Tuesday, March 5, 2019

Dani Rodrik: Towards A More Inclusive Globalization: An Anti-Social Dumping Scheme


An ingenious reform strategy...

Towards A More Inclusive Globalization: An Anti-Social Dumping Scheme

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Dani Rodrik

FEBRUARY 2019

Summary

Theory and empirics both suggest that international trade has sharp distributional implications. Furthermore, redistribution caused by trade is often viewed by the general public as more harmful or disruptive than other domestic market shocks. I discuss conditions under which there may be a legitimate case for restricting trade to promote domestic social inclusion, and propose a specific policy – a social safeguards clause – targeting those circumstances.

Trade and distribution

One of the remarkable implications of the theory of comparative advantage is that sharp distributional consequences are generically the flip side of the gains from trade. This point was first formalized in the famous Stolper-Samuelson (1944) theorem, which demonstrated that one of the factors of production would be left worse off in absolute terms as a consequence of opening up to trade. In a country where skilled labor is relatively abundant (compared to trade partners) and which has comparative advantage in skill-intensive goods, the loser would be unskilled labor. It is not simply that the gains from trade are distributed unevenly between skilled and unskilled labor; what is striking is that the losers suffer an absolute loss in real incomes.

The Stolper-Samuelson theorem is built on very specific assumptions: there are only two goods, two factors of production, and there is full mobility of factors between the two sectors of production. One might think that the stark distributional consequences it generates is a result of these specialized assumptions. In fact, the result is remarkably robust and generalizes very broadly. Consider a world with any number of factors of production and any number of goods. Factors could be mobile, immobile, or anything in between. Suppose production takes place under neoclassical assumptions: that is, producers maximize profits and minimize costs using conventional production functions. Then, as long as a country does not fully specialize – i.e., as long as it continues to produce very close substitutes for importables – opening up to trade must leave at least one factor of production worse off in absolute terms.[1] The result that openness to trade creates losers is not a special case; it is the implication of a very large variety of trade models.

Nevertheless, until recently it was not uncommon to dismiss this as a theoretical result with little empirical support. Early research by trade economists looked for effects across the skill divide, and the effects there were not that large. Trade seemed to account for perhaps 10-20 percent of the rise in the skill premium. In retrospect, it appears that this work missed the scale of the distributional effects because they mostly focused on the wrong margins. More recent work has focused on differences in labor markets across different communities and has uncovered much larger effects. Workers are apparently not very mobile spatially and communities that compete with imported goods can be hurt very badly by rising import competition.

Hakobyan and McLaren (2016) find that NAFTA produced modest effects for most U.S. workers, but an important minority suffered substantial income losses. Regions that were most affected by tariff reductions experienced significantly slower wage growth than regions that had no tariff protection against Mexico in the first place. The effect was greatest for blue-collar workers: a high-school dropout in heavily NAFTA-impacted locales had 8 percentage points slower wage growth over 1990-2000 compared to a similar worker not affected by NAFTA trade. The industry effect was even larger: wage growth in the most protected industries that lost their protection fell 17 percentage points relative to industries that were unprotected initially.[2] These are very large effects, especially when one bears in mind that the net gains from trade generated by NAFTA apparently have been quite small, less than 0.5 percent at best (Romalis 2007, Caliendo and Parro, 2015).

In a well-known paper Autor, Dorn, and Hanson (2013) have documented the labor-market disruption caused by the "China trade shock," which was not only large but also very persistent. These authors' unit of analysis is the commuting zone. Their baseline result is that a commuting zone in the 75th percentile of exposure to Chinese import growth had a differential fall of 4.5 percent in the number of manufacturing employees and a 0.8 percentage point larger decline in mean log weekly earnings, compared to a commuting zone at the 25th percentile. They also find a significant impact on overall employment and labor force participation rates, indicating that this is an additional margin of adjustment to trade shocks. As the authors stress, this implies that the wage reductions are under-estimated, both because of increase in non-participation and the fact that the unemployed are more likely to have lower ability and earnings. Moreover, these local labor-market effects appear to have been highly persistent. The wage, labor-force participation, and unemployment consequences had not dissipated after a full decade of the China trade shock (Autor et al. 2016).

Trade, fairness, and appropriate remedies

How should such distributional effects be remedied? In a market economy, labor markets are buffeted constantly by shocks of different types. Jobs can be lost or displaced because of demand shocks, technology shocks, management decisions, and a host of other reasons. Trade is only one source of labor market disruption, and normally far from the most important one. Most economists would probably agree that there should be some kind of compensatory mechanism (unemployment and training benefits) when the shocks hit those at the bottom end of the labor market. They would also agree, however, that the safety net should not discriminate by the type of shock. If we are going to help those who are adversely affected by labor market disruptions, we should treat those who are hit by import competition differently from those who are displaced — against their will — for other reasons.

The view that policy makers should not be concerned by the nature of the underlying shock is predicated on an implicit judgement that all market shocks are alike and therefore require identical responses, if any. But this judgement is not consistent with basic moral intuitions. To make the point as starkly as possible, consider the following thought experiment. Suppose Harry and John run two firms that compete with each other. How do you feel about the following scenarios?

