13 Responses to “Preserving the open economy at times of stress”

Comments

1. Adrian Wood: I remember an economist called Adrian Wood who argued more than ten years ago that globalisation had substantial adverse effects on unskilled workers in developed countries. I also remember how vigorously he was jumped on by many other economists, including Martin, who counter-argued that the effects of trade on inequality were small beer and that the misfortunes of these unskilled workers were caused principally by the spread of computers.

   If he’s still around somewhere, Wood must be deriving considerable satisfaction from the recent articles of Messrs Summers and Wolf. Come to think of it, I even remember him arguing, exactly like Mr Summers, that playing down the adverse distributional effects of trade was a dangerous game for economists, and one that, politically, was more likely to exacerbate protectionism than to restrain it.

   Martin is absolutely right to say that there should be an honest debate about these issues. And I agree with him on the first three of the conclusions that such a debate would and should reach. But not on the fourth: his argument that international tax coordination is not required for an increase in taxes, which he bases on a comparison of tax shares in the US and Sweden, is superficially appealing, but seems to me to muddle up levels with changes.

   The levels of tax shares now vary widely among countries, for economic, historical, ideological and administrative reasons. The point at issue, however, is whether tax shares could be raised, to a substantial extent and in a way that was concentrated on the richest citizens in each country. I believe that both Sweden and the US would find this difficult to do because of the international mobility of these citizens and their incomes, and that this difficulty could be reduced by international agreements that established common tax rules and minimum tax rates.

   Maybe I (and Larry Summers) are wrong about this. But maybe not. So yes, let’s proceed with the debate for which Martin calls.

   Posted by: Adrian Wood | May 21st, 2008 at 8:59 pm | Report this comment
   

2. Kevin H. O’Rourke: There has been an interesting debate recently in these web pages regarding what needs to be done to maintain political support for globalization. In his contributions, Larry Summers raised among many other points the issue of whether globalization implies a race to the bottom in terms of regulation, corporate income taxes, and the ability of states to maintain fiscal policies benefiting ordinary workers.

   The belief that the need to maintain tax and regulatory competitiveness in a globalised world is inconsistent with progressive taxes and regulation is a commonly held one. It allows those on the left to argue against globalization, and those on the right to argue against taxes and regulation. But is the belief correct?

   As an economic historian, I cannot but think back to the origins of the welfare state, which occurred at the end of the first great globalization of 1840-1914. In several recent articles, Michael Huberman has convincingly shown that if anything trade and government intervention were positively related during the late 19th and early 20th centuries. For example, a range of labour market regulations was introduced across Europe, prohibiting night work for women and children, prohibiting child labour below certain ages, and introducing factory inspections. The period also saw the widespread introduction of old age, sickness and unemployment insurance schemes. Crucially, this “labour compact” as Huberman calls it was more advanced in those countries which were more open to trade. There is no evidence of a race to the bottom here: rather, governments in Belgium and elsewhere used the introduction of such reforms to secure the support of workers for free trade. Similarly, there was no race to the bottom in terms of the numbers of hours worked annually. Indeed, the gains to workers in terms of shorter work days were greatest in small open economies.

   To be sure, multinational companies loom much larger in the world economy now than they did then, and it must not be easy for governments contemplating the loss of major companies to less-heavily taxed competitors, such as Ireland. On the other hand, look at the European Union today – surely the most tightly integrated group of independent countries ever to have existed. As a share of GDP, the tax burden there in 2005 ranged from less than 30% in countries like Latvia, Lithuania and Slovakia, and less than 40% in such long-established members as Germany, the UK, Ireland and Spain, to over 50% in Denmark and Sweden. EU members have long pursued a wide range of social and economic policies, and will presumably continue to do so in the future. I thus share Martin Wolf’s scepticism regarding the death of the nation state, and his view that prematurely proclaiming its demise is not in the best interests of an open world economy.

   Globalization has not made redundant age-old debates about the appropriate role and size of government. If that is clearly understood by voters, who like to feel that they are in control of national policymaking, then they will have one less reason to oppose economic openness.

