripheral concerns risks ultimately becoming peripheral itself. Even a massive power like the United States is not immune to such a fate.

Shorter version of the Auerswald argument here, and go here for Eugene Gholz and Daryl Press’s excellent Policy Analysis for Cato of the many problems of “energy alarmism.”

May Day in Latin America

This Tuesday, May 1, Venezuelan ruler Hugo Chavez will take control “of Venezuela’s last remaining privately run oil projects.” The symbolism is obvious: the socialist May Day. Last year, Bolivian president Evo Morales sent his soldiers to occupy the gas fields in his country on May Day.

So I’m reminded, as I was last year, that May 1 is also the anniversary of the institution of private retirement accounts in Chile. Since then Chile has been a great economic success story.

Perhaps 25 or 50 years from now, we will know whether Chile’s privatization or Bolivia’s and Venezuela’s nationalizations brought a higher standard of living to their citizens.

“The Most Important Health Care Legislation of Our Lifetimes”

That is how Gov. Mitch Daniels describes his health care reform plan (which the Indiana legislature passed last night) in an email his staff helpfully forwarded my way.  According to the Indianapolis Star, Daniels’ plan will:

  • Expand Medicaid eligibility for pregnant women and children
  • Provide health insurance subsidies to individuals making $20,420 and families of four making $41,300 per year (i.e., 200 percent of the federal poverty level)
  • Provide those beneficiaries with $500 of free preventive care and $1,100 in a health savings account
  • Institute a “slacker mandate” that requires insurers to allow children to remain on their parents’ insurance policy up to age 24
  • Increase the cigarette tax by $0.44/pack, to $0.995/pack

Daniels was understandably moved.  Here is his full quote:

The health plan passed last night can fairly be described as the most important health care legislation of our lifetimes.  I have asked a host of people whether they can think of a better example and nobody has.  I am excited about the passage of the plan and what it can mean for uninsured Hoosiers and for low-income children, and, of course, to try to bring down the second-highest smoking rate in America.

Did Gov. Daniels (R!!) bother checking with anyone who has actually set foot outside of Indiana?  Whatever the case, here are a few things the Daniels plan will also do:

  • Crowd-out private coverage
  • Encourage cigarette smuggling and related crime
  • Trap more Indianans Hoosiers in low-wage jobs
  • Re-create in Medicaid the dependence problems that Congress sought to eliminate with welfare reform
  • Impose a brutally regressive tax on the poor.  According to Harvard’s Kip Viscusi: “The usual concerns about regressive taxes involve those that are regressive in percentage terms, that is, the poor pay a higher percentage of their income in taxes than do the wealthy. Cigarette taxes are actually so regressive that the poor pay a much higher absolute level of taxes than do the wealthy. In 1990, people who made under $10,000 per year paid almost twice as much in cigarette taxes as those who made $50,000 and above. The people who will bear the cigarette taxes are not the legislators who enact them but rather the janitors and support staff for the legislature.
  • Cost more than projected

When conservatives finally do start questioning why so many supposed good guys keep turning to the Dark Side, they might launch their inquisition with an examination of the Medicaid program, which makes Democratic and Republican governors alike this very tempting offer: big government at one-half the price.