  1. Harry works really hard, saves and invests a lot, comes up with new innovations, and outcompetes John, resulting in John and his employees losing their jobs.
  2. Harry gets a competitive edge over John by finding a cheaper supplier in Germany.
  3. Harry drives John out of business by outsourcing to a supplier in Myanmar, which employs workers in 12-hour a day shifts and under extremely hazardous conditions.
  4. Harry brings workers from Myanmar to the U.S. under temporary contracts, and puts them to work under conditions that violate domestic labor, environmental, and safety laws.

These scenarios are isomorphic from a purely economic standpoint insofar as each creates losers as well as gainers in the process of expanding the overall size of the economic pie for the national economy. That is, Harry's gains are larger than John's losses. They differ only in the manner in which these gains and losses are generated.

When I present these scenarios to my students, they react very differently to them, and I imagine most other audiences would too. Scenario 1 generally elicits the least opposition; what is happening seems to be the normal operation of a competitive market economy. Scenario 2 typically raises few concerns either – at least for an audience that is well educated and understands the benefits of international trade. But support drops sharply when I present scenarios 3 and 4. It appears there is something problematic with the exchanges described in the latter two scenarios. Some self-reflection may suggest that what is different is that these scenarios entail a form of market competition that would be considered unacceptable if it took place at home, and therefore has been legally ruled out in the domestic jurisdiction.

Some may remain unconvinced that the distributional burden created by scenario 3 is any different than that in scenarios 1 or 2. To economists, in particular, it may seem that the source of comparative advantage does not matter, even if it is abuse of labor rights. But then such economists should also be in favor of scenario 4 (which would of course break the law) – and I have met few who are willing to go that far. But then why should scenario 3 be OK if scenario 4 is not?

In recent work, Rafael di Tella and I carried out a survey in which we presented respondents with a news story about a possible factory closure that would leave hundreds of workers at risk of unemployment. Our "treatments" consisted of different explanations for why the factory might close. These included: a technological shock (automation), a demand shock (changing consumer preferences), management failures, and two trade shocks, outsourcing to a developed country (France) and outsourcing to a developing country (Cambodia). A control scenario where no specific shock is mentioned was also included. Then we asked two questions on how the government should respond: (a) whether the government should provide financial assistance to displaced workers, and (b) whether the government should restrict imports.

The results (shown in Figure 1) support three broad conclusions. First, respondents' willingness to provide financial compensation to workers is dependent on whether the shock is trade related or not. Non-trade shocks increase willingness to provide financial support; trade shocks decrease it (in both cases relative to the control scenario). Second, trade shocks greatly increase preferences for import protection, relative to non-trade shocks. Third, there is a further difference between trade that involves a developed country and trade that involves a developing country. The preference for import protection is greatest in the case of outsourcing to a developing country.

Clearly our respondents draw sharp differences across the scenarios and how the government ought to respond. While financial compensation – safety nets – is viewed as appropriate for domestic market shocks, it is viewed unfavorably for trade shocks. And they viewed trade with developing countries as more problematic than trade with developed countries, exhibiting a preference for much greater import protection in the first case.

One way to interpret these results is through the lens of distributive fairness. International trade is viewed differently from domestic competition because certain kinds of international competition can undermine domestic norms with regards to what's an acceptable redistribution. (Note that a similar thing happens when competition from tax havens undermines the domestic tax regime, or when imports from jurisdictions with poor safety enforcement undermine domestic consumer safety rules.) This is the argument that corresponds to scenario 3 in the thought experiment above. In this case, compensation is generically inadequate because what is at stake is the surreptitious modification of the rules of the game – the undermining of domestic social bargains through the back door. Trade is not merely a market relationship, but an instrument for reconfiguring domestic institutions to the detriment of certain groups. One could argue that such instances require targeting directly the trade flows that have the alleged effect.

In summary, we need to distinguish between two different arguments for why trade may be problematic from a distributional – and hence social and political – perspective. When international trade operates just like any domestic form of market competition, it makes little sense to set it apart and decouple it from other approaches for dealing with inequality in labor markets at large (unemployment compensation, progressive tax systems, active labor market policies, employment-friendly macro policies, etc.). But when trade entails practices that violate laws or norms embodied in our domestic institutional arrangements, and thereby undercuts domestic social bargains, it is legitimate to restrict the import flows that have the alleged effect.

In the specific context of trade with developing nations, what should be of particular concern for labor advocates is not low wages or labor costs per se, to the extent that those reflect labor productivity or alternative employment opportunities. Trade is unfair when competitive advantage is gained through the violation of worker rights in the exporting country. The proposed policy is a remedy against this kind of trade, to prevent social dumping.

A remedy against social dumping

A policy that targets social dumping must distinguish between true social dumping and regular market competition. Therefore it needs a domestic investigatory process of fact finding. To see how such a process can be devised we can take our cue from the prevailing trade remedy regime under the WTO. Two types of trade remedies are especially relevant: ant-dumping and safeguards.

The WTO allows countries to impose anti-dumping duties when imported goods are being sold below cost. In addition to determining dumping, domestic authorities must show a "material injury," or threat thereof, to a domestic industry. And under the Agreement on Safeguards, countries are allowed a (temporary) increase in trade restrictions under a narrow set of conditions. Triggering the safeguards clause requires determination that increased imports "cause or threaten to cause serious injury to the domestic industry," that causality from imports be firmly established, and that injury be not attributed to imports if there are multiple causes for it. Safeguards cannot be applied to developing-country exporters unless their share of imports of the product concerned is above a threshold. And affected exporters must be compensated by providing "equivalent concessions."

