Friday, December 28, 2007

The Economics and Politics of Trade

Paul Krugman (hat tip: Mark Thoma, as usual) says:
…I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.
Greg Mankiw asks:
But what if those who are worried about trade are protectionists? Should we still respect them?
Until Paul Krugman gives his own answer, I think we can presume that the answer is yes. Respecting protectionists doesn’t mean we are willing to give in to their protectionist demands, but it does mean that we appreciate their concerns and presumably that we are interested in finding some way of accommodating those concerns, short of actual protectionist policies.

It helps, I think, to separate the positive question from the normative question. The positive question is, “Who is helped by trade, and who is harmed?” The normative question, in the abstract, is, “How much weight should we give to the interests of the various parties that are helped and harmed by trade?” Twenty years ago, there was an easy answer to the first question: “Nearly everyone is helped in the long run, and in the short run, only people in a few specific industries are harmed.” That made the answer to the normative question irrelevant. Unless one wanted to give a ridiculously high weight to the short run interests of industries that were hurt by trade, the conclusion was always that trade was good, and protectionism was bad. And anyone who disagreed could be written off as either representing a special interest or misunderstanding the positive economics, thus not deserving our respect.

The answer to the positive question is no longer easy, and Prof. Krugman suggests that the answer now may be something like this: “Rich Americans and poor foreigners are helped, while typical Americans are harmed.” I think most American economists, including both Greg Mankiw and Paul Krugman, will agree with my answer to the normative question: “Since poor foreigners are much, much, much, much poorer than typical Americans, any reasonable notion of distributive justice, utilitarian optimization, or human charity requires that we give more weight to the interests of poor foreigners.” But that answer is unattractively convenient for American economists, since, whether or not they are personally rich, they fall into the functionally defined category of “rich Americans” that benefit from trade. As Archie Bunker once said, “It’s always good to be generous when it don’t cost you nothing.”

The ultimate answer may be even more convenient for Paul Krugman, because it justifies his prior political preferences. He advocates addressing the concerns of protectionists by means of (broadly speaking) redistributionist policies that benefit typical Americans (trade losers) at the expense of rich Americans (trade winners). That answer is convenient, but nonetheless, provided that Prof. Krugman can substantiate his positive conclusions, pretty convincing (though perhaps I’m not one to judge, since I tend to agree with his prior political preferences anyhow). Whatever ones initial preferences regarding equity-efficiency tradeoffs, a recognition of the politics of trade should shift them a bit to the equity side. Or, more precisely, if the marginal efficiency gains (and equity gains at the global level) from trade are first order and you are already at your domestic optimum for the equity-efficiency tradeoff, then, with the introduction of the political constraint, the envelope theorem requires that you revise that domestic optimum.

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Tuesday, December 25, 2007

Efficiency Wages?

`It's only once a year, sir,' pleaded Bob, appearing from the Tank. `It shall not be repeated. I was making rather merry yesterday, sir.'

`Now, I'll tell you what, my friend,' said Scrooge,' I am not going to stand this sort of thing any longer. And therefore,' he continued, leaping from his stool, and giving Bob such a dig in the waistcoat that he staggered back into the Tank again;' and therefore I am about to raise your salary.'

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Sunday, December 23, 2007

Compulsory vs. Voluntary Voting

Apropos of a recent post on Economist’s View, I was going to explain that voter turnout has nothing to do with the free rider problem and that basic economic logic suggests that smaller turnouts are better than larger ones, but Radek (a.k.a. YouNotSneaky!) beat me to it.

In the end, though, I think Radek is wrong, because we need some political logic to supplement the economic logic. To begin with, economic logic will indicate that voting is, for the individual, irrational, unless it is mandatory. Therefore (here’s the political part), under a voluntary voting regime, only irrational people will vote. Do we really want government by the irrational, for the irrational, and of the irrational?

This may sound like a bit of sophistry, but I really think it has some relevance to the real world. Generally, people with strong opinions – opinions that are strong enough to make people do something irrational – will vote (plus maybe a few people whose only strong opinion is about their own civic duty). Radek seems to think this is good, because the people with strong opinions will be better informed and will have thought more about the choices. I’m willing to concede that point in some contexts – in particular, when we’re operating, as it were, close to the center of the distribution of policy possibilities. But when we get into the tails of the distribution, things get weird. The people with really crazy opinions – that Aryans are a master race, that Muslims must conquer the world and establish a Caliphate with worldwide dominion, etc. – are the ones who can most be counted on to do irrational things, like voting, to further their cause. If you have 60% voter turnout, one group of crazies can take over by converting 31% of the population. That’s a difficult task, but history suggests it’s sometimes possible. If you have compulsory voting, the crazies have the significantly more difficult (but, again, history suggests, not impossible) task of converting 51% (well, OK, maybe 48%, since there won’t be perfect compliance) of the population. Under normal circumstances, compulsory voting isn’t going to have a dramatic effect on election outcomes, because, let’s face it, the candidates usually aren’t all that different in the grand scheme of things. But in the occasional weird case where the election really matters a whole hell of a lot, compulsory voting reduces the chance that dangerously insane people can take over the country. That might be worth all the extra shoe leather.

