Economic Internalionalism 101 (for US Presidential Candidates)

In a recent Column for the Financial Times, Larry Summers has, once again, combined truth with half-truth and a fair measure of obfuscation, mixing of issues and blurring of key distinctions. What Larry says and writes matters, because he is an influential voice in the Democratic party on economic issues. Both candidates for the Democratic presidential nomination appear to have taken the King’s shilling and are about to set sail on the good ship Protectionism. For the sake of the US economy, its workers and the rest of us, they should think again.

I agree with Larry that opposition, in the US and elsewhere, to trade agreements and to economic internationalism generally, reflects a growing recognition by workers (or their representatives or those purporting to speak on their behalf) that what is good for the global economy and its business champions is not necessarily good for workers. There is also empirical evidence that suggests there are reasonable grounds for this belief. A good example is Robert Z. Lawrence’s book Blue-Collar Blues: Is Trade to Blame for Rising U.S. Income Inequality? Peterson Institute for International Economics, 2008, which makes a reasonably convincing case that globalisation has adversely affected the real wages of certain categories of US workers.

Like Summers’ argument, the book suffers from the weakness that it can be read as attributing to international trade itself (that is, to the degree of openness of the trade regime), a whole host of developments that manifest themselves through trade, but are independent of the US trade regime. Among these are the following:

  1. The entry of previously almost autarkic countries (China, India, Vietnam) and trade blocks (the COMECON) into the global economy where America makes its living.
  2. The global spread of technology, skills and know-how and best-practice management techniques. Even countries with much lower overall standards of living and productivity than the US, can now be at the technology frontier in a limited number of market segments, offering sharper competition to US producers at home and in traditional US export markets.
  3. As the result of (1) and (2), rapid growth in key emerging markets which undermines established patterns of comparative advantage. Not only did new suppliers of goods and services that were potentially importable into the US compete with domestic US suppliers, the new competitors also competed with established US exporters in Europe, the Far East and other emerging markets.
  4. Large-scale migration, some of it legal, some of it illegal, of workers with a range of skills, some of which were complementary with those of US blue collar workers, black and while, but some of which competed directly for traditional blue collar jobs.
  5. Increasingly wide and deep global integration of financial markets. Foreign direct investment was one of the vehicles that permitted the global spread of technology and management skills to take place as rapidly as it did.
  6. Global competition among national tax authorities to attract or retain globally mobile factors of production, especially capital, which lowered effective tax rates on capital income.
  7. Global competition among national regulatory authorities to attract the financial and financial services industries to their national jurisdictions, which resulted in a competitive race to the bottom of standards of financial regulation – soft-touch regulation rather than light-touch regulation.
  8. The effectively unrestricted growth of tax havens and regulatory havens which offered not only low tax rates on personal and corporate income (which is any country’s right, even though it may result in a collectively suboptimal race to the bottom of personal and corporate income tax rates) but also secrecy and confidentiality – which should be illegal as it aids and abets criminal conduct, including tax evasion and money laundering.
  9. Developments (4), (5), (6), (7) and (8) have restricted the ability of national fiscal authorities to use redistributive taxation (especially taxation involving progressive income taxation) to make the evolution of the post-tax and -transfer payments distribution of personal income less unequal than the developments of the pre-tax and -transfer payments distribution of personal income. On top of that, the prevailing ideology of the Bush administration these past eight years has re-enforced the growing inequality in the US, through a strongly regressive tax policy.

You can’t go home again

Although some of Larry Summers’ workers may be right in their belief that they have become worse off during during the past couple of decades as a results of these globalisation developments, it is also true that these same workers are deeply mistaken in their belief that trade restrictions/protectionism can restore the status quo ante and bring back the well-paid manufacturing jobs (and increasingly also service jobs) that were lost to foreign competition. The knowledge, skills, technology, management systems and other drivers of superior efficiency and productivity that permitted US workers to enjoy steadily rising real wages for 40 years following World War , have now been disseminated across the world. The US monopoly rents, which were shared between labour and capital, have largely disappeared. The autarkic centrally planned economies of Central and Eastern Europe and the former Soviet Union have stopped shooting themselves in the foot and have become market economies that are increasingly integrated into the global economy. On a much larger scale, the same has happened in China and India. And the process is continuing, with Vietnam, Brazil, Thailand, Turkey and a long list of other emerging markets and developing countries.