A broader interpretation of safeguards would acknowledge that countries may legitimately wish to restrict trade for reasons going beyond competitive threats to the profitability of their industries.[3] As I have discussed, distributional conflicts with domestic norms or social arrangements are one such reason. We could imagine recasting the current agreement into an Agreement on Social Safeguards, permitting the application of safeguard measures under a broader range of circumstances. This would require replacing the "serious injury" test with another hurdle: the need to demonstrate broad domestic support, among all concerned parties, for the proposed safeguard measure.

To see how that might work in practice, consider what the current WTO agreement says:

"A Member may apply a safeguard measure only following an investigation by the competent authorities of that Member pursuant to procedures previously established and made public in consonance with Article X of the GATT 1994. This investigation shall include reasonable public notice to all interested parties and public hearings or other appropriate means in which importers, exporters and other interested parties could present evidence and their views, including the opportunity to respond to the presentations of other parties and to submit their views, inter alia, as to whether or not the application of a safeguard measure would be in the public interest. The competent authorities shall publish a report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law."

As written, the clause allows all relevant groups, and exporters and importers in particular, to make their views known, but it does not actually compel them to do so. Consequently, it creates a bias in the domestic investigative process towards the interests of import-competing groups, who are the petitioners for import relief and its obvious beneficiaries. This is also a key problem with hearings in anti-dumping proceedings, where testimony from other groups besides the import-competing industry is not allowed.

A key reform, then, would be to require the investigative process in each country to: (i) gather public testimony and views from all relevant parties, including consumer and public-interest groups, importers of the product(s) concerned, and exporters to the affected country, and (ii) determine whether there exists broad support among these groups for the application of the safeguard measure in question. Protectionism pure and simple would not have much chance of success if groups whose incomes would be adversely affected by trade restrictions — importers and exporters – were necessarily part of the deliberative process and the investigative body had to determine whether these groups also support the safeguard measure. At the same time, when deeply and widely held social norms are at stake, these groups are unlikely to oppose safeguards in a public manner, as this would endanger their standing among the public at large. Imagine, for example, that forced labor was used in producing goods for export in country X, or that labor rights were widely and violently repressed. Exporters to country X and downstream users of X's products would find it difficult to publicly defend free trade with this country.

In less clear-cut cases, the main advantage of the proposed procedure is that it would force a public debate on the legitimacy of trade and when it may be appropriate to restrict it. It ensures that all sides would be heard. This is something which rarely happens. This procedure could also be complemented with a strengthened monitoring and surveillance role for the WTO, to ensure that domestic procedures are in compliance with the expanded safeguard clause. The specific oversight criteria might include transparency, accountability, inclusiveness, and evidence-based deliberation. An automatic sunset clause could ensure that trade restrictions do not become entrenched long after their perceived need has disappeared.

WTO panels would still have jurisdiction, but on procedural rather than substantive grounds. They would examine the degree to which requirements of democratic deliberation were fulfilled. Were the views of all relevant parties, including consumer and public-interest groups, importers and exporters, civil society organizations, sufficiently represented? Was all relevant evidence, scientific and economic, brought to bear on the final determination? Was there broad enough domestic support in favor of the opt-out or safeguard in question? The panels may rule against a country because the internal deliberations excluded an interested party or relevant scientific evidence. But they would not be able to rule on the substantive claim—whether in fact the safeguard measure serves the public interest at home by furthering a domestic social purpose. This echoes the procedural emphasis in the existing Agreement on Safeguards, although it greatly increases the scope of its application.

The proposed procedure would force a deeper and more representative public debate on the legitimacy of trade rules and on the conditions under which it may be appropriate to suspend them. The most reliable guarantee against abuse of opt-outs is informed deliberation at the national level. The requirements that groups whose incomes would be adversely affected by the opt-out—importers and exporters—participate in the deliberations and that the domestic process balance the competing interests in a transparent manner would minimize the risk of protectionist measures benefiting a small segment of industry at large cost to society. A safety valve that allows principled objections to free trade prevail makes it easier to repress protectionist steam.

Even though domestic interests would presumably dominate the deliberations, the consequences for foreign countries need not be entirely overlooked. When social safeguards pose serious threat to poor countries, for example, non-governmental organizations and other groups may mobilize against the proposed opt-out, and those considerations may well outweigh ultimately the costs of domestic dislocations. A labor union may win protection when its members are forced to compete against workers abroad who toil in blatantly exploitative conditions. They are much less likely to carry the day against countervailing domestic interests when foreign working conditions reflect poor productivity rather than repression of rights. As the legal scholar Robert Howse notes, enhancing confidence in the ability of domestic deliberations to distinguish between legitimate domestic regulations and protectionist "cheating" should allay concern that domestic measures are purely protectionist. "Requiring that regulations be defensible in a rational, deliberative public process of justification may well enhance such confidence, while at the very same time serving, not frustrating, democracy" (Howse 2000, p. 2357). The proposed safeguard would be the embodiment of the principle that countries have the right to uphold national standards when trade undermines broadly popular domestic practices, by withholding market access or suspending WTO obligations if necessary.

