More Trade, More Jobs, Higher Wages

Critics of international trade argue that imports mean fewer jobs and lower wages for American workers. They repeat this mantra despite plain evidence to the contrary.

The latest evidence comes this morning with another U.S. Labor Department report that the U.S. economy continues to create new jobs at a healthy clip. U.S. payrolls grew by another 132,000 in November. The unemployment rate ticked up slightly to a still relatively low 4.5 percent because new workers surged into the labor market.

In the past year, total payroll employment has jumped by 1.8 million. Since mid-2003, payroll jobs have grown by 6.2 million, and since 1990 total payroll jobs have grown by 27 million. That impressive job growth has occurred against a backdrop of rising U.S. trade with the rest of the world, so clearly trade does not mean fewer jobs for American workers.

What about wages? They too are rising again, according to the same labor-market reports this morning. Average wages are up 4.1 percent from a year ago, ahead of inflation. When benefits are added, total compensation for U.S. workers continues to rise faster than inflation and is up significantly in real terms compared to previous years.

Like technology, trade can cause turnover in the labor market. But also like technology, trade raises the overall productivity of American workers, leading to better jobs and higher real wages.

The best analysis on this subject remains the 2004 Trade Briefing Paper, “Job Losses and Trade: A Realty Check,” by my Cato colleague Brink Lindsey.

Dasgupta Corrected

I am deeply chagrined to see Brad DeLong take me to the woodshed for mischaracterizing one aspect of Prof. Parth Dasgupta’s criticism of the Stern Review on the Economics of Climate Change. 

Prof. Dasgupta does not criticize Stern’s use of a 0.1% discount rate (that’s Prof. William Nordhaus’ job) per se. He criticizes the use of that discount rate while simultaneously ignoring the difference in well-being between present and future generations. That was indeed the point of my post, but I inadvertently suggested that Prof. Dasgupta complaint resided in the discount rate. 

Mea culpa.

If Growing Inequality Is a “Serious Problem,” Please Explain Why

Via Greg Mankiw comes this suggestion of Yale economist Robert Shiller reported in Tax Notes Today:

The IRS should be instructed to automatically adjust tax rates to keep economic inequality from getting worse, according to a new proposal outlined by Robert Shiller, a Yale University economics professor.

“We have a serious problem, and it’s a problem of growing inequality,” Shiller said on December 6 at a Library of Congress discussion in Washington. Shiller developed the proposal with Len Burman, director of the Tax Policy Center, and the two are planning to write a book on the idea.

“We need a standard or principle of income inequality. We don’t have one now,” he said. Inequality provides motivation to work harder and benefits hard work, he said, so “we do want some inequality, but we don’t have any clear idea about where we’re going and what is appropriate.”

The standard, which Shiller calls “inequality indexation” of the tax system, would instruct the IRS to adjust brackets and rates whenever inequality worsened beyond an agreed-on level.

The question that leaps to mind is: why?

Shiller’s proposal illustrates the extent to which policy is a normative enterprise.  In order to defend Shiller’s “inequality indexation,” you need some principled basis for believing that growing income inequality is a “serious problem,” and an explanation of why it is a problem. How greater inequality per se is a problem strikes me as utterly mysterious. There are many possible causes of income inequality. Some of them reflect injustices in the system, or barriers to the development of adequately fulfilling human lives. But in this case, inequality is a side-effect of some other injustice, and isn’t really the problem. And some causes of inequality don’t reflect injustice of any kind. How a change in the pattern of the income distribution over time can be a serious problem by its very nature is baffling.

Take an highly idealized example. Suppose for a moment that all of a society’s basic laws, institutions, and rules governing market exchange are fair. Everyone starts with a perfectly equal endowment of capital of various kinds, but with different preferences and goals. There will be, say, 1,000 rounds of exchange. Now start the clock. Some people will sit out some rounds. Some people will participate every round. Given different preferences, people will be motivated to invest in different forms of knowledge and skill, pursue different kinds of work, and purchase different kinds of goods and pick different kinds of trading partners. After round 1,000, stop the clock. Now count everybody’s money income over the period. There will be a certain amount of inequality in income. Start the clock again, and stop it after another 1,000 rounds. Suppose income inequality grew. What does that tell us?