These new emerging giants have entered the global economy as producers of goods and services that are competitive with the goods and services America produces and exports; They have entered the global economy also as consumers of the commodities (oil, gas, coal, metals, agricultural commodities etc.) that America imports – grains and other agricultural commodities have been the only exception to this pattern. The US has seen the monopoly rents it previously earned on its exports competed away, and there has been a massive terms of trade shock against the US consumer and the US worker. Only American farm exporters are benefiting, and that sector is not economically significant for the US (it is significant for poor importers of US grains and other foodstuffs). All of agriculture, forestry and fisheries in the US accounts for just under one percent of US GDP. You could close down the entire US agricultural sector and not see it in the aggregate GDP statistics.

The US cannot, either through international action or through multilateral action, get China and Russia to re-instate central planning and socialist autarky, or India to reconstitute Fabian socialism and Gandhian autarky. The global dissemination of scientific and technical knowledge and of best-practice engineering and management skills is also irreversible. That part of the globalisation genie cannot be put back into the bottle. It is certainly possible to restrict international trade, and I fear we may well pass through an increasingly protectionist phase in the US and in Europe.

The risk of the US turning towards trade protectionism is particularly high if Senator Hilary Clinton were, through some cosmic misfortune, to become the next president of the USA. She has trampled the most enlightened aspects of her husband’s presidential legacy – NAFTA and Bill Clinton’s firm stand on free trade generally (and indeed despite NAFTA, his support for multilateralism in trade negotiations). Senator Clinton has also indicated that, when she is not occupied totally obliterating Iran (or rather, re-obliterating the rubble that would be all that is left of Iran following a retaliatory nuclear strike by Israel, should the Iranian leadership ever be insane enough to launch a nuclear attack on Israel), she will be unilaterally renegotiating a whole slew of bilateral and multilateral trade agreements.

Free trade is the only trade policy that makes sense, also for US workers

Except for a minor qualification based on the optimal tariff argument for exploiting what national monopoly power a country has, the best trade policy for the US, and indeed for any country with an adequate set of domestic redistributive instruments, is free trade, indeed unilateral, unconditional free trade. The optimal tariff argument is irrelevant from a practical point of view, first, because the US has little market power left in most of its import and export markets and, second, because retaliation would inevitably follow. The American workers Larry Summers is so concerned about, should be told firmly and clearly that protectionism is escapism, and is therefore not on the political menu. Calling protectionism ‘fair trade’ does not change the nature of the beast.

Ignoring the exploitation of national monopoly power, given the right domestic redistribution instruments, unilateral free trade can make everyone, even Larry’s morose middle, better off than they would have been with any other trade regime. They will not necessarily be better off tomorrow than they are today or were yesterday or 10 years ago. As Samuelson has pointed out, growth abroad can make a country worse off. But with free trade that country will be less worse off than with any other trade regime.

What else can be done?

Many of the measures that are required to make a lasting, substantive contribution to the standards of living of the modal American worker will take years or even decades to implement.

Much of the US transportation infrastructure is rubbish and overly dependent on road transport. A serious increase in infrastructure investment, most of which will have to be publicly funded and ultimately paid for through higher taxes or lower public spending elsewhere, is long overdue. This will take at least a decade to have a noticeable effect, even if we were to start today.