Current safeguard procedures require most-favored nation (MFN) treatment of exports, permit only temporary measures, and demand compensation from the country applying the safeguard. These need to be rethought in the context of the broader arrangement I am proposing. MFN treatment will often not make sense. If the safeguard is a reaction to labor abuses in a particular country, it is appropriate to direct the measure solely against imports from that country. Similarly, an ongoing abuse will require ongoing use of the safeguard. Instead of imposing temporary relief, it would be better to require periodic review or a sunset clause that could be revoked in case the problem continues. This way trade restrictions or regulations that hamper other countries' interests are less likely to become ossified.

The issue of compensation is trickier. When a country adopts a safeguard measure, the logic goes, it revokes a "trade concession" it had previously granted to other countries in an internationally binding agreement. Those other countries are entitled to receive equivalent concessions or to revoke some of their own concessions in return. In a dynamic world with near constant change, the nature of the concessions that a country grants to others cannot be predicted perfectly. This uncertainty turns international trade agreements into "incomplete contracts." When unforeseen developments change the value or cost of trade flows—because of new technologies (genetic engineering), say, or new values (on the environment), or new understandings (on desirable development strategy)—who controls rights over those flows? The requirement of compensation places those rights squarely with the international trade regime; the exporter can continue to demand market access on the original terms. But we might just as legitimately argue that the value of the original concessions depend on the circumstances under which they were provided. Under this interpretation, an exporter could not claim a benefit that did not exist, nor the importer be forced to suffer a loss that was not originally contemplated, when the agreement was signed. This would bring control rights closer to nation states and sharply limit the amount of compensation that exporters could expect.

Authoritarian regimes likely will become easier targets for safeguard action by democratic nations when their exports cause problems in those nations. Even though some of their labor practices, for example, will be easy to justify, others may not be. Minimum wages significantly lower than in rich countries can be rationalized in the domestic debate by pointing to lower labor productivity and living standards. Lax child labor regulations are often justified by the argument that it is not feasible or desirable to withdraw young workers from the labor force in a country with widespread poverty. In other cases, arguments like these carry less weight. Basic labor rights such as non-discrimination, freedom of association, collective bargaining, and prohibition of forced labor do not cost anything. Compliance with these rights does not harm, and indeed possibly benefits, economic development. Gross violations constitute exploitation of labor, and will open the door for safeguards in importing countries on the ground that they generate unfair distributional costs.

Broadening safeguard action in this manner would not be without its risks. The possibility that the new procedures are abused for protectionist ends and open the door to unilateral action on a broad front, despite the high threshold envisaged here, has to be taken into account. But as we have already seen with the rise of Trump, doing nothing is not riskless either. Absent creative thinking and novel institutional designs, the tensions created by globalization will reinforce the protectionist backlash. That would be far worse than the safeguard regime I have just described. Moreover, qualms about the protectionist slippery slope have to be tempered by considering the abuse that occurs under the existing rules, without great detriment to the system. If mechanisms with explicit protectionist intent, such as anti-dumping, have not destroyed the multilateral trade regime thus far, it is not clear why well-designed exit clauses would have consequences that are worse.

I address two remaining questions briefly. First, would such a scheme affect developing countries and their development prospects adversely? I would argue not, since the aim of the proposal is to delegitimize unwarranted protectionism (against developing countries in general) by enabling trade restrictions in those, relatively narrow range of circumstances where they are warranted on social grounds. My hypothesis is that generalized protectionism is rendered more likely in the absence of such a clause against social dumping. Moreover, the social safeguards described here could be paired with a "development box" that provides developing countries their own, enhanced policy space with respect to the use of industrial policies (Rodrik 2011). Such an exchange of policy space between the advanced and developing nations would benefit both partners, without necessarily harming prospects for global trade.

Second, why not address labor rights by incorporating labor clauses directly into international trade agreements, instead of providing domestic safeguards?[4] This has been the preferred route for two decades now, but with very meager results (Rodrik 2018b). Experience with aid conditionality shows that trying to get countries to change their policies in return for continued material benefits (financial assistance or continued market access) does not have a very good track record. Regardless of what happens in trade agreements, there needs to be a domestic mechanism to address the problems discussed in this essay.

[1] The proof of this result is sketched in Rodrik (2018a). Let the unit cost of production for the importable sector that is being liberalized be expressed as , with denoting the return to the ith factor of production used in that sector. Since payments made to the factors must exhaust the cost of production, changes in unit costs are a weighted average of changes in payments to each of the factors, where the weights (in perfect competition) are the cost shares of each factor. In other words, , where a "hat" denotes proportional changes, is the cost share of factor i, and . Consider what happens with trade liberalization. The effect of trade liberalization is to raise the domestic price of exportables relative to importables. Let the importable described above be the numeraire, with price fixed at unity. We are interested in what happens to the returns of factors used in the importable. Since this good is the numeraire, we have the equilibrium condition , stating equality between price and unit cost (the zero-profit condition). As long as the good continues to be produced, this condition holds both before and after the liberalization. Therefore . Hence there must be at least one factor of production, call it the kth factor, such that . (The inequality will be strict when goods differ in their factor intensities.) Meanwhile exportable prices have increased (), thanks to the liberalization. Hence, and the return to the kth factor declines in terms of both the importable and exportables, producing an unambiguous fall in real returns, regardless of the budget shares of the two goods.

