Re: [CCDS Members] Dani Rodrk: Trade, redistribution, and social dumping

Too much focus on redistribution. No mention of control of production by whom, and thus what goods and services are made in the first place...and to what end.


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On Wednesday, April 19, 2017, 5:41 AM, John Case <jcase4218@gmail.com> wrote:

Trade, redistribution, and social dumping

Danny Rodrik

I just saw this response from Joel Trachtman to my column "Too Late To Compensate Free Trade's Losers." Trachtman argues that "the fundamental problem of winners and losers will not be solved by these changes."

I do not disagree. But the fundamental political problem with trade is not there are winners and losers -- the domestic market generates much greater job churn and dislocation than trade does. It is that it generates unfair redistribution, or at least redistribution that can be legitimately perceived as unfair, when goods cross jurisdictional boundaries.

As I explain here:

It's important to distinguish between two versions of an argument as to why trade may be problematic from a social or political perspective.

Some suggest trade is problematic because it redistributes income. The basis for that claim is true, but trivial. Pretty much everything else that happens in a market economy somehow redistributes income. Technology and market competition are the sources of endless churns in an economy. Moreover, plenty of other things, including skill-biased innovation and minimum-wage laws, have vastly greater effects on income distribution than trade.

So it makes very little sense to set international trade apart and decouple it from other domains or approaches for dealing with inequality in labor markets at large (progressive tax systems, active labor market policies, employment-friendly macro policies, etc.). Imports from Germany may adversely affect domestic companies that are displaced, but there's no reason to treat the people who lose out any differently from workers who are adversely affected by, say, technological innovation. There is a coherent justification for compensating the losers of free trade for reasons of solidarity and equity, but the justification would apply in the case of innovation. Consequently, the preferred remedies should be the same as well.

That brings us to a different social and political objection to trade — that trade violates norms embodied in our institutional arrangements. The suggestion here is that trade may undercut the social bargains struck within a nation and embedded in its laws and regulations. [In this case] compensating the losers would be beside the point, 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 intervention into domestic institutions and an instrument for reconfiguring them to the detriment of certain groups. It would be entirely legitimate to respond to such an injury by directly curtailing the trade flows that have the alleged effect. After all, this is no different from keeping out imports that violate, say, domestic health and safety regulations, which most countries already do.

As Pierre Rosanvallon puts it, inequality is felt most acutely when citizens believe that the rules apply differently to different people." It is not inequality per se that people mind; it is unfairness.

This also relates to a question I get very often. If trade is apparently a small component of the overall impact on labor markets, why focus at all on globalization or devise special remedies for globalization. The answer is that it is not the overall quantitative impact that often matters; it is the normative filter through which those impacts are viewed.

--

John Case
Harpers Ferry, WV

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Dani Rodrk: Trade, redistribution, and social dumping

Trade, redistribution, and social dumping

Danny Rodrik

I just saw this response from Joel Trachtman to my column "Too Late To Compensate Free Trade's Losers." Trachtman argues that "the fundamental problem of winners and losers will not be solved by these changes."

I do not disagree. But the fundamental political problem with trade is not there are winners and losers -- the domestic market generates much greater job churn and dislocation than trade does. It is that it generates unfair redistribution, or at least redistribution that can be legitimately perceived as unfair, when goods cross jurisdictional boundaries.

As I explain here:

It's important to distinguish between two versions of an argument as to why trade may be problematic from a social or political perspective.

Some suggest trade is problematic because it redistributes income. The basis for that claim is true, but trivial. Pretty much everything else that happens in a market economy somehow redistributes income. Technology and market competition are the sources of endless churns in an economy. Moreover, plenty of other things, including skill-biased innovation and minimum-wage laws, have vastly greater effects on income distribution than trade.