If your answer is “It tells us that the laws, institutions, and rules” were not fair after all, then the question is “How does it tells us that?” And then, if the response is, “Because inequality is unfair,” that’s just begging the question. Justice and fairness, if those ideas mean anything, have something to do with giving people what they are due. If the basic rules aren’t keeping people from getting what they are due in each voluntary exchange (which would not have occurred unless the terms were satisfactory to each party), and each got what they were due every round in which they participated, then, when we stop the clock, what each ends up with over the period–their income–is just the sum of what they were due. But no one was due any particular sum. A fortiori no one was due a sum that is a particular ratio of someone else’s sum. So a change in the ratios between incomes across periods is irrelevant.

OK. Now suppose there are two social systems, A and B, with different basic rules running side by side, but in isolation from each other. A has lower inequality in each period, and lower inequality growth between periods that does B. Is A in any sense better? Maybe, maybe not. Suppose that the average income in each decile in B is higher than in A. Wouldn’t the denizens of A rather live in B, where there is greater inequality? I would. Indeed, this is the sense in which I think things like aggregate income is a matter of justice. People are due a system under which they can do as well as possible. If there is some alternative set of rules under which everyone could expect to be better off than in the status quo, failing to transition to that alternative system of rules would be a mark of injustice. Justice may require us to shoot for a system with greater inequality.

Shiller says “we do want some inequality,” since leveling would kill effort, leaving everyone worse off.  But I don’t think we really want “some inequality.” We want a system in which everyone is doing as well as possible, and inequality is going to be a side-effect of that.  Shiller needs to say why we should want less inequality. I am willing to believe that rising income inequality does reflect some injustices in the system. Perhaps some of the rules that regulate the governance of corporations. Or elements of the electoral and regulatory system that enable predatory rent-seeking. Or the system of monopoly public provision of education that systematically disadvantages certain classes of citizens on the basis of morally arbitrary characteristics, like the property tax rate in their neighborhoods. Or price floors and labor regulations that exclude low-skilled workers from the labor market. But in each case, inequality is the symptom, not the disease. The attempt to “correct” increases in inequality through the tax system is completely arbitrary, beside the point, and almost certainly itself unjust, if rising inequality is a side-effect of deeper injustice in the structure of our institutions. And if it is not a side-effect of injustice, but just a side-effect of exchange according to just rules, then it is a non-issue.

Turkish Classical Liberal Defends Himself and Free Speech

Dr. Atilla YaylaI blogged earlier about the unpleasant experiences of a Turkish friend, Professor Atilla Yayla, whose remarks got him in hot water in Turkey, including suspension from his post as a professor at Gazi University and public denunciations as a traitor.  He has now written a vigorous defense of freedom of speech in Turkey for the International Herald Tribune, “Freedom of Expression in Turkey.”  As Atilla explains,

After my fear and panic in the first few days, I think I now understand why this is happening.

I am a well-known classical liberal. I openly defend human rights for everybody. That naturally includes the rights of Kurds and conservative Muslims.

The Kemalists hate my attitude, but they are not able to challenge and refute my ideas. Their opportunity came with this event and they turned my criticism of Kemalism into an insult against Ataturk.

But Turkish journalists, cartoonists, writers and academics face more than just state ideology and trial by media. Law 5816 prohibits publicly “insulting Ataturk’s memory.” Just to be sure, Article 301 of the penal code stipulates prison for “public denigration of Turkishness, the Republic or the Grand National Assembly of Turkey” or “the Government of the Republic of Turkey, the judicial institutions of the State, the military or security structures.”