Figure 1 Marginal effects on shares of respondents that respond favorably to statement on the chart (relative to control)

Source: OECD Stats. Notes: wages are PPP-adjusted real wages, indexed to 1985 value.

Notes

[2] Given the nature of identification, these results refer to relative wage changes. But since real wages of blue collar workers have generally stagnated, they are telling also about the magnitude of real income impacts.

[3] I have written about the social safeguards clause in Rodrik (1997 and 2011), on which the following paragraphs are based. Legal aspects are discussed in Shaffer (2019).

[4] See Tucker (2018) for a recent such proposal. Tucker advocates an international agreement that explicitly targets higher unionization rates, allowing countries discretion on how to get there. These targets would be paired by international arbitration that can be initiated by labor groups.

References

Autor, David, David Dorn, and Gordon Hanson, "The China Syndrome: Local Labor Market Effects of Import Competition in the United States," American Economic Review, 103(6), 2013, 2121–2168.

Autor, David, David Dorn, and Gordon H. Hanson, "The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade," Annual Review of Economics, 8, 2016, 205–240.

Caliendo, Lorenzo, and Fernando Parro, "Estimates of the Trade and Welfare Effects of NAFTA," Review of Economic Studies, 82, 2015, 1–44.

di Tella, Rafael, and Dani Rodrik, "Labor Market Shocks and the Demand for Trade Protection: Evidence from Online Surveys," 2019, forthcoming.

Hakobyan, Shushanik, and John McLaren, "Looking for Local Labor Market Effects of NAFTA," Review of Economics and Statistics, 98(4), October 2016, 728–741.

Howse, Robert, "Democracy, Science, and Free Trade: Risk Regulation on Trial at the World Trade Organization," Michigan Law Review, Vol. 98, No. 7, June 2000.

Rodrik, Dani, Has Globalization Gone Too Far? Institute for International Economics, Washington, DC, 1997.

Rodrik, Dani, The Globalization Paradox: Democracy and the Future of the World Economy, W.W. Norton, New York, 2011.

Rodrik, Dani, "Populism and the Economics of Globalization," Journal of International Business Policy, vol. 1, 2018(a).

Rodrik, Dani, "Can Trade Agreements Be a Friend to Labor?" Project Syndicate, September 14, 2018 https://www.project-syndicate.org/commentary/trade-agreement-labor-provisions-small-practical-effect-by-dani-rodrik-2018-09.

Romalis, John, "NAFTA'S and CUSFTA'S Impact on International Trade," Review of Economics and Statistics, 89(3), August 2007, 416–435.

Shaffer, Gregory, "Reconceiving Trade Agreements to Address Social Inclusion," Illinois Law Review, 2019, forthcoming.

Stolper, Wolfgang, and Paul A. Samuelson, "Protection and Real Wages," Review of Economic Studies, 9, 1941, 58-73.

Tucker, Todd N. "Seven Strategies to Rebuild Worker Power for the 21st Century Global Economy: A Comparative and Historical Framework for Policy Action," Roosevelt Institute, September 2018.

All Policy Briefs

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John Case
Harpers Ferry, WV
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There’s nothing radical about Elizabeth Warren’s proposal for universal childcare [feedly]

True, from a humane perspective. But for the billionaire "universal" anything contradicts his/her inherent position: "the people are not entitled to anything". Nevermind the Bill of Rights and the Abolition of  Slavery.

There's nothing radical about Elizabeth Warren's proposal for universal childcare
https://www.epi.org/blog/theres-nothing-radical-about-elizabeth-warrens-proposal-for-universal-childcare/

The right-wing punditry machine has gone into full spin cycle as Democratic presidential candidates throw their hats into the ring, ready to brand any initiative that might ameliorate the lot of working families as radical or, worse in American political parlance, "socialist."

That has certainly been the case with Senator Elizabeth Warren's proposal for universal healthcare. But there's nothing radical or socialist about her plan, which represents a sensible, evidence-based, practical, and much-needed strategy that tackles several critical national crises in one neat package. And it doesn't even take money away from the GOP's sacred cows of military spending and border security.

What crises do Warren's proposal address? Let's review:

First, and perhaps foremost, the majority of American families currently struggle to get their young children into child care that is decent, let alone of high quality. And for a substantial subgroup in the bottom quintile of the wage distribution, "struggle" is an understatement. For example, a 2015 EPI studyshowed that a single parent with one child who worked full-time for the minimum wage would not be able to sustain a modest but adequate lifestyle due to the high cost of child care.

Warren's plan, which would make high-quality care free for families living at up to 200 percent of the federal poverty line and institute a sliding scale above that, with no family paying more than seven percent of their income, would do away entirely with that problem. Families that currently must choose among rent, food, and keeping their toddlers safe can now have all three, and middle-class families can invest in other child development activities and resources. Sounds a lot better than a wall already.

Second, our past and current failure to invest in such a system means we are condemning a large share of the country's children to futures far below their potentials and aspirations. As would be true if we decided that we just didn't have the money to invest in paving our roads or repairing our train tracks, we are setting up the next generation of potential doctors, teachers, and active citizens to crash and derail at alarming rates. Brain and child development science are unequivocal both about the critical importance of nurturing, stable, and stimulating care in the earliest years and about the major benefits of high-quality care and education programs.