Not only does America’s infrastructure encourage and subsidise unsustainable transportation methods, American production technology in general, and the products it makes tend to be overly energy-intensive. That is not surprising. Even in California, ‘gas’ or petrol sells for under $4.00 a US gallon. In London, UK, a US gallon of gas costs over $8.00. A $4.00 additional Federal tax on a gallon of gas would help kick the US into the 21st century. Commensurate tax increases on other uses of greenhouse gas emitting substances (e.g. those used for heating, cooling, power generation etc.) would also have to be implemented. To avoid a contractionary effect on aggregate demand, the carbon tax increase could be returned to US households as a progressive cut in income taxes. With domestic incentives better reflecting current and future global resource scarcity, it is more likely that US industry will produce goods and services the world will actually want to buy. This will take years, even decades, to percolate through from the design stage to the production line and the shelves of foreign distributors.

The competitive edge the US used to have over the rest of the world because of the quality of its labour force, reflecting the excellence of its educational system has been eroding steadily. In my own professional universe, the best US universities, especially those with research-oriented graduate and professional schools, continue to be world leaders. But they are increasingly islands of excellence in a sea of mediocrity. The US state-funded high school system provides far too many of its students with a sub-standard education that prepares them, at best, for menial labour. We know from the UK experience that simply throwing more money at a publicly funded sector (be it health, education or the military) does very little to improve its efficiency and productivity. Most of it will simply disappear as rents for the incumbent producers. The incentives and inputs of the producers (teachers and heads) and of the consumers (pupils and parents) need to be changed to get better performance. This will take at least a generation to implement.

Are there any measures that, if implemented, would produce results more rapidly?

