Oliver Kamm

Oxfam's bitter coffee

Following is an article in The Times today.

OXFAM, we learnt last week, is going to back a chain of “fair trade” coffee bars. Meanwhile Gap clothing company has disclosed that many of the factories that it uses in developing countries do not comply with minimum labour standards. For those consumers whose prime concern is Third World development, the proper course is clear: buy clothes at Gap and avoid Oxfam’s coffee.

The rationale of Oxfam’s venture is to lessen the hardship that coffee growers have suffered since coffee prices slumped in 1997. The organisation claims: “Coffee growers will win three times . . . They’ll be selling their coffee at a fair trade price; they’ll share directly in the profits and will also showcase their coffee to the UK.”

Unfortunately the sharp decline in world coffee prices is not only cyclical. Over the past decade, exchange-rate movements and new technology have made the Brazilian coffee industry more productive, while Vietnam has used its low wage costs to become a large and efficient producer. Low coffee prices are not the result of market failure, but a sign that there are too many producers.

Of course laissez-faire is no reputable response to the farmers’ hardship. Oxfam is right that there is an obligation to assist poor coffee farmers. But its Scargillite remedy of subsidising enterprises that can never be profitable will prevent the development of new businesses which could be. A better scheme is to support farmers’ efforts to diversify production.

GAP and other multinational companies have long been targets of trade union and activist campaigning against Third World sweatshops. Dangerous, unsanitary and ill-paid conditions do exist in some textile and footwear factories in developing countries. Yet multinational corporations help to improve those conditions. Innumerable studies in South-East Asia have shown that foreign-owned companies employing unskilled labour typically pay higher wages than local employers. Those wage rates are still low compared with advanced industrial economies because productivity is low. They are not evidence of exploitation.

The anti-corporate campaigners are now focusing their attention on the gap between the price of the finished goods on Western shelves and local wage rates. It is a massive non sequitur. As Jagdish Bhagwati, former special adviser to the UN on globalisation and a leading trade economist, has pointed out, it makes no economic sense to “shift the criterion from where and at what wage you buy labour to where and at what price you sell the output”.

It is also actively damaging. There is evidence that, through the transfer of technology to local economies, multinational companies such as Gap improve the productivity of both labour and capital and so help developing countries to industrialise and become richer. Far from being corporate villains, they improve poor people’s living standards.

The most egregiously ill-informed of the anti-corporate pressure groups, CorpWatch, claims that a “race to the bottom” is taking place in global wages and working conditions. In reality, a race to the bottom is evident principally in the quality of campaigners’ analysis. A pervasive fallacy of Thirld World campaigning is the notion that economic decisions have no costs. In supporting Oxfam’s coffee venture, we enable poor coffee growers to “win three times ” — yet by insinuating that other coffee is ethically dubious, Oxfam threatens the livelihoods of other more successful, but generally poor, coffee farmers.

By castigating multinationals, these campaigners are not promoting living wages but are impeding developing countries’ efforts at economic progress. This is neither ethical campaigning nor guilt-free consumption: it’s narcissism.

Denying chances to the poor

Here’s what John Kerry had to say yesterday in a populist exchange risibly termed a debate among the contenders for the Democratic nomination:

I will fight for labor and environment standards in our trade agreements, and we'll enforce them. And it's that simple.

An international economist, Paul Krugman at MIT, had pertinent things to say on this matter a few years ago in an article in Slate entitled In Praise of Cheap Labor:

The only reason developing countries have been able to compete with [First World] industries is their ability to offer employers cheap labor. Deny them that ability, and you might well deny them the prospect of continuing industrial growth, even reverse the growth that has been achieved. And since export-oriented growth, for all its injustice, has been a huge boon for the workers in those nations, anything that curtails that growth is very much against their interests…. [A]s long as you have no realistic alternative to industrialization based on low wages, to oppose it means that you are willing to deny desperately poor people the best chance they have of progress for the sake of what amounts to an aesthetic standard...

