Wednesday, November 15, 2006

Intelligent Trade policy

Sub-title: Another reason I think conservative pundits are stupid.

Ever since the election results came in last week, we have been bombarded with the notion that the newly elected Dems are going to put in protectionist trade policies. If anyone even refers to the fact that inequality is growing and trade policy might have something to do with it - they are immediately labeled Protectionists.

Here's an idea - just because you want to help people in the lower end of the income distribution does not mean you do not believe in the benefits of more open trade policy. I am one who is concerned about our current income distribution and here are three ways of conducting trade policy in the future. (1) put up protectionist trade barriers - this is a really BAD idea!! (2) continue with our current trade policy - NOT a GOOD idea!! or (3) implement more open trade policies and redistribute some of the gains to those who lose in the process. Yes - you read it correctly - REDISTRIBUTE!!! Not to the point where all the gains from trade are redistributed, but SOME of them.

Here is the story I told my class yesterday. Suppose a firm packs up and leaves the US for China. Here are some of the benefits: (1) People in China get jobs, (2) prices in the US fall, (3) the firm increases its profits, (4) shareholders in the firm make money, (4) eventually workers in China start to demand US goods and services.

The primary cost is the resultant unemployment in the US. So - should we stop this firm from moving to China - NO!!! Should we let this firm move to China and then implement domestic policy to lower the marginal tax rate for corporate income and capital gains - NO!! By the way, this is what the Republicans have done. Should we let the firm move to China and raise the corporate taxes and capital gains taxes in order to help those who lost their jobs in the US - YES!!

Since the Republicans have been using option 2 and they want you to vote for republicans the next time around they will spend the next two years trying to convince you that the only other option is number 1 and this is just an out and out lie!!!

We can have more free trade and we can also have sensible policies to help those who lose in the process.


Tom said...

The author's idea for redistribution of gains from open-trade policies is novel, but in some sense contradictory. In the author's defense, it is a tricky situation with no easy anwser.

Instead of a protectionist policy, the author is arguing for a free trade policy where some of the gains from trade are redistributed to the losers. Initially, this seems appealing, but I wonder how different the results of the redistribution would be than the results of the protectionist policy? I say this because if the gains are redistributed from the winners to the losers, this would create a disincentive for firms to trade, which is tantamount to some of the effects of a protectionist policy.

I admit I don't have a good understnding of some of these taxes, but wouldn't the author's suggestion of letting "the firm move to China and raise the corporate taxes and capital gains taxes in order to help those who lost their jobs in the US" be another instance of protectionist policy? In that sense, the author contradicts himself, both aruging against protectionish policy, and then advocating specific protectionist policies. Again, this is a very complex question, and I enjoyed this author's new ideas, but I feel that he ultimately falls short.

-Andrew Sims

Laura said...

I think the author makes a good point overall. However, if I can fully understand what he suggests about economic policy, I feel as if he must be simplifying the problem too much. It does sound very appealing, but there must be more to the story than he implies. Furthermore, the extremity of his tone on top of the assumed simplification makes it even harder to take him very seriously.

In his defense, the topic discussed is very important and requires passionate people. And, if the problem really is as simple as he makes it out to be, then he certainly makes a very strong argument for his point of view.

Martha said...

The author's idea is promising, but I agree with Andrew and Laura that the article seems oversimplified and overall not very convincing.

sarah tilbor said...

I think the important part of this article is simply questioning the facts. But, like Andrew, I don't really see the difference between the protectionist policy and redistribution.
I do think that by redistributing, it would be solving the problem more directly. Instead of working around the problem, it takes the unevenly distributed money and simply reallocates it. Would it really work?

Mackenzie Hutton said...

I think that the author's idea is a step in trying to solve the problems that have resulted from the movement of jobs out of the US. While I think that the idea is great I think that it would be hard to implement in a way that would actually accomplish what it intends to accomplish. In response to Andrew's comment, I beleive that firms would still move to China and would pay the corporate taxes and capital gains taxes as long as the benefits that the firm recieves from moving outways the cost of the taxes. I think that if taxes that are less than the benefits are put into place, firms could provide jobs in China and be more productive than they are in the US, and the "losers" would still collect benefits from the taxes.

Drew Martin said...

I am a little skeptical. It is a complicated issue that the author puts very simply here. His ideas could be good, but I think they could be analyzed more.