So it makes very little sense to set international trade apart and decouple it from other domains or approaches for dealing with inequality in labor markets at large (progressive tax systems, active labor market policies, employment-friendly macro policies, etc.). Imports from Germany may adversely affect domestic companies that are displaced, but there's no reason to treat the people who lose out any differently from workers who are adversely affected by, say, technological innovation. There is a coherent justification for compensating the losers of free trade for reasons of solidarity and equity, but the justification would apply in the case of innovation. Consequently, the preferred remedies should be the same as well.

That brings us to a different social and political objection to trade — that trade violates norms embodied in our institutional arrangements. The suggestion here is that trade may undercut the social bargains struck within a nation and embedded in its laws and regulations. [In this case] compensating the losers would be beside the point, 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 intervention into domestic institutions and an instrument for reconfiguring them to the detriment of certain groups. It would be entirely legitimate to respond to such an injury by directly curtailing the trade flows that have the alleged effect. After all, this is no different from keeping out imports that violate, say, domestic health and safety regulations, which most countries already do.

As Pierre Rosanvallon puts it, inequality is felt most acutely when citizens believe that the rules apply differently to different people." It is not inequality per se that people mind; it is unfairness.

This also relates to a question I get very often. If trade is apparently a small component of the overall impact on labor markets, why focus at all on globalization or devise special remedies for globalization. The answer is that it is not the overall quantitative impact that often matters; it is the normative filter through which those impacts are viewed.

--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

7-9 AM Weekdays, The EPIC Radio Player Stream, 

Sign UP HERE to get the Weekly Program Notes.

Check out Socialist Economics, the EPIC Radio website, and 

The Poets and Mechanics Quaker Worship Group

Thomas Piketty: Inequality in France

18 April 2017

Inequality in France

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A long-standing legend has it that France is a profoundly egalitarian country which has miraculously escaped the sharp rise in inequality observed elsewhere. If so, how can we explain the anxiety provoked by globalisation and by Europe which is expressed so forcefully in this presidential campaign? In the first instance by recognising that  this great national myth of France as egalitarian and an exception to the rule is grossly exaggerated and, secondly, because it is too often used by the dominant groups to justify our own national hypocrisy.

There is nothing new here. France was the last country to adopt a progressive income tax, and did so under the Law of 15 July 1914, voted in extremis to finance the war. In contrast, this tax had already been introduced in Germany, the United Kingdom, Sweden, the United States and Japan, sometimes decades previously, to finance schools and public services. Until 1914, the political and economic elites in the Third Republic had stubbornly refused this type of reform declaring that France had already become egalitarian, thanks to the Revolution, and therefore had no need of an intrusive and predatory tax, more suited to the aristocratic and authoritarian societies which surrounded us. In reality, the inheritance archives demonstrate that the concentration of property and income was as extreme in the France of the period as in other European societies (and greater than in the United States).

Today we find the same hypocrisy when confronted with the glaring inequalities in our educational system. In France, in all good republican conscience, we choose to devote three times more public resources to the selective « grandes ecoles » than is spent on those university courses in which young people from socially underprivileged backgrounds are concentrated. Now this elitist and austerity tendency which has already led to a fall of 10% in expenditure per student between 2007 and 2017 (even though we all talk of the 'knowledge society', 'innovation', etc) may well get worse in the next five years, if we judge from some of the electoral programmes. France is also the country in which private primary and secondary schools are almost entirely financed by the taxpayers, while reserving the right to choose the pupils which suit them. This contributes to unacceptable levels of social segregation. There again the status quo is breezing ahead.