A polemicist of the same name, Paul Krugman of the New York Times, says this today:

[In a speech this week Kerry] proposed speed bumps, rather than outright barriers to outsourcing: rules requiring notice to employees and government agencies before jobs are shifted overseas, steps to close tax loopholes that encourage offshore operations, more aggressive enforcement of existing trade agreements, and a review of those agreements with an eye toward seeking tougher labor and environmental standards.

I don't see anything there that threatens to unravel the world trading system. If anything, the question is whether it provides enough of a "political safety valve."

In fact, it’s clear from what Kerry is arguing (he states baldly, “I will fight for the American worker”) that his concern is to counteract what he considers to be unfair advantages accruing to developing countries that wish to export to the US. He says there is no difference between his position on trade and that of his principal challenger, John Edwards – who explicitly believes trade agreements should incorporate minimum wage requirements on the part of America’s trading partners.

We’re all entitled to change our views on issues of public policy, but so far as I’m aware Krugman, who in his academic writings has made important contributions to trade theory, hasn’t changed his view that imposing minimum wages beyond the productivity level of a developing country’s workforce will curtail the demand for labour in that country and thereby prevent poor people from bettering themselves. Other noted trade economists have no trouble stating their position forcefully on the matter: Jagdish Bhagwati of Columbia University says bluntly in the current edition of Foreign Affairs, “the Democratic candidates are staking out fiercely irresponsible antitrade positions.” Krugman, it appears, prefers these days to emphasise his partisan political prejudices.

'Shame on them'

Liberal Washington Post columnist David Ignatius urges that American politicians state candidly that in the global economy there is ‘no easy escape from global competition’. The usual caveat applies: Ignatius is right if you look at the individual firm, but positively misleading if he’s suggesting that economic relations between states are characterised by competition. Nonetheless, he says apt things about current American political debate:

This anti-trade talk [from the contenders for the Democratic nomination] is dangerous nonsense, and the Democrats should be embarrassed by it. It suggests to U.S. workers that there is an alternative to change and adaptation -- to getting the skills that are necessary to compete in an increasingly competitive world. That's wrong, most of all because it misleads people about their real options. Rather than helping workers build a bridge to the future, as Clinton tried to do, these Democrats talk as if they want to build a roadblock. Shame on them.

Shame on the Republicans, too, for disowning the administration's chief economist, Gregory Mankiw. He made the "gaffe" (a Washington term for stating something that is true but politically embarrassing) of saying that "outsourcing" jobs abroad can be beneficial, by lowering costs and improving efficiency.
In economic terms, Mankiw's statement was utterly noncontroversial (unless you imagine that it's good for workers if companies have high costs and go out of business).

If I were American I would be a registered Democrat, and I say with some feeling that the views of that party’s senior figures on trade are worse than dangerous nonsense and far worse than bad economics (though they are both of those things). More fundamental, they’re a betrayal of liberal internationalist principle, which the Democratic Party once represented in contrast to the isolationism of Republicans such as Robert Taft and Thomas Dewey.

A few years ago the Progressive Policy Institute, a moderate think-tank within the party, published with the Brookings Institute one of the best non-technical expositions of the merits of open trade that I have seen. Expertly written and attractively presented, with plenty of data and charts to substantiate the authors’ compelling arguments, it apparently had zero impact in winning the Democratic Party to a responsible and reputable position on the issue. (The report’s main arguments and policy recommendations are summarised here; they remain, so far as I can see, unanswerable.) How sad and shocking it is to see the tradition of American liberalism come to a juddering halt in the persons of John Kerry and John Edwards; we liberal internationalists have no dog in that fight, and no obvious Democratic candidate for the future either.

Do-It-Yourself Economics

Continuing an occasional series in which public figures make dogmatic economic assertions that, while enduring and popular, are otherwise inexplicable. The term was coined by David Henderson in his 1985 Reith Lectures, Innocence and Design.

The Times’ ‘Money’ section remarks:

Contrary to popular myth, professional gamblers do not swagger into a casino and risk all on a high-stakes wager. Most aim for a steady return by making a series of small bets. The ordinary investor can emulate this strategy for success by drip-feeding their [sic] cash into an investment fund, rather than making one lump-sum investment.