   Kevin H. O’Rourke is Professor of Economics at Trinity College Dublin

   Posted by: Kevin H. O'Rourke | May 22nd, 2008 at 10:10 am | Report this comment
   

3. Robert Wolfe: In an otherwise admirable analysis (”Preserving the open economy at times of stress”), you fall into the “lump of power” fallacy when you write that “Power is a scarce resource: if country A has more, country B has less.” Without more specification of what “power” is thought to be, and what it is thought to be useful for, such a statement cannot mean anything at all. It is misleading to think of a fixed quantum of power, which assumes that power is a finite resource, that there is only so much to go around. (Globalization critics are also prone to the closely related lump of sovereignty/authority fallacy.) Power may be the ability to achieve one’s ends, but actors have many ends, and many ways to achieve them, which is why power is such a problematic concept in international relations.

   The familiar story about how the USA as the new hegemon rescued the world trading system from autarchy after the Second World War is not wrong, but was its role predicated on its military strength, the size of its market, or its ability to alter the terms of debate? The answer is
   obviously, some combination thereof, but it is easy enough to see the GATT of 1948 as a public good supplied by the USA alone. It was clear from the roles played by Brazil and India in shaping the launch of the Uruguay Round in the 1980s that things had begun to change. Either power was shifting into new hands, or new forms of power had emerged. It would still be foolhardy to pretend that the current Doha Round will end before the United States and the EU are ready, yet they manifestly cannot force an outcome, which does not mean that some other country has taken power from them.

   Traditional definitions of power and the hierarchical classifications of actors associated with them are not always analytically helpful in the context of the WTO, but two types of power seem especially salient. “Compulsory” power, Michael Barnett and Raymond Duvall argue in introducing a good collection on the problem, can be based on material resources, and on symbolic or normative resources. Not only states, but
   international organizations, firms, and civil society organizations have the means to get others to change their actions in a favored direction in certain circumstances. The sources and the holders of this form of power have clearly been proliferating, as we have seen in the way environmental issues or access to essential medicines have been handled in the WTO.

   The concept of “institutional” power is a reminder that the diffuse social relations that institutions shape can also constrain behavior. The consensus rule combined with the fact that the WTO is a Single Undertaking gives every Member the ability to slow the process down, a form of institutional power developing countries use effectively-witness the failure of the Cancún ministerial. India’s power in the WTO, for another example, is based less on its material weight in global transaction flows (it comes well down the list of the leading traders) and more on its ability to lead other developing countries.

   Globalization makes the world a more complex place, but I don’t think it needs to be seen in zero sum terms.

   Robert Wolfe is professor at the School of Policy Studies at Queen’s University in Kingston, Canada

   Posted by: Robert Wolfe | May 22nd, 2008 at 10:12 am | Report this comment
   

4. Jagdish Bhagwati: Martin Wolf’s column, and the two columns by Larry Summers that he cites, make several fine observations but require some amplification and qualification.

   The most important question posed by Martin Wolf is: How does one deal with domestic anxiety over globalization in the US, the anxiety being prompted by the fear that trade with poor countries (and immigration, often illegal, of the unskilled from the poor countries; and investment abroad) is driving down wages? The answer is manifold.

   First, if globalization is not the cause of such “wage compression”, then the economist must assiduously say so in public. Summers in his first article conceded as much for trade. But there has been prevarication from some others such as Paul Krugman (whose recent Brookings foray into the question was less than compelling and, in addition, failed to connect with the vast theortical and empirical literature that has grown up in the last two decades on the question of the link between real wages and trade). Besides, economists such as Robert Lawrence have argued persuasively against the alleged link in recent empirical studies. My own empirical work earlier argued that, if one wants to decompose the net effect on workers’ real wages from both labour-saving technical change and from exogenous changes in trade (i.e. exogenous shift in the offer curve facing the US), there is good reason to believe that trade changes had in fact moderated, not accentuated, the decline in wages from technical change. [See the discussion of my and other work, in the 1990s and recently, on the problem in my 2004 book, In Defense of Globalization.] The same comforting, indeed “paradoxical”-to-many, conclusion has been reached on the effect of illegal immigration in some recent studies.