As far as the development of monetary inequalities is concerned, a new study carried out with Bertrand Garbinti and Jonathan Goupille-Lebret (on line on WID.world), clearly shows the limits of the French myth of egalitarianism. True, the rise in inequality has been less widespread than in the United States, where the share of the poorest 50% in the national income has literally collapsed. The fact remains that France has also experienced a sharp rise in inequality. Between 1983 and 2015, the average income of the richest 1% has risen by 100% (above inflation) and that of the 0.1% richest by 150%, as compared with barely 25% for the rest of the population (or less than 1% per annum).  The richest 1% alone has siphoned off 21% of total growth, as compared with 20% for the poorest 50%. The break with the 'Trente Glorieuses' or thirty year post-war boom is striking: between 1950 and 1983, incomes were rising steadily by almost 4% per annum for the immense majority of the population. On the contrary, it was the highest incomes which had to settle for a growth of barely 1% per annum. The fact that the post-war boom (Trente Glorieuses) is not over for everyone has not gone unnoticed: you only have to read the weekly magazines with the salaries of the executives and the ranking of fortunes to realise this.

The study also confirms the strong growth of the highest assets, 90% of which are held in financial portfolios, when above 10 million Euros, These have risen, not only much faster than GDP since the years 1980-1990, but also faster than the average assets (driven upwards by property assets). We find this prosperity in the number and amounts of assets declared year after year in the wealth tax. There is no problem of outflow here: on the contrary we see a very dynamic basis for fiscal purposes.

In these conditions, it is difficult to understand why some candidates think it opportune to abolish the wealth tax on financial assets, or to impose a lower tax on financial incomes than on income from employment. To promote mobility, it would be more judicious to lower the property tax (which is by far the principal tax on wealth: it generates 30 billion Euros as compared with 5 billion Euros for the wealth tax) for the households who have borrowed to buy property.

Some may consider this a kickback in return for the political financing observed. One can also see in these fiscal choices the effects of a sincere but false ideology, whereby subjecting people and territories to whole scale competition would spontaneously result in social harmony and prosperity for all. What is sure is that it is dangerous to address first and foremost those who have gained from globalisation and to invent a new French passion for the regressive tax, while the most vulnerable social groups have the impression they have been abandoned and are increasingly attracted by the sirens of xenophobia.  It is urgent to face up to the fact that inequality does exist in France.

--

John Case
Harpers Ferry, WV

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Mainly Macro: Inequality or poverty

Tuesday, 18 April 2017

Inequality or poverty

Tony Blair famously said:

"[It's] not that I don't care about the gap [between high and low incomes], so much as I don't care if there are people who earn a lot of money. They're not my concern. I do care about people who are without opportunity, disadvantaged and poor."

Most people, including the Labour government, interpreted that as focusing on poverty rather than inequality. For an excelllent discussion of historic trends in inequality and how they were influenced, among other things, by poverty reduction programmes pushed by Labour (as well as how that may unwind in the near future) see this excellent discussion by Rick. 

I recently saw a very clear defence of the position that poverty mattered more than inequality from Miles Kimball. His argument comes from surveys that quantify a basic principle of economics, which is diminishing marginal utility. He quotes results which suggest that a dollar of income means an awful lot more to someone earning half the average wage than someone who earns double the average wage. He suggests the results come close to validating the second principle of justice suggested by John Rawls. To put the idea at its most simple, we should not worry about the rich too much because their extra money buys them very little extra happiness, but instead focus on reducing poverty.

Now of course this point is irrelevant if we are talking about reducing poverty by taxing the rich. The rich are a very good source of money, because they will not miss it very much. The importance comes if we compare two societies. One has no poverty, but a significant number of very rich people. The other has no rich people, but still has poverty. Miles's argument is that we should prefer the society with no poverty to the one with no super-rich. In a static sense I think that is right, but I have dynamic concerns that I will now come to.

Right at the start of Miles's discussion is an interesting paragraph:

"Before going on, let me concede first of all that the amount of wealth held by the ultra-rich is truly astonishing, and that making sure that the ultra-rich do not convert their wealth into total control of our political system is important. Documenting and studying in detail all of the ways in which the ultra-rich influence politics is crucial. But short of the ultra-rich subverting our political system, the focus of our concern about inequality should be how well we take care of the poor; whether money needed to help the poor comes from middle-income families or the rich is an important issue, but still of secondary importance to how well we take care of the poor."