Yayla is a well known classical liberal in Turkey.  He has devoted his life to defending the rights of everyone, regardless of religion, language, nationality, ethnicity, gender, or other characteristics.  Now it’s time for others to defend his rights.

‘New Lipstick on a Very Old Pig’

My friend Spencer Ackerman has an appropriately depressing piece on Baker-Hamilton online at the American Prospect. A snip:

There is something of an upshot to the commission, however. Even though it doesn’t really propose ending the war, it will shift the Iraq debate in favor of the modalities of extrication. Welcome to 1968: everyone knows the war must end and victory is unachievable, but the will to actually withdraw in full remains unpalatable to the political class. Bush will have a very hard time recommitting the country to a chimerical “victory” in Iraq. But in the name of “responsibility,” thousands more will die, for years and years, as the situation deteriorates further. Someone, at sometime, will finally have to say “enough,” and get the United States out.

Sometime. Read the whole thing.

Free Markets, Limited Government, and the Arab World

Today is the second day of the Economic Freedom of the World network meeting in Beirut, at which Cato has an international presence. (The conference is organized by our good friends at the Fraser Institute of Canada and the Jordan office of Germany’s Friedrich Naumann Foundation.)

My colleagues Ghaleb Hijazi and Fadi Haddadin brought from Jordan the beautifully printed and bound full Arabic edition of the Economic Freedom of the World report. The Arabic edition (which will soon be available online) is beautiful and really impressive. They also distributed for the first time the new brochures for Misbahalhurriyya.org, Cato’s Arabic libertarian website and publishing service, as well as other products for Arabic readers. We got a preview yesterday of a series that they helped to produce with Al Jazeera on examples of successful free-market entrepreneurship in the Arab world. They’ll be run on television over the next month.

One of my colleagues gave a really interesting presentation that looked at the roots of Arab economic stagnation, during which he used data to show that it’s not religion, it’s not ethnicity, and it’s not even oil — it’s state-owned oil monopolies that have been responsible since the 1970s for lagging economic performance in the Arab world. (In particular, his data on the difference between Arab OPEC members and Arab non-OPEC members were quite interesting.)

A number of foreign participants, as well as a lot of the Lebanese participants – notably the government ministers – had to cancel their participation in the conference due to security concerns, but for those who did come, it all seems rather peaceful. (On the other hand, given the recent attempts to bring down the government through extra-electoral means, if I were a Lebanese minister, I might not go to a lot of public events, either.) Today’s sessions are focused on auditing the performance of Arab governments and identifying and reducing or eliminating barriers to trade, obstacles to entrepreneurship, and so on.

I walked with some of the other participants (from Turkey, Poland, Russia, Georgia, Jordan, and Canada) to visit the Hezbollah camp in front of the prime minister’s office last night. It was quite an interesting experience. (I posted some photos on my personal website of posters with Hugo Chavez and Hezbollah’s Nasrallah, which seemed popular there.)

This afternoon and over the next few days my colleagues and I will be meeting with newspapers and publishing houses.

Why Rawls is Great!

A few friends and colleagues have asked me why I think Rawls and not, say, Nozick, was the best political philosopher of the 20th Century. What kind of libertarian am I to think that? Well, I certainly think Nozick gets the conclusions right. But I truly think A Theory of Justice is an incredibly rich and profound book that lays out an extremely compelling method for evaluating the moral desirability of basic social and political institutions. Nozick’s Anarchy, State, and Utopia is in my opinion one of the most, if not the most, compelling, creative, and pyrotechnically brilliant pieces of extended reasoning in all of 20th Century philosophy. But it famously begins with an unsupported assumption of John Locke-style individual rights. If you don’t accept the assumption, the argument just doesn’t get going.