   Second, some economists, who have no political axe to grind, say: the belief that globalization (in the sense above) harms workers is so deeply held that there is no way that analysis can dispel it. That is too pessimsitic. Many believed that globalization lacked a human face, in that it handicapped social objectives. I dispelled that belief systematically in my 2004 book. Today, partly due to the argumentation of the kind I have in my book, that erroneous belief is not held as widely and deeply as before. If we did not believe in the power of our analysis, why do public policy? We should then retreat into proving theorems that please us by their elegance but have no demonstrable bearing on improving human welfare.

   Third, the fact is that political leadership has been lacking in this regard. President Clinton fought for the Uruguay Round and, sadly, for NAFTA (a discriminatory trade treaty as all FTAs are). But he let us all down when, instead of confronting the AFL-CIO and their economic advisers on the subject, he coasted along with them. He could have called on the many Democratic economists (including, at that time, Paul Krugman) who could have demonstrated to these skeptics that their anxiety on this front were not supported by analysis. But he did not. This is equally true of Senator Hillary Clinton who is the only Presidential candidate without a serious economist as her economic adviser: no wonder he quotes people like Paul Samuelson, whom her trade advisers hardly understand, to say that trade is no longer beneficial the way it used to be.

   Fourth, the endless repetition of the polls which show a continued reduction in support for free trade in the public does not allow for the fact there is a perverse relationship between the media and the politicians on this issue. Politicians in the US rely on focus groups and they in turn are typically composed of people who watch Lou Dobbs on CNN, an anti-trade and anti-immigration bigot. So the politicians feel they must pander to such views and make anti-trade noises which, in turn, feed the anxieties over trade. Leadership requires that the politicians use their platform to disabuse their constituents of these fallacious notions. But, alas, on the Democratic side, few do it.

   Finally, the anxiety over wages and jobs is real. It must be attended to in a holistic way. We need to understand where it comes from and then deal with it through appropriate institutional and policy changes. I discuss this in a new book I am writing on the subject (to be published in early Spring 2009). The basic source of the anxiety is the fragility of jobs that comes from two sources: rich-rich country competition that reflects what I have called “kaliedoscopic” comparative advantage, with thin margins of comparative advantage that lead to volatility of specialization; and the rapid and deep labour-saving technical change. These factors then feed the anxiety over jobs and they also tend to depress wages. A response to the “new epoch” that these two factors constitute requires a holistic revision of our institutional and policy framework. TRhe patchwork set of measures that are often discussed will not do. The task before us is much like the task that the Soviets faced when they were transiting from a communist economy to an altogether different, capitalist system
   without the instituional mechanisms that had evolved over nearly a century on our side.

   Posted by: Jagdish Bhagwati | May 22nd, 2008 at 11:39 am | Report this comment
   

5. John Christensen, Tax Justice Network (guest contributor): I welcome Martin Wolf’s timely article about globalisation “Preserving the open economy at times of stress” It is mostly up to his usual standards of clarity and wisdom. There is one section, however, where more clarity would be welcomed.

   He says taxes will have to be raised, and points out that the freer movement of capital (or labour) makes it harder to tax and regulate those able to move. Yet his response to Larry Summers’ recent proposal for greater international co-operation is only luke warm. He favours greater international agreement on regulation in some areas, notably finance, but thinks the case for tax co-operation is weaker. If Sweden’s taxes can be 56 per cent of GDP, he says, it is not tax competition that keeps the US at just 34 per cent. “The mobility of capital and people is an excuse, not a justification, for low US tax levels.
   This is not quite, but looks like, a rejection of international co-operation on tax. We would welcome more clarity on this. Does he oppose it?