I want to explore a point that Miles does not pursue. If money matters so little to the very rich, why would they want to become ultra-rich to an astonishing degree, and go on to try and control the political system to ensure they get even more? The answer comes from exactly the same logic as Miles uses. If £1000 means nothing to you because you are very rich, if opportunities arise you put effort into making that £1000 into £10,000 or £100,000. The fact that the ultra-rich have wealth that is truly astonishing may not be an accident, but may be a result of exactly the same principle that Miles explores: diminishing marginal utility. The rich are no different from everyone else in wanting more utility, except for them it requires huge amounts of money to get it. [1]

To see why this can matter, consider an argument put forward by Piketty, Saez and Stantcheva that I discussed here. Why has pre-tax income for the 1% risen so much in the two countries, the UK and US, that in the 1980s saw large reductions in top income tax rates? The argument these authors put forward is that with punitive tax rates, there was little incentive for CEOs or finance high-flyers to use their monopoly power to extract rent (take profits away) from their firms. It would only gain you a few thousands after tax, which as they were already well paid would not increase their utility very much. However once top tax rates were cut, it now became worthwhile for these individuals to put effort into rent extraction.

As I discussed here, the bonus culture may be the means of rent extraction that was incentivised by cutting top tax rates. If you want to see the kind of thing I have in mind in action, read this article by Ben Chu on what happened to Theresa May's wish to see annually binding votes by shareholders on executive pay. That kind of lobbying takes effort. It worked, and as a result top executives at the builder Crest Nicholson can ignore a shareholder vote against changes to their compensation rules. No wonder executive pay seems to rise even when a company's fortunes turn sour.

So it seems to me that I could take the same basic principle that Miles explores and write a very different conclusion. Once we allow those at the top the opportunity to earn very high incomes, and the only way these individuals can see to get additional utility is to embark on rent seeking, we can at the very least divert their effort from socially enhancing activities (i.e improving the company). When those efforts extend to influencing the political system, we are in serious trouble. These activities may culminate in taking over the political system, which after all is what has happened in the US, with potentially disastrous consequences. For that reason alone, inequality matters as well as poverty.

--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

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Economists found something surprising and you won’t believe what happened next [feedly]

Economists found something surprising and you won't believe what happened next
http://www.digitopoly.org/2017/04/15/economists-found-something-surprising-and-you-wont-believe-what-happened-next/

Luigi Butera and John List have examined how cooperation is impacted on by uncertainty — and not just any uncertainty but Knightian uncertainty where outcomes cannot easily be described by a probability distribution. They examine a situation where experimental subjects are contributing to a public good whose returns are uncertain and where individuals may or may not hold information regarding those returns. What this means is that individuals do not know whether people are not contributing because of free riding or because their do not have high information regarding the quality of the public good they are contributing too. In some sense, you might think this might make free riding issues even worse for, if you have a draw that suggests the public good has a high return and you know that others have differing information, you may not be confident they will follow you and contribute. In other words, you may anticipated more free riding which causes cooperation to unravel faster. The alternative view is that if you have no information and observe some cooperation, that might signal that they know something you don't. But even there, for full rational agents, why cooperate when you don't have to. If I had to guess before reading the abstract of this paper, my guess is that uncertainty makes things worse. We saw instances of this in a public good game instituted by Stephen King that I outlined in Information Wants to be Shared; problems that were alleviated by crowd funding models that provided more information.

As it turns out Butera and List find that uncertainty increases cooperation.

We show that our results are unlikely driven by confusion, since cooperation when noisy signals are publicly observed is inversely correlated with the informativeness of the signals. Otherwise said, as we reduce uncertainty, cooperation decreases. In the limiting case where public signals fully resolve uncertainty, cooperation rates revert back to those observed in the baseline. We argue that the presence of Knightian uncertainty fosters conditional cooperation by generating ambiguity around the determinants of players' payoffs. When the returns from public goods contributions are perfectly observed, any reduction in payoffs can only be attributed to other players free-riding. When the exact quality of a public good is unobserved however, lower returns from a public good may be driven in part by a lowerthan-expected quality of the good itself. While uncertainty has no effect on the Nash 1 equilibrium outcome, it does affect decisions of conditional cooperators who may become more tolerant to payoffs' reductions, effectively limiting the "snowball effect" of free-riding on conditional cooperation. An alternative and related explanation is that the presence of uncertainty facilitates cooperation among betrayal averse individuals (Bohnet et al. 2008, Aimone and Houser 2012).