The best that can be said of this patronisingly absurd claim is that at least it demonstrates the author’s intimate acquaintance with popular myth. In one form or another it appears in almost every newspaper with a financial column, almost every week. Yet ‘drip-feeding cash’ (popularly known as pound-cost averaging) in preference to lump-sum investing is not the opposite, but the equivalent, of risking all on a high-stakes wager.

Consider this for an analogy (which I’ve taken from the economist Steven Landsburg). Suppose you’re in a casino that has ten roulette wheels, and you have $55,000 to bet with. One way of dividing your stake would be to place $1,000 on the first wheel, $2,000 on the second, and so on up to $10,000 on the tenth wheel (these bets on ten wheels would sum to $55,000). That would clearly be an irrational strategy: you’d be placing half your entire stake on the spin of just the last three wheels. Yet that’s what ‘drip-feeding’ cash into financial markets involves: you progressively increase the sum you have at stake in the market, as your investment time-horizon contracts (even personal-finance journalists retire and draw their pensions sometime, though it rarely seems like soon enough to this reader), till you’re betting everything on just a brief period at the end of that time-horizon.

In short, it would be difficult to construct a less rational strategy if you tried. What The Times presents as a risk-averse course in contrast to lump-sum investing isn’t one at all: it’s merely a series of small lump-sum investments with ever-decreasing investment time-horizons. Yet the volatility of investment returns typically contracts as your holding period lengthens. The rational investor can ride out periodic bouts of market volatility on the assumption that over the long term he’ll still end up ahead (and if the rational investor doesn’t expect that to happen, then he wouldn’t be putting money into the market in the first place).

I have never been able to work out why otherwise serious and reputable newspapers give space to astrologers. My best guess is that editors must collectively decide to replicate the respect for science and reason evidenced by their personal-finance columnists.

Do-It-Yourself Economics

Continuing an occasional series in which public figures make dogmatic economic assertions that, while enduring and popular, are otherwise inexplicable. The term was coined by David Henderson in his 1985 Reith Lectures, Innocence and Design.

The government must do more to help our businesses compete in overseas markets, just as rival countries’ governments do.

Digby Jones, Director-General of the Confederation of British Industry, The Guardian, 26 January 2004

The government has economic duties that are important and extensive. Those I would list at a minimum are providing public goods, levying taxes in a way that is widely accepted as fair rather than arbitrary, controlling inflation, maintaining an adequate level of demand, managing public borrowing such that the budget balances over the course of the business cycle, dealing with negative externalities that aren’t efficiently corrected through the marketplace, providing social benefits and redistributing income in order to tackle poverty. These are ambitious goals with no obviously correct way of accomplishing them; any government that could claim tolerable success in them will have done a worthwhile job and a public service.

To claim that in addition the government has a duty to ‘help our businesses compete in overseas markets’ is a gross and impertinent non sequitur. I have read Jones’s article several times, and I have no idea why he issues this stern injunction. Actually, that’s not strictly true: the clue lies in his preposterous designation of other countries as ‘rivals’. So they may be on the football field; they are not rivals or competitors in the international economy.

The notion that government should promote exports is a hangover from the post-war period when exchange rates were fixed and sterling was not a convertible currency. The term ‘balance-of-payments deficit’ became a recurring feature of British politics in that period, when official reserve transactions (which are an important part of the balance of payments under a fixed-exchange-rate regime) were a separate part of the national accounts. But advanced industrial economies with floating exchange rates and relatively free capital flows do not have balance-of-payments problems: a deficit on current account will always be balanced by a surplus on capital account. If a country is buying more goods and services from the rest of the world than it is selling, then it must also be selling more assets to the rest of the world than it’s buying.

Countries can certainly suffer from adverse currency movements (up or down) if they run a mix of policies that is inconsistent with stable inflation – but the remedy is already within the remit of what the government’s legitimate responsibilities are (in the UK, the independent operation of monetary policy to meet an announced inflation target). Governments have no business whatever in promoting exports, which are a cost and not a benefit: they are what we give up in order to purchase things we want. What is particularly outrageous about the assertion of the Director-General of the CBI is his insistence that government take upon itself, at taxpayers’ expense, the promotion of a sectional interest – namely his members.