   Second, he seems to make an analytical distinction between tax and regulation, but there is no solid dividing line. One area is in the transparency of international taxation. With some flawed exceptions, nations generally cannot “see” the income their residents earn in other countries, and consequently cannot tax it. Tax authorities cannot easily “see” whether multinational companies are mispricing internal transfers or carrying out fake transactions to evade tax. Developing nations are especially vulnerable here. Many hundreds of billions of dollars are involved annually; several strategies are needed to improve transparency; each requires international co-operation on what is both a tax matter and a regulatory one. We believe Martin Wolf would favour a strong push for transparency for international taxation: we would welcome more clarity from him on this.
   Third, he recognises that taxes will have to be raised, but then seems to argue that because Sweden can have relatively high taxes (and relatively little inequality) in spite of globalisation and tax competition, this means that tax competition is not the problem to attend to. If this is his argument, he is wrong.

   Other countries have not gone Sweden’s way, and they cannot and will not in current circumstances. Aside from the fact that tax competition seriously restricts nation states’ sovereignty and means governments cannot get the tax systems their voters want, tax competition also powerfully shapes and distorts the national debates themselves. Witness the pressure that business lobbyists are currently putting on the UK’s Chancellor, Alistair Darling, using threats by some companies to relocate elsewhere as sticks to beat him with. Witness the debate over “non-domiciled” residents, and what Mr. Wolf’s excellent recent article on that debate described as “special interest ‘the sky is falling‘ pleading.” The domicile rules emerged for historical reasons, but have endured for so long precisely because of tax competition. “Don’t tax us too heavily,” the non-doms threaten, “or we’ll run away to Switzerland.”

   Ferocious tax competition is stopping Britons from getting a more progressive tax system, even if they don’t want to go as far as Sweden. Most pernicious is competition from tax havens like Switzerland or Liechtenstein. Their aggressive appropriation of other nations’ taxable incomes – not to mention their conducive climate for organised crime and international corruption – punches special-interest loopholes in reputable nation states’ tax systems. Once again, developing nations are the most vulnerable. They are often in no position to resist the demands from multinational companies to grant them tax concessions and other subsidies which allow them to free-ride on services provided by others. All this distorts markets, tending to shift investment away from where it is most productive towards where it is able to secure the biggest fiscal subsidy.

   A race to the bottom on secrecy and regulation is real. The race to the bottom on tax is different: people and many resources are not as mobile as capital, so states can still extract high taxes. Yet that does not mean that tax competition is not a problem. As a result of tax competition, states are under great pressure to replace the taxes lost because of their difficulties in taxing flighty capital, by introducing regressive taxes like VAT and by taxing lower-paid labour more heavily. Taxing capital better must be an essential part of dealing with the challenge of inequality, and only international co-operation on tax will do it.

   It is time to recognise that tax competition is harmful, and that that if we want (as I do) to rebuild and preserve a good reputation for globalisation, then real progress is simply not possible without strong international co-operation on both tax and regulation.

   John Christensen is director of the Tax Justice Network (and former economic adviser to the States of Jersey)

   Posted by: John Christensen | May 22nd, 2008 at 11:50 am | Report this comment
   

6. Jon Stern (guest contributor): I think that Kevin O’Rourke’s comment is very important.

   Political sustainability of an open trading order requires at least that potential losers believe that their governments care about what happens to them and will do something to avoid their lives being ruined. The way to do that is not just to provide retraining and other assistance to those displaced but to develop a modern and effective notion of a labour compact that is supportive of market-indicated changes. This applies to developing country governments reducing protection as well as to OECD countries.

   The other key condition is for governments keen to promote globalisation and open trading markets to make it clear that they are genuinely aware of the problems of potential losers and will act both to prevent unnecessary damage and help provide effective assistance. Stronger and clearer public statements would be very welcome and help head off protectionist pressures. (See the letter in today’s FT by John Evans, General Secretary of Trade Union Advisory Committee to the OECD as a good instance of this.)

   Dani Rodrik, in his 15 May discussion of Larry Summers’ pieces, argues that a key condition of the success of the post-1945 liberal economic order was that it allowed enough room for nation states and governments to strike their own particular domestic economic and social bargains. I agree. It is economically and politically very dangerous for those who feel at risk of market forces destroying their jobs and skills to feel that they are going to be left by their governments to deal with this on their own.