This is an interesting result and certainly suggests that there is more interesting theoretical work to be done. Another possible reason for the result may be that uncertainty interacts with certain behavioural tendencies of agents (something that Peter Landry and I have theorised about).

Now on to the "you won't believe what happened next part." This experimental finding is surprising. Actually very surprising. And usually this poses an issue because many people may not believe the result and wonder if it is the result of an abberation. Replications will assist this but as many have noted (see for instance the discussion in Scholarly Publishing and its Discontents) those studies do not receive the scientific kudos relative to their value in establishing the potential truth of something. So our authors here have a conundrum. They have anticipated, correctly, that their finding will be discounted because it is surprising. And they have also anticipated that there is little incentive for independent replication. In other words, there is a break down in cooperation in the production of science.

One option may be to add uncertainty to the mix and see what happens but we still don't know for sure that that is a thing. The other is what they chose to do:

This paper proposes and puts into practice a novel and simple mechanism that allows mutually beneficial gains from trade between original investigators and other researchers. In our mechanism, the original investigators, upon completing their initial study, write a working paper version of their study. While they do share their working paper online, they do however commit not to submit it to any journal for publication, ever. The original investigators instead offer co-authorship of a second paper to other researchers who are willing to independently replicate the experimental protocol in their own research facilities.2 Once the team is established, but before beginning replications, the replication protocol is pre-registered at the AEA experimental registry, and referenced in the first working paper. This is to guarantee that all replications, both successful and failed, are properly accounted for, eliminating any concerns about publication biases. The team of researchers composed by the original investigators and the other scholars will then write and coauthor a second paper, which will reference the original unpublished working paper, and submit it to an academic journal. Under such an approach, the original investigators accept to publish their work with several other coauthors, a feature that is typically unattractive to economists, but in turn gain a dramatic increase in the credibility and robustness of their results, should they replicate. Further, the referenced working paper would provide a credible signal about the ownership of the initial research design and idea, a feature that is particularly desirable for junior scholars. On the other hand, other researchers would face the monetary cost of replicating the original study, but would in turn benefit from coauthoring a novel study, and share the related payoffs. Overall, our mechanism could critically strengthen the reliability of novel experimental results and facilitate the advancement of scientific knowledge.

In other words, in response to a problem of breakdown in cooperation they have proposed a fairly standard solution — integration. Basically, they have offered to sell a share of the kudos they would receive if the study is successfully replicated to those who are replicating the study.

From the perspective of a reader, this paper both offers an experiment (with results) and the proposes another for which the results are yet to be determined. It will be very interesting to see how it works out.

But I have a question. If a replication is done, it will be a little surprising given that this paper is already out there so the true allocation of kudos can only be partially transferred. And so if that is the case, won't they have to offer another experiment with a surprising result coupled with their new mechanism in order for the kudos allocation experiment to be replicated? And if that is so, when will this end?

 -- via my feedly newsfeed

Enlighten Radio:The Love Doc, Bill Fletcher, and more ...

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Blog: Enlighten Radio
Post: The Love Doc, Bill Fletcher, and more ...
Link: http://www.enlightenradio.org/2017/04/the-love-doc-bill-fletcher-and-more.html

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Enlighten Radio:Rockpile, Best of the Left, economic update -- Tusday on Enlighten Radio

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Blog: Enlighten Radio
Post: Rockpile, Best of the Left, economic update -- Tusday on Enlighten Radio
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