  1. Trade adjustment assistance. This is the motherhood and apply pie policy for helping the losers from changes in global comparative advantage. It includes public grants for retraining and relocation of individuals and businesses. As long as these measures do not impede or delay the necessary reallocation of domestic resources, they can be useful.
  2. Progressive redistribution using the tax and expenditure system. Bush pursued regressive policies; time for democrats to propose progressive policies, preferably ones that cause the least amount of damage to incentives to work, save and invest.
  3. Uncouple health insurance from employment. A not insignificant part of the anxiety and fear of working Americans comes from the country’s idiotic system of linking health insurance with employment. Health insurance, or more generally, the availability for all of adequate health care, independent of ability to pay, has to be associated with the status of being alive, not with that of being employed. None of the presidential candidates proposes to eliminate the fiscal and other distortions that have made employers in the US the financiers of health insurance for many of the employed.
  4. End immigration that competes with domestic skills. I am not recommending this, because I don’t recognise national property rights. But if national economic measures are taken with just the well-being of domestic residents in mind (or citizens, or legal residents….) as opposed to the well-being of the global population, then selectively restricting immigration, if you can do it, would be an option worth considering. If lower-paid and American workers and workers on average pay have been most adversely affected by immigration, the solution, from a nationalistic perspective, would be to restrict the immigration of workers with below-average skill and education levels. I don’t actually believe such a policy would work, because I don’t believe the US polity has the stomach for the kind of police state that would be required to enforce an effective immigration policy. Despite the encroachment on civil liberties and constitutional rights and freedoms of the Bush years (think Guantanamo Bay), I cannot (yet) see a chain of floodlight-equipped watchtowers along the Mexican border, shoot-to-kill policies, land mines and free firing zones along the Great Wall of the Southern United States, large-scale razzias on suspected immigrant hide-outs in US cities, concentration camps (no doubt called temporary internment camps or something similar) for those awaiting deportation, parents being forceably separated from their children, and children from their siblings.
  5. Cooperation among national tax authorities. I agree with Larry that there is a potential problem that without effective international cooperation, the tax rate on the income from internationally mobile factors of production can fall to excessively low levels. There is also a risk that with effective international cooperation, the closed economy Leviathan will re-emerge, creating a public sector of excessive size, as regards spending, employment and taxation. In the US this is likely to be less of a problem than in most of the rest of the overdeveloped world, as public spending in the US appears to me below the minimal level required to fund key public goods and services and meet legitimate distributional objectives.
  6. Cooperation among national regulatory authorities. Here I am in full agreement with Larry (see Buiter (Lessons from the 2007 financial crisis). There has been a problem, especially in the financial sector, of competitive international deregulation. Indeed some countries have created regulatory havens, the regulatory equivalent of tax havens, where natural persons and legal entities can find shelter from reporting requirements, auditing requirements, accounting standards, any and all transparency demands, governance standards, capital requirements and every other sensible regulatory requirement under the sun. As with taxes, there is the risk that international cooperation could lead to over-regulation. In the case of the financial sector, however, the balance has tilted to far in the other direction, that cooperation, global minimal standards and unified measures against regulators of convenience or regulatory havens, is not just desirable but essential.
  7. Blockade the tax havens. As regards tax havens too, I am in full agreement with Larry (but without implicating him in any proposals for blockades (see e.g. Blockade the tax havens and Non-doms and tax havens)). Before I get flamed again on the issue: I don’t object to low taxes; I do object to secrecy for for the financial affairs of natural and legal persons (e.g. Liechtenstein’s trusts). Today’s tax havens are the equivalent of the pirates’ lairs of yesteryear and should be dealt with in a 21st century equivalent manner. Through the secrecy, confidentiality and anonymity they offer, tax havens aid and abet crime and criminals, including those engaged in tax evasion. Where these tax havens are pseudo-states and other micro-entities, it should not be hard to put them out of business, either through economic sanctions or by having them annexed by a nearby real country that does play by the rules. Larger tax havens, like Switzerland, Austria, Luxembourg, Dubai and Singapore. As they are engaged in hostile acts against the countries whose residents they offer the veil of financial secrecy, they should be confronted with economic, financial and other sanctions that would give them sufficient incentives to desist.
  8. Labour rights. Here Larry is skating on very thin protectionist ice. Labour standards arguments are not just ‘at times’ invoked as a cover for protectionism, they are almost invariably invoked for that reason. Labour rights, for organised labour in the USA and elsewhere, is often no more that the right to force foreign competitive labour to price itself out of a job.The ILO Declaration on Fundamental Principles and Rights at Work, adopted in 1998, covers but four areas:
    1. Freedom of association and the right to collective bargaining;
    2. The elimination of forced and compulsory labour;li>
    3. The abolition of child labour, and;
    4. The elimination of discrimination in the workplace.
    5. I support the declarations contained in the first, second and last of these four areas of principles and rights at work as rights that should be granted immediately and everywhere; I consider the abolition of child labour as a top-priority objective, for which immediate implementation is not desirable only because it would do more harm than good for many of the child labourers themselves.None of these four rights is absolute, even in the US. A trade union in the US armed forces would probably not be welcome (one exists in the Netherlands). Forced labour in US prisons has been a long-standing practice – the practices of stamping license plates and of breaking rocks as part of a chain gang may now belong to history, but other forms of forced labour by convicts have taken their place. As regards child labour, Professor Jane Humphreys of the University of Oxford reports in a recent paper1 that there may be as many as 186 million child labourers today. Of these, 5.7 million are in forced labour, 1.8 million in prostitution and 0.3 million soldiers. This leaves 178.2 million child labourers who fall into categories for which it is not immediately obvious that a campaign to impose an immediate ban on either the products of child labour or on child labour itself would do more good than harm for the children. Blatant gender and religious discrimination in the workplace in Saudi Arabia does not stop the US from importing large quantities of oil from that country or selling arms to it. Trade restrictions should not be justified by appealing to labour rights, environmental rights or humanitarian concerns. There are always more effective ways to pursue these desiderata.

Conclusion

Larry Summers’ arguments in support of greater international cooperation between tax authorities and (financial sector) regulators and about coordinated international action against tax havens are useful, but are not what motivates the US workers who have experienced or fear a decline in real wages or job losses as a result of global economic change – or ‘trade’ as they mislabel it. Not only does it not resonate with the ‘scared middle’ in the US, it is doubtful that any likely future US administration would be able to do much in these three areas of action. Effective action in this area requires international cooperation, not US unilateralism and possibly not even US leadership – success is much more likely with the US on board than off on its own.