   Isn’t this what, in the UK, we have seen with the serious erosion of working class support for the Labour Party? And isn’t this why the Democratic candidates - and Larry Summers - are arguing the way that they are now doing?

   Jon Stern is Research Director of the Centre for Competition and Regulatory Policy

   Posted by: Jon Stern | May 22nd, 2008 at 1:47 pm | Report this comment
   

7. Arvind Subramanian: An important point raised in recent FT columns by Larry Summers, Martin Wolf and by Devesh Kapur, Pratap Mehta and myself relates to the domestic policy responses to the problems—stagnant wages, job insecurity, and worsening access to health care—faced by middle class American workers. Martin Wolf rightly suggests that one part of the solution must be “higher taxation of the winners” and that globalization is not a “reason for low taxes, but an excuse.”

   Indeed, a cursory look at U.S. foreign direct investment (FDI) and tax revenue numbers do not support a globalization, or more specifically, capital-flight induced erosion in the U.S. tax capability. Overall FDI flows have been small and fluctuating (between net inflows and outflows), and FDI flows from the U.S. to developing countries have been really miniscule as a share of U.S. GDP and capital stock. On the tax front, overall taxes as well as corporate and income taxes (as a share of GDP) have either been relatively constant over the last two to three decades or trended up slightly. Individual income taxes spiked up around 2000 because of the tech bubble and the cashing of stock options but have since reverted to long-run trends.

   Yes, tax rates have been cut under President Bush but that has been more ideology driven than forced upon globalization-straitjacketed policymakers. Moreover, it would be difficult to make the case that globalization had any important role to play in the repeal of the estate tax, or the inability to reform and strengthen health care, education, and worker assistance programs. The case that globalization has constrained policy choices to bolster the sagging fortunes of U.S. labor needs stronger empirical backing.

   So, if these policy choices are not constrained, the Bhagwati-Ramaswami insight about appropriate policy instruments clearly applies. The U.S. middle class problem is overwhelmingly a domestic one, and the appropriate remedy—the most effective, with the least collateral damage in terms of foregone growth—must therefore also be domestic.

   There is another reason for pursuing the domestic option first. While Lou Dobbs blames the ills of the American worker on globalization or the more advantageous playing field of his Chinese/Indian counterpart, it could well be that the American worker is really being hurt more by the uneven domestic playing field between him and U.S. managers and capitalists.

   The American worker who has watched the recent scandals—of Enron and the tech bubble, the widening pay differentials between chief executives and average workers (from a multiple of 27 in 1973 to 300 in 2000),and the wealth accumulation by the financial wizards despite their reckless and socially costly risk-taking—all with public policy either actively aiding (in the case of the tax cuts) or being acquiescent (through excessive regulatory forbearance), could reasonably suspect double standards in the rules for capital and for labor. The American social compact—which condones inequality of outcomes to a greater degree than elsewhere—is supposed to be about all Americans having a more-or-less equal shot at the American dream.

   More effective redistribution, more accessible healthcare, and better regulation of corporate excesses, including executive salaries, would help shore up the fact and perception of the economic well-being and security of U.S. labor. In turn, these domestic policy responses could go a long way in restoring faith in the basic American compact, raising morale, and checking the natural and understandable instinct to ascribe to the foreigner the travails that are mostly home made.

   Posted by: Arvind Subramanian | May 22nd, 2008 at 6:47 pm | Report this comment
   

8. Lawrence Summers: I am glad that Martin and this round of commentators did not have the difficulty in understanding my views that plagues Arvind Subramaniam and his colleagues.

   No one seems to really object to my urging that greater cooperation between nations would reduce tax competition and permit greater progressivity which in turn would make it easier to mitigate any adverse consequences globalization had with respect to inequality and more generally to build support for global integration.

   Rather the argument seems to be that somehow tax competition and races to the bottom are a red herring and that all that is necessary is a sufficiently robust set of domestic social protections and all will be well, and that political will not globalization is the barrier to such social protection measures.

   I am a democrat and so it should not surprise anyone that I believe that the United States could and should enact greater progressivity and social protection even in the absence of any new global compacts.

   However I would substantially qualify Martin’s column and the various comments with these observations.

