BuckeyeBlog

Add one dose of flawed thinking on taxes, another dose of misplaced outrage at “outsourcing,” some nifty Presidential rhetoric about “tax havens,” and what do you get? A Presidential tax plan that, as the Cato Institute’s Dan Miller observes, will hurt American businesses and provide a boon to foreign companies:

There is a surfeit of most-important issues right now, but among them is the idea of cap and trade on pollution.

As a means of pollution control, this is actually a free market idea. It avoids command and control and sets prices. However, such a scheme depends on honestly setting prices and there is next to no chance of doing that by government.

Moreover, when one explicitly ties the price structure, not to pollution, but to social programs, then it’s no longer cap and trade at all. It’s just a tax, and the worst kind of tax at that. Once again it is the opposite of transparency, and there is zero chance it will be effective for either revenue or pollution control. (As a means of advancing the socialist cause, it will be quite effective.)

If free marketers don’t grasp this and soon, there is nothing but poverty ahead for all of us. Well, all of us except a few hundred thousand people who will have Daschle dachas and drivers. That probably sounds like a lot of people, but in a society of 300 million, suffice to say, it’s not you.

Robert Scott, the author of the EPI report which I criticized earlier today, defended his study in a response to my post. In that defense, he draws heavily upon statistics and models from which his conclusions and assumptions are drawn. It’s easy to get caught up in numbers and leave the principles that give them meaning far behind. But detailed observations don’t always reflect the truth, and it’s easy to fall into a trap when one forgets which is the master and which is the servant. For thousands of years, humans observed the sun moving from the east in the morning to the west at night. From this observation, they developed the theory that the sun revolved around the earth. They were so convinced of their beliefs that they were willing to kill others to preserve their theory. As we now know, however, they were wrong. Data and observations by themselves serve only as the various colors on a painter’s palette. One must have the principles to use as a brush if he wishes to paint a picture. (more…)

The Columbus Dispatch ran a front page story by Dan Gearino today on a report being released by the Economic Policy Institute:

The trade deficit with China has cost Ohio more than 100,000 jobs since 2001, and the greatest losses have been in manufacturing, according to a study being issued today.

The report by the Economic Policy Institute, an advocacy group in Washington, D.C., was timed for release days before China hosts the Summer Olympics in Beijing.

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The Washington Post had a story today about how free trade is helping to move people in Colombia out of poverty. It’s a great reminder that the real way to help people in foreign countries isn’t foreign aid (which has a poor track record of success) but allowing them to sell goods to consumers in the U.S.

Of course, Democratic Presidential candidate Barack Obama is on record supporting increasing U.S. foreign aid but is opposed to a free trade deal with Colombia. Why would he be supporting spending more money on aid programs that will likely do nothing to help people but is opposing a deal that has demonstrable benefits for poor Colombians?

Economist Tyler Cowen had an excellent article in Sunday’s New York Times about why globalization fears are unfounded:

Trade advocates focus on the benefits of goods arriving from abroad, like luxury shoes from Italy or computer chips from Taiwan. But new ideas are the real prize. By 2010, China will have more Ph.D. scientists and engineers than the United States. These professionals are not fundamentally a threat. To the contrary, they are creators, whose ideas are likely to improve the lives of ordinary Americans, not just the business elites. The more access the Chinese have to American and other markets, the more they can afford higher education and the greater their incentive to innovate.

Conservative and liberal economists agree that new ideas are the fundamental source of higher living standards. We urgently need new biotechnologies, a cure for AIDS and a cleaner energy infrastructure, to name just a few. Trade is part of the path toward achieving those ends. A wealthier China and India also mean higher potential rewards for Americans and others who invest in innovation. A product or idea that might have been marketed just to the United States and to Europe 20 years ago could be sold to billions more in the future.

Those benefits will take time to arrive, but trade with China has already eased hardships for poorer Americans. A new research paper by Christian Broda and John Romalis, both professors at the Graduate School of Business at the University of Chicago, has shown that cheap imports from China have benefited the American poor disproportionately. In fact, for the poor, discounting in stores such as Wal-Mart has offset much of the rise in measured income inequality from 1994 to 2005.

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While it’s politically popular to attack free trade in Ohio, the reality is that freedom to trade and move freely has a variety of benefits:

Anderson looked at a number of econometric modeling scenarios and calculated the cost and benefits that would obtain from full trade liberalization under realistic assumptions derived from the current World Trade Organization’s Doha Development Agenda negotiations. Anderson estimated that liberalization of global merchandise trade would mean an annual increase of $287 billion per year in global GDP, of which $86 billion would go to developing countries. This compares very nicely with the $104 billion in development assistance that the governments of industrialized countries gave to developing countries in 2006.

In other calculations, Anderson found that the long term effects of trade liberalization would be that global income in 2098 would be up to 10% greater than it otherwise would have been. The associated net present values from freer trade range from $50 trillion to $424 trillion. Consider that in 2007, total gross world product was $53 trillion. In other words, both the immediate and long-term benefits from free trade are enormous. Anderson reports benefit cost ratios ranging from 269:1 to 1121:1.