I support Tony Blair against his allegedly Left-wing but almost invariably reactionary critics on many things: Iraq, top-up fees, foundation hospitals, the lot. But there’s one thing I don't defend him on. His critics claim he pays too much attention to the business lobby, and – oddly enough, and for reasons that they probably wouldn’t recognise – his critics are right. Blair does place too high a regard on the judgements of industrialists, who are merely one lobby among many others and who have no more necessary expertise in economic management than the most obdurate trade union leader. I draw the analogy deliberately, as a brace of television programmes this week to mark the twentieth anniversary of the miners’ strike reminds me of the economically insupportable demand of the then miners’ leader that no pit should ever be closed on economic grounds. Nonsense it may have been (and was), but the National Union of Mineworkers is a shadow of its former self, while to this day one can rely on the CBI to come up with destructive tomfoolery.

The Democrats and trade - again

It really is splendid news that Richard Gephardt is out of the race for the Democratic nomination. The man has founded a political career on economic demagoguery, and it's fitting to the merits of his case that he should have turned out to be the perpetual loser. I hope, though am not confident, that the Democrats can now abandon the anti-trade stance that Gephardt has popularised and with which he has impoverished American political debate.

To that end, and with obviously minuscule influence, I want to pin down the criticisms of free trade before moving on to other matters. Fortunately two of my correspondents have objected, from incompatible standpoints, to my last post but one, entitled Democrats against the world, and I will address their objections directly.

The first correspondent, from the US, maintains:

"'Level playing field' advocates—including, most prominently, the labor unions—say that it will prevent American jobs from being stolen. Another way to say this is that it will prevent jobs in poor countries from being created."

It's this simple: why should a job in one country be lost so that a job can be created in another country? What obligation does the US have to the world that is so important that it must allow its own citizens to be deprived of jobs so that someone overseas can have one?

Is this just down to the have-nots drowning out the voices of the (for the time being) haves or is there some silver lining for the recently fired American employee in this picture that I am missing?

I'm not saying free trade is good or bad, just raising a very simple point -- one which I have yet to see any Gephardt opponent / anti-anti-free trader / etc take the time to respond to. It was one thing when it was just textiles jobs that were headed overseas, but now it's the tech sector, and that's going to hit a lot closer to home with anyone who dreamed of hopping on the PC/e-gravy train of the 80s and 90s, once it gets up to speed.... [He then argues that protecting American jobs will be a huge vote-winner for the Democrats.]

Well, I'll respond to it. I believe that even if it made economic sense to protect US (or British) industry from foreign competition in order to safeguard jobs, it would still be morally wrong to do so at the expense of Third World development. But fortunately (for I am no moral philosopher), the argument for protecting jobs through trade restrictions is bad economics as well as bad ethics.

The overall effect of trade on aggregate US employment is (approximately) zero. Of course trade destroys some jobs, in import-competing industries; it also creates new jobs, in export-competing industries. Over time these will balance each other. This happens because if there is an imbalance between jobs destroyed and jobs created then it will be generally be offset by either an adjustment in wages or a shift in macroeconomic policy. For example, a rise in unemployment will typically result in an easier monetary policy by the Fed, which will stimulate growth and put downward pressure on the exchange rate. This in turn will, other things being equal, expand demand for exports and dampen demand for imports, causing employment to rise. In the long run the variable that total employment most closely tracks is the number of people in the labour force. This will depend on such things as demographics and labour market policies (which affect the so-called non-accelerating inflation rate of unemployment) rather than trade.

This is not just a matter of theory. This table from the Council of Economic Advisors' Economic Report of the President shows annual data going back to the 1940s for the civilian labour force and civilian employment (these are columns C and D in the table; the most recent data are on the second sheet). They track each other closely. There is always some unemployment, but this is determined in the short run far more by the decisions of the Federal Reserve Open Market Committee than by trade, while over the long run employment will resume its relationship with the labour force.

The reason jobs lost will be balanced by jobs created is that imports and exports are not independent. It is not possible to boost exports without at the same time expanding imports. In order to import goods and services we need to generate the earnings to pay for them, which is to say we need to export. (Putting it like this brings out the fact, as frighteningly few politicians understand, that exports are a cost, not a benefit: they are what we have to give up in order to enjoy the benefits of imported goods.) If we impose import controls, then our trading partners will be unable to generate the foreign earnings necessary to buy our exports.