   Demonstrations of the kind suggested by Kevin O’Rourke and others of circumstances where increased globalization and increased social protection went together prove nothing. On my argument globalization increases the demand for social protection and raises the cost of providing it and so the impact on the amount of social protection is ambiguous. That social protection and integration came together or that as Dani Rodrik as pointed out openness and extent of social insurance are correlated today across countries does not call into question my thesis that global considerations constrain competitiveness.

   Nor do Arvind’s empirical observations. His look at the data is indeed as he acknowledges (but not before publishing it elsewhere) cursory. If he looked at all carefully he would see that over time there has been a general trend downwards in the ratio of corporate taxes to corporate profits in the US, and I suspect an even larger downwards trend in their ratio to the market value of us corporations. Moreover he would note a shift from personal income taxation towards more regressive payroll taxation and major declines in top rates of tax.

   I can assert based on proximate involvement that concerns about competitiveness have inhibited efforts to increase tax progressivity, including very recently in discussions of the taxation of carried interest. Questions of competitiveness have been central with respect to proposals to reform international tax collection so as to raise more revenues. Some experts believe that the United States loses tens of billions of dollars year due to various kinds of international tax shelters. Does anyone really believe that the steady march downwards in corporate tax rates globally has nothing to do with issues of tax competition and is just a coincidence?

   It was common for economists two decades ago to advise governments concerned with investment to give more generous depreciation or an investment tax credit because such relief would apply only to new and not to preexisting capital (as would a corporate rate reduction) on grounds of maximizing the bang for the buck. Such advice is no longer given because it is recognized that through transfer pricing and through the location of debt issuance reductions in the corporate rate are likely not to have large costs. This is all about tax competition.

   The sums of money involved here are not enormous relative to the whole economy or perhaps even to increases in inequality but they dwarf the adjustment assistance measures that have accompanied past trade measures so I see little reason to suppose that they are politically irrelevant to trade debates.

   There is a separate point to be made. We share a common desire to develop popular and political support for global efforts to promote freer trade and greater integration. In a political sense I continue to believe it would be very helpful for some of the negotiation effort to be directed at issues that working people see as directly relevant to their situation. In this sense adding tax competition, and race to the bottom issues to the global integration debate is likely to be constructive and I can see no real downside.

   Posted by: Larry Summers | May 26th, 2008 at 12:05 am | Report this comment
   

9. Martin Wolf: I appreciate Kevin O’Rourke’s and Arvind Subramaniam’s support. We agree that the erosion of the ability of countries to tax is exaggerated.

   Certainly, we see few signs of such erosion, though the attempt of some small countries to capture the tax base of their larger neighbours is obviously irritating. Let me be clear about this. I am merely saying that countries need to be able to tax activities that go on inside them. If the headquarters of big companies move to Dublin, while nearly all the activities remain where they were, those activities should still be taxed. A comprehensive review of the taxation of companies and of capital is thus clearly needed.

   I also appreciate the intervention of John Christensen. My main point was quite a simple one: there is not that much compelling evidence that globalisation, as currently practiced, is eroding nations’ ability to tax. This is not an argument against fiscal co-operation, far from it. But it is an argument against those who argue that, failing such co-operation, there is limited possibility of raising taxes even in a country like the US.

   I have not looked at the most recent data on taxation of corporations. But I did so in my book Why Globalization Works (2004) (for years up to 2000). What surprised me is that, despite widespread reductions in marginal tax rates, the share of corporate taxation in national income seemed to be both highly variable across countries and little changed over time. This suggested that there remained considerable room for national choice over the structure and level of corporate taxation. There is still greater room for choice where taxation of individuals is concerned, particularly if, as is the case for Americans, taxation is imposed on the worldwide income of all citizens.

   Larry Summers seems to be more pessimistic. He also argues that it is impossible for politicians to ignore the arguments about tax competition. I bow to his experience on this.