Mark Thoma has a different take. He does seem to think that 100% voter turnout would be a good thing, but he thinks that compulsory voting would be too much of an imposition on people’s liberty. But I have a suggestion: Start with a compulsory voting regime. Enforce it by using fines. Rename the fines, and call them taxes. In the case of people who do vote, rename the absence of a fine, and call it a tax with an offsetting transfer, actually not so much a transfer as a payment for the service of voting. So now we have a lump sum tax offset in most cases by a payment for a public service performed by the individual. The individual is free to pay the tax and not do the service, but presumably we set the payment high enough that only a few people will choose that option. Does Mark still object?

[Update: Thinking about my last paragraph, I realize it has an obvious implication about whose political interests are served by compulsory voting: the interests of those whose shadow price of time is low – which is to say, poorer people (and perhaps retirees). If your shadow price of time is high, the penalty for not voting will be outweighed by the value of your time, so the voting requirement won’t change your behavior. If your shadow price of time is low, the penalty will outweigh the value of your time, and you’ll definitely vote. So the voting requirement will shift election outcomes toward the side of the these low-shadow-price people – presumably people who can’t get well-paid employment on the margin, which is to say, typically, poor people. Voluntary voting, on the other hand, is, relatively speaking, good for the political interests of corporate lawyers and investment bankers.]

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Saturday, December 15, 2007

Good News about US Inflation

Everybody’s getting so freaked out about the latest CPI report, and I don’t understand why. The supposed bad news – gargantuan increases in energy prices, substantial increases in food prices and in import prices – is last month’s news. You could have gotten most of this information by looking at commodity markets and foreign exchange markets a month (or two or three) ago, and, as Dean Baker points out, you could have gotten it with even more precision by looking at the latest report on import prices. I don’t see any real bad news in this report.

Over the past 3 months, energy prices have risen at a 33.8% annual rate. That’s dreadful, but it’s not news. Food prices have risen at a 4.3% annual rate. Kind of ugly, but also not news. In fact, the 0.3% November increase in food and beverage prices is kind of tame, considering. Transportation prices rose at a 14.4% annual rate over 3 months – that’s pretty much redundant information, since I already mentioned energy prices. Medical care prices rose at a 5.2% annual rate, but that’s not unusual.

The one thing that is both unusual and unexpected is the 0.8% monthly (4.1% annualized over 3 months) increase in apparel prices. But if you look at the 12-month change in apparel prices, it’s still down (-0.4%). While apparel prices may not fall as quickly in the future as they have in the recent past, I for one do not believe that we have suddenly entered a new regime during which apparel prices will be rising by 0.8% – or even 0.3% – every month. The fact that there was a blip in apparel prices in November – and not even enough to get the core inflation rate for November above 0.3% – is hardly a significant piece of bad news.

The last thing in the report that people may have found troubling is the 0.4% increase (3.6% for 3 months annualized) in housing prices (meaning mostly rent and owners’ equivalent rent). But are you really worried about housing costs – with huge inventories of unsold houses in most parts of the country? There is probably a temporary problem in the rental market, because people are getting foreclosed on and pushed into the rental market, and the properties they vacate are remaining vacant for a while. This problem may continue in coming months, but one can’t reasonably describe this as fundamental upward pressure on housing prices.

What’s left? The “other goods and services” category did rise by 0.3% in November – more than one would have hoped – but the other two categories, “education and communication” and “recreation,” each rose by only 0.1% – less than one would have expected. All in all, not a troubling report, unless you haven’t been paying attention to the news over the past few months.

If you’re obsessed with the aggregate inflation rate, you’re welcome to be horrified that “US inflation jumps to 4.3%” – as the headline on the weekend Financial Times declared, and you might also be unhappy with the 3-month core inflation rate (2.6% annualized). But when you look at the 12-month core rate of 2.3%, don’t be upset (like the Financial Times) that it is “higher than the Fed’s upper limit of 2 per cent.” That upper limit applies to the core personal consumption deflator, which is a different index and typically runs about 50 basis points (or anywhere from 0 to 100 basis points, depending on whom you ask) below the CPI. 2.3% core CPI inflation is not a problem.