Senator Clinton will not be able to deliver this. She understands no economics, knows nothing of the world outside the US, and is by instinct a bully rather than someone who excels at cooperation and convincing others with the quality of her argument rather than the force of her conviction. She is tough as old boots, but tough is in input. Toughness in the pursuit of her isolationist, unilateralist agenda would be a disaster for the US and the world.

Senator McCain also understands little of economics, knows little about the world outside the US, and is also not known as a natural mediator and striker of efficient bargains. His economic instincts are sharper than those of Clinton and Obama.

As regards Senator Obama, who knows? Even if we believe that his protectionist prattle (only slightly less scary that that of Senator Clinton) is just a lie peddled to get the Democratic nomination, we don’t know what his real views are on international economic relations and the conduct of international negotiations. Unlike Senator Clinton, he is not an isolationist, unilateralist bully or a macho nuke-rattling headcase whose finger I would never want to see near the nuclear trigger. It would, however, be nice to be in a position to express a preference for someone because of their positive qualities rather than because of the absence of some negative qualities possessed by his rivals.

The fact that Obama has not been able to finish off Clinton also worries me. It may be true that the only way to kill the Clinton challenge is to drive a stake through her heart. But a president of the USA has to be willing and able to do so, not with relish, as Senator Clinton would, were the situation reversed, but because it is the right thing to do.

Labour rights, like environmental rights and human rights are a dangerous fig leaf for protectionist organised labour lobbies. They should be deposited in the dustbin of corrupt ideas.

I am still waiting for a political leader who has the courage to explain to US workers who feel they have fared badly as a result of globalisation, and some of whom undoubtedly have suffered as a result of globalisation, that globalisation is not a government policy that can be reversed. Preventing imports that have replaced US domestic production and jobs from entering the country would not restore the status quo ante. Globalisation is way more than free or less unfree trade in goods and services. It may manifest itself to some workers as losing their jobs to imports, that is, to trade. But pushing that cork under water again would simply cause it to pop up again elsewhere.

There is a strange and flawed conceit underlying much of the debate about who has lost out as a result of globalisation. It is that a worker has a property right in a specific job and an entitlement to the highest standard of living this job ever provided him or her with.

Obviously, in a world with pervasive change and uncertainty, this is a nonsense. Nostalgia is a well-documented human emotion, but not a proper foundation for economic policy. Through individual and collective insurance mechanisms, it may be possible (with a high degree of certainty) to guarantee that no-one will fall below a certain material standard of living. Specific jobs can never be guaranteed. Even employment (of any meaningful kind) cannot be guaranteed – reclassifying all the unemployed as civil servants won’t help. Governments can try to ensure that labour markets function as efficiently as possible, and they can try to structure the educational and training facilities funded by the state to optimise the matches between available jobs and willing workers. But that is all they can do.

No one has a property right in a specific job, or a right never to be worse off than they were in the past. If this is what Larry’s losers in the globalisation game really want, as I suspect they do, they must be told they cannot have it. Stuff happens. To pretend the state can do more than (1) provide a social safety net (whose height will depend on the joint willingness of its citizens to pay taxes) and (2) design laws, rules and regulations that promote the efficient functioning of markets and (3) provide public funding to promote education, training and other mechanisms and institutions to facilitate efficient job matches, is to live in cloud cuckoo land. If the morose middle threaten to become the moronic middle, politicians should not follow them but try to educate them. Rerum causas cognoscere (I hope I got this right; if not, Martin Wolf will no doubt correct me).

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1Jane Humphries, “Children in the Labour Market: The Autobiographical Evidence” presented at the Economic History Society’s 2008 annual conference at the University of Nottingham, 28-30 March. See also Kaushik Basu and Zafiris Tzannatos (2003), “The Global Child Labor Problem: What Do We Know and What Can We Do?,” World Bank Economic Review, Oxford University Press, vol. 17(2), pages 147-173.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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