   In addition, Larry states that “adding tax competition, and race to the bottom issues to the global integration debate is likely to be constructive and I can see no real downside.” But there is indeed a huge and obvious downside. What if these efforts fail, as is all too likely, given the number of countries and divergent interests involved? Then the opponents of liberal trade will be able to say: “look, globalization is unfair, by your own admission. You have failed to halt the race to the bottom. So we are justified in being protectionists.”

   My counter-argument would then be that this conclusion is wrong, both because liberal trade remains in the interest of individual countries and because the dangers of a race to the bottom are exaggerated. But how could Larry counter this broad line of argument? With some difficulty, I would have thought.

   I also think it is important to define more precisely what we want to achieve with tax co-operation. Full information exchange among democracies is highly desirable. But providing fiscal information to predatory dictatorships is not. Agreement on how to allocate and define taxes on capital, particularly on corporate income, is evidently desirable, albeit hard indeed to achieve. I agree with Mr Christensen that the present ability of corporations to shift income into tax havens is intolerable. But tax competition among countries must still be allowed. If Ireland wants lower taxes on its residents than the UK does, that is a sovereign choice. If some British residents move to Ireland in response, so be it.

   There is an interesting counter-argument to Larry from Greg Mankiw (former chairman of the council of economic advisers), who suggests that big government is a larger threat than small government. I find myself between these two distinguished Harvard economists.

   I take professor Wolfe’s comments on power. My view was clearly simplistic, perhaps the result of reading too much literature by neo-conservatives. I accept prof Wolfe’s point that power is not necessarily zero sum. But I still think power is more zero sum than free economic exchange.

   Finally, I appreciate Jagdish Bhagwati’s comments with almost all of which I agree. I am not quite as persuaded as he is that there is no negative connection between trade and wages. I regard the evidence as inconclusive on this point. But I certainly agree that technological change has been more important.

   Posted by: Martin Wolf | May 26th, 2008 at 7:58 pm | Report this comment
   

10. Larry Summers: Martin’s comment poses an important challenge to my views. In essence he asks: “If tax cooperation is not super-important and you make it a negotiating priority and fail, dont you put at risk the ability to justify trade liberalization that is highly desirable even in its absence? Hence don’t call for more ambitious management of globalization set back the cause by giving ammunition to protectionists?”

    These are fair questions especially since I agree with him that more trade liberalization would be desirable even in the absence of broader global cooperation and that the US could do much more to promote equality even without changes in global conditions. I would make 3 responses.

    First, while unilateral trade liberalization is desirable we have a system where developed countries mostly liberalize in the context of international agreements. Much of what they currently seek to achieve seems to me less relevant to true national economic interest than what I propose. It involves concessions of various kinds to national champion companies on activities that have very little domestic economic benefit. Encouraging more emphasis on global issues at the expense of emphasis on equally difficult to achieve business issues seems to me a step forward.

    Second, I do not accept Jagdish Bhagwhati’s empirical judgement that rising inequality and rising globalization are unrelated and I despair of convincing those with decision making authority of the proposition. Perhaps with a sufficiently robust effort to promote fairness through public policy unlinked to global issues it would be possible to rebuild a free trade constituency. Perhaps having the only linkage involve adjustment assistance of various kinds will be sufficient. It would be terrific if it were so. I think it is more likely that if the pursuit of global objectives had a concern with inequality and insecurity wrapped into it, it would in the current American political context be much more likely to succeed. I suspect the same thing is true in at least some other industrial countries. Why is the goal of more globally integrated and more globally manged economy one to be rejected? To suppose that integration can be cheered on willy-nilly with faith in the market to meet all needs is I think highly optimistic.

    Third, Life is about choices. As I observe matters global trade liberalization is not currently making rapid progress at least in the dimensions involving international agreeements. It is not remotely plausible to blame this on the apostasy of a few economists. My columns suggest a strategy - (i) continuing to stress the benefits of more open markets and the cost of protection (ii) acknowleding in a non-grudging matter that global integration as a phenomenon has many dimensions and is likely to generate many winners and losers especially without new forms of policy cooperation (iii) stressing the importance of domestic policies directed at insecurity and inequality as concomitants of a global strategy (iv) also placing considerable stress on the need for global cooperation not just to promote integration but to assure that public purposes like regulation and progressive taxation can be achieved in its presents.