So it's not true that trade costs American jobs. It's not true either that the jobs that are destroyed by imports are high-wage jobs. Before he was Treasury Secretary in the Clinton administration, Larry Summers co-authored a 1989 Brookings paper that concluded "after being adjusted for skill differences, wages in export-intensive industries are 11 per cent above average, whereas wages in import-intensive industries are 15 per cent below average". Every subsequent study that I know of has been consistent with these findings: the two big industry exceptions to this conclusion, steel and autos, are unrepresentative of the wider economy.

Summers's conclusion points to one facet of why trade benefits America and indeed its trading partners. Trade is valuable not because it boosts employment - it doesn't, as we free traders should acknowledge - but because it raises living standards by allowing specialisation in production. Trade is especially important for Third World development, because it enables gains in productivity and thereby increases in real wages, and from that the ability of a country to lift itself out of poverty. I argue below that an anti-trade bias in domestic policy by Third World nations is a more important obstacle to their economic betterment than rich-world protectionism, but rich-world protectionism is certainly an obstacle and progressives will wish to lift it rather than compound it.

On which point, I turn with a heavy heart to a comment posted by one of my regular contributors, who lives in Manchester. He writes (beginning with a quotation from me):

"Trade is not a zero-sum game: it's a mutually enriching exchange that allows gains in living standards through each country's being able to specialise in what it produces."

I'm surprised noone [sic] has challenged this. As you may be aware, I am not an expert in economics. Nonetheless this sounds like a ridiculous statement. Trade will ideally be a mutually enriching process, sure. But sometimes you get ripped off, no? Sometimes a country like Vietnam starts selling a whole load of coffee on bad IMF advice, and there's a glut in the coffee market, and prices plummet, and this is enriching for consumers of coffee and enpoverishing [sic] for producers of coffee.

Sometimes countries aren't able to specialise in what they have a competitive [sic - I think he means comparative, but can't be sure from the context] advantage in, for example when the US/UK floods the developing world with agricultural products and erects tarrifs [sic]. It's still trade, if not 'free' trade. So I dispute your claim that trade is a mutually enriching exchange.

Go ahead Mr Kamm, sneer at my ignorance, I thought I'd rattle the cage anyway.

PS: Gore and Leiberman [sic] wanted to protect the environment and labour standards? No way! What fools! If we insisted that products were built in factories with a fire escape, then the poor would never escape from poverty! - he writes with sarcasm.

It's not my purpose to defend the IMF. (Though in fact the IMF has had an unfair press: in many countries over some decades its policies have contributed to sound economic management. The British Labour Government's borrowing from the IMF under certain conditions in 1976 was much criticised at the time both by the Conservatives and by the Labour Left, but it was an entirely sensible recourse for a country that was soon to become a net oil exporter. The Chancellor in that government, Denis Healey, in my view did an excellent job of dealing with a wretched economic inheritance and a recalcitrant party - but that's a post for another time.) But it's worth interjecting that whatever anti-globalisation web site my interlocutor has got his Vietnam example from didn't trouble to check its facts. The usual villain cited in this case is the World Bank, which allegedly lent large sums to expand the Vietnamese coffee industry, whereupon prices collapsed on the world market and hardship resulted. In fact, the World Bank - which has become commendably open and self-critical about schemes that have failed - played almost no part in this at all, and made no investments designed to boost coffee production. Only two of its projects in rural Vietnam had even a connection with coffee, and one of them - an agricultural diversification project - was intended to diversify Vietnamese production away from this single, highly-cyclical commodity.

On the question of trade more generally, there is no question but that Vietnam has benefited from a more open economic regime. Between 1990 and 2002, total exports and imports of goods (in US dollar terms) both increased on average by 21 per cent a year, significantly faster than GDP, while the merchandise structures of exports and imports became - as the IMF had intended and advised - more diversified. In 1992 almost half of Vietnamese exports were in the commodity sector (12% rice and 37% other primary commodities); in 2002 the equivalent figure was 25% (4% rice and 21% other primary commodities). Crude oil was down from almost a third of exports to a fifth, while manufactures in this rapidly industrialising nation grew from 6% to 32% of exports. (All these data are taken from the IMF report Vietnam: Selected Issues, 5 December 2003, page 14.)