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Sunday, December 09, 2007

Illegal Immigration

Michael Kinsley (hat tip: Mark Thoma) is right, and Andrew Samwick is wrong. (Well, mostly wrong. He does make an important point about fairness to people who are trying to immigrate legally.)

Another question: Why are you so upset about this particular form of lawbreaking? After all, there are lots of laws, not all of them enforced with vigor. The suspicion naturally arises that the illegality is not what bothers you. What bothers you is the immigration. There is an easy way to test this. Reducing illegal immigration is hard, but increasing legal immigration would be easy. If your view is that legal immigration is good and illegal immigration is bad, how about increasing legal immigration? How about doubling it? Any takers? So in the end, this is not really a debate about illegal immigration. This is a debate about immigration.

That's not a good test, unless Kinsley is arguing that a politician's desired amount of legal immigration should not depend (negatively) on the number of illegal immigrants who are already here. One does not have to argue that there are no differences between illegal and legal immigrants (for example, in their economic or fiscal impact) to assert that the key distinction of legality is relevant for public policy.

Let me try to clarify what I think Kinsley is arguing. Let’s suppose we ask a slightly different question: How many total immigrants, legal plus illegal, should we have in the US? I allow three different answers:
  1. exactly as many as we have now,
  2. more than we have now, or
  3. fewer than we have now.
(I'm talking about immigration flows, not about a snapshot of the number of immigrants at a particular time.)

If you give the first answer, I’m inclined to doubt your sincerity. Undoubtedly there are some people who do think we have just the right number of immigrants, but it’s hard to imagine that there are many. It’s clear (to me anyhow, from reading blog comments on the subject) that there is a broad distribution of opinion about how many immigrants we should have. It seems implausible that the distribution would just happen to have a large atom located at exactly the status quo. You might support the status quo for reasons of general conservatism, but in that case, you’re not particularly against illegal immigration in general; you’re just against having more illegal immigration than we already have. If you are against illegal immigration in general, then you are against the status quo, and you’ll have to do better than claiming general conservatism.

If you give the second answer, then you are pro-immigration, and if you claim at the same time to be against illegal immigration, Michael Kinsley will presumably agree with you: “We all oppose breaking the law, or we ought to.” But if you are pro-immigration, you’ve got some explaining to do as to why illegal immigration should be more of an issue than “illegal drug use or illegal speeding.”

If you give the third answer, I submit that you are not just against illegal immigration; you are against immigration. (I mean against immigration at the margin; presumably that’s what it means to be against immigration, since hardly anyone would argue for zero immigration.)

It seems to me, though, that the real issue is not whether illegal immigration is good or bad, but what we should do about it. The question of what to do should depend not so much on how much immigration we want as on what the costs and benefits of various options are. If preventing illegal immigration were cheap, then presumably even pro-immigration people would support doing more about illegal immigration so that we could increase legal immigration. It isn’t cheap, and as someone who doesn’t consider immigration (at the margin) to be a bad thing, I see the general imperative for enforcing laws as the only major point in favor of strong enforcement. In my opinion, marijuana and exceeding the speed limit both cause more net harm than illegal immigration, and I don’t think we should devote any more resources to enforcing immigration laws than we do to enforcing marijuana laws or speed limits.

Friday, December 07, 2007

Pigovian Tacks

Conventional estimates put the appropriate level for a carbon tax (to combat global warming) at the equivalent of between 10 cents and one dollar per galoon of gasoline. I've been driving on the highway in Connecticut today, and judging by the mix and behavior of vehicles after several years of rapidly rising gasoline prices, my intestinal econometrics tells me that $1 would not be anywhere near enough to have a significant impact: a dollar a gallon is basically saying we don't care much about global warming, or at least that we don't intend to address it primarily by reducing use of carbon-based fuels.

My modest (really!) proposal: a carbon tax equivalent to about $5 per gallon, to be phased in over, say, 10 years, with the first few increments to be fully rebated as lump sum transfers and later increments to be partially rebated and partially applied to. Medicare or other federal health care programs, with some provision for flexibility based on economic and budgetary conditions. Along with huge punitive tariffs on goods with Chinese content until the Chinese adopt similar policies.

Since most people seem to think even 10 cents per gallon is too much, my money would be on global warming. Unfortunately, because uncertainty is a big part of the problem, it's hard to know how to play it. If Case and Shiller come up with a futures contract for beachfront properties, though, it sounds like a good long-term short. But the contract would have to specify what happens when some fraction of the index ends up underwater (literally).

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