Allowing workers to move from developing countries to rich countries also provides big benefits to both. Anderson cites a World Bank study which found that annual migration from now to 2025 of 560,000 workers and their families from developing countries to rich countries would yield global gains by 2025 amouting to $674 billion per year in 2001 US dollars. Most of the gain would go to the migrants, but natives would gain $138 billion in benefits.

Since the notion that somehow free trade hurts workers and consumers seems so prevalent in Ohio, Robert Samuelson’s column in today’s Washington Post provides some much-needed common sense:

…it’s politically convenient to oppose the trade agreement because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier: Although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot-com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.

Look at the numbers. From 1998 to 2007, total non-farm payroll employment rose 12 million, and unemployment averaged only 4.9 percent – despite the 4 million lost factory jobs. In that period, U.S. manufacturing output rose 22 percent.

No matter. Globalization and trade have become lightning rods for myriad grievances (job insecurity, wage inequality, eroding fringe benefits). But even if trade caused all the factory job loss, its impact is shifting. The dollar’s dramatic depreciation (down an inflation-adjusted 20 percent since early 2003 against a basket of currencies) has enhanced the competitiveness of U.S. exports. Their growth now looms as a major source of job creation and economic expansion.

The overall trade deficit is dropping and, except for higher oil prices, would be dropping faster. In 2007, manufacturing exports rose 10.9 percent, double the 4.9 percent for manufacturing imports. At some companies, the effect is already noticeable. Consider Bison Gear and Engineering, a medium-size firm near Chicago that makes electric motors used for kitchen equipment, packaging machinery and medical devices. Since 2006, exports have increased from about 20 percent to 30 percent of total sales, says Chairman Ron Bullock. Bison has hired about 50 workers, bringing total employment to 250.

It is no longer necessary to rely on elegant theories of comparative advantage, more consumer choice or greater competition to favor open trade. Jobs and economic growth will suffice. Indeed, without export-led growth, the economy may face a sluggish future.

Given that NAFTA played a large role in the Ohio presidential primary, a story from the Washington Post entitled Don’t Blame NAFTA for Downturn, Many Economists Say is quite pertinent:

It is true that the United States has lost about 4 million manufacturing jobs since 1994, the year NAFTA went into effect and eliminated most hurdles to trade and investment between the United States, Mexico and Canada. Not only are items such as clothing, toys and televisions increasingly made abroad, but so are more complex goods including sophisticated magnets that help steer military smart bombs and radio frequency identification chips embedded in new U.S. passports.

But many economists blame the march of technology and the increasingly dominant manufacturing role of China, not NAFTA, for that shift.

Overall, they said, NAFTA has been a net plus, if a modest one, for the U.S. economy. Even as the number of factory jobs dropped, manufacturing output in the United States was up 58 percent between 1993 and 2006, as U.S. plants produced more goods with fewer workers. Exports are at a record high, and trade among the three NAFTA partners has tripled since 1994. Meanwhile, overall employment in the United States has grown 24 percent and average unemployment is down since NAFTA went into effect. Some cities along the border with Mexico have grown, and farm exports have gone up.

Buckeye Institute advisor Joseph Zoric discsussed NAFTA here.

As any Ohio voter knows, the Democratic presidential primary campaign in the state seemed focused on which candidate was more anti-trade. Yesterday’s Wall Street Journal has an excellent article detailing why these views are problematic:

It is true that there is a lot of churning as jobs are destroyed, but even more are created as firms enter, exit or are resized in a dynamic economy. Back in 2004, Ben Bernanke, then a Federal Reserve governor, looked at Bureau of Labor Statistics data stretching back a decade and pointed out that about 15 million jobs were lost and 17 million created each year — an annual net creation of nearly two million jobs. What’s more, only about 2.5% of the jobs lost were a result of import competition. The vast majority of jobs lost were caused by changes in consumer tastes, domestic competition, and technology. It is also true that U.S. manufacturing has been shedding jobs since the late 1970s, with workers increasingly moving into services. But we have seen this process before. In 1900, it took about 40% of the American workforce toiling on the farm to feed the country. Today, thanks to farm mechanization, agricultural chemistry and other innovations, a mere 2.5% of the workforce feeds the nation and exports about third of U.S. farm production.

Trade is not the threat Mrs. Clinton and Mr. Obama allege. It is a central reason why American workers are among the world’s most productive and prosperous. An economy open to trade is also an economy free enough to thrive in a changing world….

Trade agreements are also important for noneconomic reasons, because they have foreign policy implications. Take South Korea, a longstanding ally in Asia. Both Mrs. Clinton and Mr. Obama oppose ratifying a trade deal with Seoul. But failing to do so would send a troubling signal — that the U.S. is uninterested in supporting an ally at a time when our friends in the region are worried about an ascendant China.

Or take Colombia, a vital U.S. ally in Latin America. Mrs. Clinton opposes, and Mr. Obama has declined to embrace, a trade deal with Bogotá. Colombia is a stalwart ally in the drug war and essential to neutralizing Hugo Chávez’s Venezuela. Nafta helped spur economic reform, private-sector growth and political stability in Mexico. A trade deal with Colombia could work similar magic in a country where it is desperately needed.