Rather than follow that science, however, we are paying through the nose for the bad outcomes that result: for the children who are not prepared for kindergarten and fall behind or need remedial services that could have been averted; for the teens who disengage and drop out, and thus never make it to college and good-paying jobs, and who don't pay taxes and rely on public support; for the young adults who end up in jail rather than in stable homes with healthy children of their own.

As such, rather than costing money long-term, Warren's proposal carries a relatively modest initial price-tag of $1.7 billion and is likely to start saving money in the near future. Return-on-investment analyses suggest that as fewer children repeat grades and require special education services, public education dollars can be saved (or better spent).

As more of those children graduate from high school and are prepared for college, our workforce will generate more income and workers will pay more taxes. As more of those teens grow into adults who have savings accounts, buy homes, get married, and have children, and fewer of them end up in the criminal justice system, we will start to see big savings across multiple departments/agencies/sectors.

The Warren childcare plan would thus place little further strain on a budget that has been stretched, and would also our economy in critical ways. It would make current workers more productive by reducing distractions at work and time lost due to unstable child care arrangements, bring potentially large numbers of women who currently cannot afford to enter it into the workforce, and, of course, make our future workforce much better prepared. It would also put substantial sums into the wallets of child care providers/early childhood teachers, who are now among the lowest-paid employees in the country.

Compared, again, to Donald Trump's pet border "wall" fantasy that would cost several times this plan, this seems like a much better investment.

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Monday, March 4, 2019

Bernstein: New data reveals the flaw in the Trump economy [feedly]

New data reveals the flaw in the Trump economy
https://www.washingtonpost.com/outlook/2019/03/01/new-data-reveals-flaw-trump-economy/

The Trump administration hit its forecast of 3 percent real GDP growth last year, as new datashows that the economy grew 3.1 percent from the last quarter of 2017 through the last quarter of 2018 (there are other ways to measure this, but I think this way is the most accurate). And its policy contributed to this outcome: The deficit-financed tax cuts added to growth in 2018, as did significant deficit spending.

But before popping the champagne corks, Trump aides should recognize that, contrary to their claims, GDP growth is already slowing. For students of the failed promises of supply-side, trickle-down economics, that's not a surprise.

Lower taxes or increased government spending that's not offset by tax increases or spending cuts elsewhere feeds automatically into higher GDP, for the simple, and obvious, reason that both consumer and government spending count as part of GDP. That result isn't guaranteed: If tax cuts and spending push up interest rates, either through actual overheating or by making the Federal Reserve nervous about potential overheating, that would counteract the growth effects of spending. But even as the Fed began last year with a few minor rate hikes, it backed off, and the interest rate on the 10-year bond is lower now than it was a year ago. Inflation is also in check.

So the big story for last year's 3 percent growth rate is that deficit spending fueled growth without overheating or "crowd-out" — the theory that public borrowing takes the place of more productive private borrowing, thus pushing up interest rates. This result has ushered in a robust debate about whether deficits matter at all (they do, but it's nuanced; see here).

But the real problem for the administration is that the growth effects of large 2018 deficits are already fading. And that reveals some bad news about the impact of the tax cuts.

Since around 2010, the GDP's trend growth rate has been about 2 percent, meaning 2018 came in about a point above trend. In human terms, that means unemployment was about half a point lower than would have occurred absent the fiscal stimulus, which in turn translates into around 800,000 jobs. And while real wages haven't done anywhere near as well as the administration promised when selling the tax cuts, they have recently been growing in real terms, thanks in part to the high-pressure labor market (as well as lower energy prices).

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But for 3 percent to become the new trend, as the fiscal stimulus fades, structural growth accelerators must kick in — most important, faster productivity growth. This, in fact, is the administration's theory of the case, one immortalized by economist Art Laffer's supply-side growth story: High-end tax cuts would juice business investment, which would lead to faster productivity growth.

It's a lovely story, but the data never fail to reject it, which is why you see growth forecasts like those in the figure below. Most forecasters got last year about right, but as fiscal stimulus fades, they predict slower growth ahead. They're collectively saying that what happened last year was Keynesian stimulus providing a temporary growth bump, not a lasting upshift as in the Laffer story.


Sources: See figure (Jared Bernstein/Jared Bernstein)

These forecasts could be wrong, but Thursday's report already shows GDP slowing from its faster trend earlier in the year. Moreover, while the business investment data has been solid, it has been what we'd expect at this stage of the expansion, leading economist Dean Baker to conclude that "the evidence is overwhelming that the impact of the tax cut was a conventional Keynesian demand-side stimulus, rather than the investment-led growth that was the ostensible justification for the large reduction in corporate income taxes."

Finally, whenever we're talking about GDP growth in our highly unequal economy, we have to ask how much it lifted all boats, not just the yachts. Recent analysis by David Leonhardt at the New York Times finds that after-tax income growth for the wealthiest households has long outpaced GDP growth, while the upper middle class — the 90th to 99th percentiles — has kept pace with GDP. Everyone else has lagged far behind. To be clear, that data takes a few years to come out, but up-to-date information on corporate profitability vs. wage outcomes suggests that these unequal patterns persist.

Sure, we can temporarily juice the economy with deficit-financed tax cuts, but we've known that since Keynes. But such stimulus always fades, and if the cuts are structured mostly to benefit the wealthy, the middle class won't have much to show for them.

So here's something else we're learning again even though we've long known it was true: Trickle-down economics still doesn't work.