Rawls, I think, offers a compelling way of justifying something like rights as side-constraints. Now, I don’t think many of Rawls’ conclusions follow from his intermediate premises. For instance, Rawls’ does not take sufficiently seriously his own claim for the moral priority of his First Principle of Justice, “each person is to have an equal right to the most extensive basic liberty compatible with a similar liberty for others,” over his Second Principle, that inequality in the “distribution” of “primary goods” is justified only if it benefits the least well-off class of citizens. Additionally, even if one accepts Rawls’ second principle (I think it is too strong), his conclusions about how it justifies certain institutions of the modern welfare state don’t follow, given what is known, empirically and theoretically, about economics and political economy. Nevertheless, I think Rawls’ theoretical framework is very close to the right one, and that is an enormous achievement. My own view is very close to that of Richard Epstein in his remembrance of Rawls in the National Review:

The great irony here is that the Rawlsian construct in the end supplies, I believe, the strong intellectual foundation for a political system with which he had only scant affinities: classical liberalism, with strong property rights and limited government. The irony is even greater when Rawls’s work is conjoined with Nozick’s, for the latter recoiled from the formal procedures so championed by Rawls, and used ingenious, if intuitive, arguments to defend the primacy of individual autonomy and private property even though, with the benefit of hindsight, these are more strongly defended by an astute application of the veil-of-ignorance technology.

I think Epstein (and most everyone) over-emphasizes the importance of the “veil of ignorance” in Rawls’ system, but I think he’s close to the bullseye.

It’s worth noting that Hayek himself endorsed the broad outlines of Rawls’ basic theoretical framework. From Law, Legislation, and Liberty, Volume 2: The Mirage of Social Justice, p. 100, Hayek writes:

… there unquestionably … exists a genuine problem of justice in connection with the deliberate design of political institutions, the problem to which Professor John Rawls has recently devoted an important book. [Vol 2 of LL&L was published in 1976.] The fact that I regret and regard as confusing is merely that in this connection he employs the term ’social justice’. But I have no basic quarrel with an author who, before he proceeds to that problem, acknowledges that the task of selecting specific systems or distributions of desired things as just must be “abandoned as mistaken in principle, and it is, in any case, not capable of a definite answer. Rather the principles of justice define the crucial constraints which institutions and joint activities must satisfy if persons engaging in them are to have no complaints about them. If these constraints are satisfied, the resulting distribution, whatever it is, may be accepted as just (or at least not unjust).” This is more or less what I have been trying to argue in this chapter.

Hayek’s claim that the idea of “social justice” is a kind of category error is right on. The pattern of holdings that arise from voluntary cooperative exchange according to just rules is not itself a subject of moral evaluation, and the attempt to “correct” the pattern according to some moral principle requires rules of social interaction that are unjust–a point Nozick makes with great force and lucidity in his section on “How Liberty Upsets Patterns” in Anarchy, State, and Utopia. Rawls’ waffles on this point, distinguishing between “distribution,” which he takes to be the emergent outcome of interaction according to the rules of the “basic structure” of a society’s institutions, and “allocation,” the coercive redistribution of holdings. Rawls claims to be concerned with distribution in this sense, but it’s pretty clear he’s often attempting to justify broad “allocative” powers for the state.

Nevetheless, the depth and scope of what Rawls gets right is incredible. Join that to the fact that his later major work, Political Liberalism–a profound and innovative meditation on the meaning of liberal neutrality in pluralistic societies–has a fairly straightforward libertarian reading (despite his protestations to the contrary), and I think Rawls takes the laurels. Of course, these judgments are complex and depend on how heavily one weighs various valuable aspects of philosophical works, so others might reasonably come to different conclusions. But I think my judgment here is on pretty solid ground.

Special bonus! Who are the greatest political philosophers of the past few centuries, according to my idiosyncratic judgment? 19th C.: Herbert Spencer (maybe the most unjustly maligned thinker ever) by a hair over J.S. Mill and Henry Sidgwick. 18th C.: David Hume over Adam Smith by a nose. 17th C.: Thomas Hobbes by a nose over John Locke, for reasons similar to Rawls vs. Nozick. I also think the Rolling Stones were better than the Beatles.