    Those who see this strategy as giving too much ground to economic nationalism and protection owe us an explanation of what their realistic political strategy would be.

    Posted by: Larry Summers | May 29th, 2008 at 2:08 pm | Report this comment
    

11. Somehow I missed Adrian’s earlier comment, for which I apologise. Adrian is right to feel a little Schadenfreude. But I still disagree with him (and so with Larry) on how essential it is to reach international agreements on taxation. Does Adrian really believe that Swedish average tax rates (well over 50 per cent of GDP) need to be even higher? Does he even believe that British average tax rates (close to 40 per cent of GDP) need to be much higher?

    I am not convinced that Larry has answered my challenge. That is to say, even if I grant him the need to increase government spending, to insure the incomes of the losers from economic changes (including globalisation)and redistribute incomes from winners, I am just not persuaded that a vast continental state, such as the US, has any real need for international agreements on taxation and regulation to do so.

    You would think that Denmark or Sweden would be far more vulnerable to border-hopping, after all. Yet they seem to manage fine, with far higher levels of taxation and regulation than in the US. And I still feel it is dangerous to emphasise the need for this, because doing so gives a hostage to the protectionists.

    Yet this does not - I repeat not - mean I am opposed to such efforts, provided they are done in a sensible, moderate and sensitive way. I certainly accept Larry’s implicit point that it is just as legitimate to pursue such goals as the agreement on trade-related intellectual property (ironically, one of the goals of the US in the Uruguay Round, when Larry served at the US treasury). But not all regulatory or tax goals make sense.

    On the latter, I would focus on two objectives: full information sharing across the globe; and development of a common base for corporation tax that prevents companies shifting income into offshore tax havens. Both seem to me legitimate efforts. But I do not think it is legitimate to try to force everybody to have the same tax rates – indeed, the US would be profoundly embarrassed if such an effort were made (which is why it won’t happen, of course). And I would continue to insist that the objectives of liberal trade with adequate division of the gains can be achieved even without big progress on international tax co-operation. It is dangerous to argue otherwise.

    International regulatory harmonisation, beyond taxation, is a real can of worms. Achieving any degree of harmonisation has been a huge challenge even within the European Union. It can be used far too readily for protectionist purposes. Just think of the potential for mischief over carbon taxation, for example. Some in the EU would like to impose countervailing duties on exports from the US and China. What does Larry feel about that? Similarly, how far do we wish to assail China’s labour market practices, given its relative success in generating employment and higher wages? These are dangerous waters, indeed.

    Posted by: Martin Wolf | June 1st, 2008 at 1:40 pm | Report this comment
    

12. Christian Broda: The US presidential campaign has sometimes sounded like a contest to prove who despises trade the most. Media reports of job losses to China and the destructive effect of Wal-Mart on local businesses are ubiquitous. In recent weeks, Lawrence Summers and Martin Wolf have in the Financial Times both highlighted the dangers of having high-income countries turn against globalisation. This public debate has taken for granted that inequality in these countries has risen as a result of globalisation.

    But has it really? In a recent paper*, co-authored with John Romalis from the University of Chicago, I argue that it has not. The reason is simple. How rich you are depends on two things: how much money you have, and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also doubles, you are no better off. Unfortunately the conventional wisdom on US inequality is based on official measures that look only at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.

    Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in the US. Inflation of the richest 10 per cent of US households has been 6 percentage points higher than that of the poorest 10 per cent in the period 1994-2005. This means that real inequality in the US, if measured correctly, has been roughly unchanged.

    The comment originally appeared in the FT Comment pages. You can read it at full length here.

    Posted by: Christian Broda | June 4th, 2008 at 3:57 pm | Report this comment
    

13. Martin Wolf: I want to thank Christian Broda. It is an excellent point, with which Jagdish Bhagwati will, I am sure, particularly agree. I had alway imagined it was true, to some extent, but not on this scale.

    Posted by: Martin Wolf | June 5th, 2008 at 10:30 am | Report this comment
    

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