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New Budget Deal Needed to Avert Cuts, Invest in National Priorities [feedly]

Things are actually getting worse, even if politics looks (from the left) a BIT more hopeful

New Budget Deal Needed to Avert Cuts, Invest in National Priorities
https://www.cbpp.org/research/federal-budget/new-budget-deal-needed-to-avert-cuts-invest-in-national-priorities

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Sunday, March 3, 2019

Capitalist Globalization Is Not Unwinding: TNCs Continue To Increase Their Power and Profits [feedly]

Capitalist Globalization Is Not Unwinding: TNCs Continue To Increase Their Power and Profits
https://economicfront.wordpress.com/2019/03/01/capitalist-globalization-is-not-unwinding-tncs-continue-to-increase-their-power-and-profits/

The Great Recession of 2008 marked the end of a lengthy period of international economic growth and rapidly increasing international trade.  Now, some ten years later, economic activity, including trade and foreign direct investment, remains far below pre-crisis levels with little sign of revival.  In fact, with growth falling in Europe and Japan, and many third world countries struggling to deal with ever larger trade deficits and worsening currency instability, the weak recovery is likely on its last legs.

Some analysts now question whether the transnational corporate created globalization system, which the United Nations Conference on Trade and Development (UNCTAD) calls hyperglobalization, is in the process of unwinding.  While real tensions, compounded by US-initiated trade conflicts, do exist, UNCTAD's 2018 Trade and Development Report provides evidence showing that the system still serves the interests of the core country transnational corporations that established it and they continue to strengthen their hold over it.

Global trends: slowing growth and international trade

As panel A in the figure below shows, the years 1986 to 2008 were marked by strong global growth and export activity, with so-called "developing countries" accounting for a significant share of both, thanks to the spread of Asian-centered, cross-border production networks under the direction of core country transnational corporations. It also shows the decline in global growth and tremendous contraction in trade in the post-crisis period, 2008 to 2016.

It is this contraction in global trade, along with the decline in foreign direct investment, that has fueled discussion about the future of the current system of globalization, and whether it is unwinding.  However, trends in the export elasticity of economic output, illustrated in Panel B, are an important indicator that the system is evolving, not fraying, and in ways that benefit core country transnational corporations.

The export elasticity is a way of measuring the effect of exports on national economic activity; the greater the elasticity the more responsive national production is to exports.  What we see in Panel B is that the export elasticity of developed countries rose in the post-crisis period, while that of developing countries continued its downward trend.  This trend highlights the fact that core country transnational corporations continue to craft new ways to capture an ever-greater share of the value created by their production networks, and more often than not, at the expense of working people in both developed and developing countries.

Transnational corporate gains

Exports are dominated by large companies, overwhelmingly transnational corporations.  As the authors of the Trade and Development Report explain:

recent evidence from aggregated firm-level data on goods exports (excluding the oil sector, as well as services) shows that, within the very restricted circle of exporting firms, the top 1 per cent accounted for 57 per cent of country exports on average in 2014. Moreover, while the share of the top 5 per cent exceeded 80 per cent of country export revenues on average, the top 25 per cent accounted for virtually all country exports.

Moreover, as we can see in the figure below, the share of exports controlled by the top 1 percent of developed country and of G20 firms has actually grown in the post-crisis period.

Studies cited by the Trade and Development Report found that concentration is even greater than the above figures suggest. One found that "the 5 largest exporting firms account, on average, for 30 per cent of a country's total exports." Another concluded that "in 2012, the 10 largest exporting firms in each country accounted, on average, for 42 per cent of a country's total exports."

The next figure looks at earnings for a group composed of the 2000 largest transnational corporations, a group that includes firms from all sectors.  Not surprisingly, their earnings closely track global trade and have recently declined in line with the downturn in world trade.  However, as the table that follows makes clear, that is not true as far as their rate of profit is concerned.  It has actually been higher in the post-crisis period.

In other words, despite a slowdown in world trade, the top transnational corporations have found ways to boost what matters most to them, their rate of profit.  Thus, it should come as no surprise that transnational capital remains invested in the global system of accumulation it helped shape.

Transnational capital strengthens its hold over the system

A powerful indicator of transnational capital's continuing support for the existing system is the steady increase, as highlighted in the figure below, in new trade and investment agreements between countries of the so-called "north" and "south."  These agreements anchor the existing system of globalization and, while negotiated by governments, they obviously reflect corporate interests.

In fact, these new agreements have played an important role in boosting the profitability of transnational corporate operations.  That is because they increasingly include new policy areas that include "increased legal pro­tection of intellectual property and the broadening scope for intangible intra-firm trade."  This development has allowed core country transnational corporations to secure greater protection and thus payment for use of intangible assets such as patents, trademarks, rights to design, corporate logos, and copyrights from the subcontracted or licensed firms that produce for them in the third world.  These new agreements have also made it easier for them to shift their earnings from higher-tax to lower-tax jurisdictions since the geographical location of services from most intangible assets "can be determined by firms almost at will."

According to the authors of the Trade and Development Report,

Returns to knowledge-intensive intangible assets proxied by charges for the use of foreign [intellectual property rights] IPR rose almost unabated throughout the [global financial crisis] and its after­math, even as returns to tangible assets declined. At the global level, charges (i.e. payments) for the use of foreign IPR rose from less than $50 billion in 1995 to $367 billion in 2015. . . . a growing share of these charges represent payments and receipts between affiliates of the same group, often merely intended to shift profit to low-tax jurisdictions. Recent leaks from fiscal authorities, banks, audit and consulting or legal firms' records, revealing corporate tax-avoidance scandals involv­ing large TNCs, have made clear why major offshore financial centers (such as Ireland, Luxembourg, the Netherlands, Singapore or Switzerland) that account for a tiny fraction of global production, have become major players in terms of the use of foreign IPR.

The growing use of this tax avoidance strategy by US transnational corporations, as captured in the figure below, highlights its strategic value to transnational capital.

Social costs continue to grow

The globalization process launched in the late 1980s transformed and knitted together national economies in ways that generated growth but also serious global trade and income imbalances that eventually led to the 2008 Great Recession.  The weak post-crisis recovery in global economic activity is a result of the fact that without the massive debt-based consumption by the US that helped temporarily paper over past imbalances, the globalized system is unable to overcome its structural tensions and contradictions.

However, as we have seen, transnational capital has still found ways to boost its profitability.  Unfortunately, but not surprisingly, their success has only intensified competitive pressures on working people, raising the costs they must pay to maintain the system.  An UNCTAD press release for the Trade and Development Report emphasizes this point:

Empirical research in the report suggests that the surge in the profitability of top transnational corporations, together with their growing concentration, has acted as a major force pushing down the global income share of labor, thus exacerbating income inequality.

It is of course impossible to predict the future.  A new crisis might explode unexpectedly, disrupting existing patterns of global production.  Or workers in one or more countries might force a national restructuring, triggering broader changes in the global economy.

What does seem clear is that current economic problems have not led to the unwinding of what UNCTAD calls hyperglobalization.  In fact, the Trade and Development Report finds that "many advanced countries have since 2008 abandoned domestic sources of growth for external ones."  The current system of globalization was structured to benefit transnational capital, and they continue to profit from its operation.  Unless something dramatic happens, we can expect that they will continue to use their extensive powers to maintain it.


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Opioid Crisis [feedly]

Opioid Crisis
http://conversableeconomist.blogspot.com/2019/03/opioid-crisis.html

The opioid crisis seems to me one of those issues everyone knows exists, but also an issue that our political system and society really hasn't come to grips with. Molly Schnell provides a useful short overview in "The Opioid Crisis: Tragedy, Treatments and Trade-offs," written as a Policy Brief for the Stanford Institute of Economic Policy Reseach (February 2019). She writes: 
Overdose deaths have increased by more than 1,000 percent since 1980, with each of the past 28 years surpassing the last. With over 70,000 fatal overdoses in 2017 alone — an average of 192 deaths per day — drugs now kill more people than HIV/AIDS at the height of the epidemic in 1995.

When the AIDS epidemic peaked in 1995, it was (appropriately) a major center of public focus and discussion. For example, the best-selling book by Randy Shilts, And the Band Played On: Politics, People, and the AIDS Epidemic, had been published in 1987. Kushner's Angels in America had premiered on Broadway four years earlier in 1991, winning a Pulitzer and a Tony. While I've read some insightful writing on America's opioid crisis, it does not seem to have led to the same intensity of discussion.

Schnell illustrates some key patterns with this figure. The blue bars show the pattern of opioid prescriptions since 2000. Notice that the sharp rise in prescriptions is also tracked by the red line showing a rise in overdose deaths from commonly prescribed opioids. Then when the level of prescribed opoids levels out around 2010, overdose deaths from heroin start rising quickly, then followed by deaths from synthetic opioids like fentanyl a few years later.


Of course, this rise in deaths is an understatement of the costs of the opioid crisis. Addition has lots of costs other than early death.

As I've argued in the past, the opioid crisis is a problem that was created by the US health care industry. There isn't any particular reason in terms of underlying health why opioid prescriptions roughly quadrupled from 2000-2010, and since then have dropped by a quarter.  But it seemed like a good idea at the time, and now tens of thousands of people are dying every year.

The rise in overdose deaths from heroin and fentanyl shouldn't obscure that deaths from prescription opioids--over overprescribed by the health care industry and then passed along or re-sold--remain part of the problem. Schnell writes:
Non-medical use of prescription opioids remains the second most common type of federally illicit drug use, second only to marijuana, and is over 12 times more common than heroin use (SAMHSA, 2018). And while overdose deaths involving prescription opioids leveled off in 2016, they remain at four-and-a-half times their level from 2000 and account for at least 40 percent of all opioid-related mortality.
Some steps seem to have moderate but real effects. For example, when an average doctor is told that a patient overdosed from their prescription, that doctor cuts back on prescribing opioids by about 10%. Some states have mandatory "prescription drug monitoring programs." which make it harder for someone to take one prescription for an opioid and have it filled at several different pharmacies.

 Schnell writes: "Any single policy in unlikely to be sufficient to address the current crisis. Policies aimed at reducing prescriptions should be paired with broad access to treatment for those with problematic opioid use. And policies must be designed so as to not prevent providers from using opioids as a tool to help manage their patients' pain." All fair enough, btut the rising body count calls for dramatically more, and it's not clear what would work.The health care industry dramatically raised its opioid prescriptions, and in doing do has opened Pandora's box.


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