Poverty in Vietnam has declined sharply since the policy of Doi Moi - a greater openness compared with the Stalinist command economy, and most particularly the abolition of the state's monopoly in foreign trade - was introduced in the late 1980s. In a recent paper on Vietnam's economic performance since 2001, David Dapice, Senior Fellow in the Vietnam Program at Harvard, noted that the poverty rate had fallen from 75% at the initiation of Doi Moi to 37% in 1998 and perhaps 32% in 2001. Dapice speculates that declines in some agricultural prices, including coffee, have contributed to a slackening in the pace of poverty reduction, which I guess is my interlocutor's point - but I give all this background to indicate that if you concentrate on one fashionable campaign without examining the wider economic context, you're liable to miss quite a lot.

On the question of western agricultural tariffs, I am of course opposed to them. Yet - as I mentioned above - rich world protectionism is not an insuperable obstacle to the betterment of developing nations. I wrote about this a few months ago when criticising a report written by my friend Stephen Pollard:

It is simply not the case that EU protectionism is the major cause of restricted growth in Third World exports. A more important factor is the import-substitution strategies that developing countries, especially those in sub-Saharan Africa, have used. An anti-trade bias has hurt export performance by restricting domestic competition. That bias takes the form of significantly higher levels of protectionism in developing countries – in textiles, food and industrial products - than in the rich world. (This chart, constructed for a World Bank working paper from figures compiled by Michael Finger and Ludger Schuknecht, demonstrates the point.)

The point is expounded lucidly by the trade economists Jagdish Bhagwati and Arvind Panagariya (from whom I took the link to the chart) in this article from the OECD Observer:

The recent castigation of rich-country protectionism by the heads of international agencies and in the media, while welcome, is ... little more than a reiteration of the obvious. But the absence of a simultaneous and equally pointed focus on the protectionism of poor countries, which has also been amply documented by informed trade economists, has encouraged several fallacies which can only make it harder to reduce protectionism in those countries. These fallacies need to be exposed and the latest critics, far too often non-trade experts, asked to always condemn protectionism in both poor and rich countries, even as they wreak more contempt on the rich ones.

I hope that my interlocutor in Manchester, and other readers who think like him, will ponder Bhagwati's advice carefully before condemning as 'nonsense' the benefits of the international trading system.

Finally, there's probably little to be gained from instructing a certain type of mind-set on the economics of trade and labour standards, but I'll do it anyway. I'm in favour of good working conditions and environmental protection, and I certainly consider no factory in the world should be without a fire escape; I object strongly to making trade agreements conditional on labour and environmental standards. The reason was well stated by 100 or so Third World intellectuals and NGOs (including incidentally the Secretary of the All-India Trade Union Congress) in a Statement Against Linkage in 1999 to coincide with the failed Seattle summit of the World Trade Organisation. (Contrary to popular mythology, the summit's failure was due not to the anti-globalisers' protests but to the insistence of the United States that trade agreements should be linked to labour and environmental standards. The conjunction of the world's richest country protesting about labour standards ought to have given even the most passionate anti-trade campaigner cause for thought, and perhaps even stirred the realisation that the demand is a transparent protectionist ruse.) The statement observed:

The WTO's design must reflect the principle of mutual-gain; it cannot be allowed to become the institution that becomes a prisoner of every developed-country lobby or group that seeks to advance its agenda at the expense of the developing countries. The game of lobbies in the developed countries seeking to advance their own interests through successive enlargement of the issues at the WTO by simply claiming, without any underlying and coherent rationale, that the issue is "trade-related", has gone too far already. It is time for us to say forcefully: Enough is enough.

Those familiar with the recent history of US labour campaigning will recognise the pattern. In 2000 the US adopted the African Growth and Opportunity Act, which aimed to stimulate development in Africa by offering similar tariff preferences to those enjoyed by Caribbean nations. And you know what? The AFL-CIO, that supposed bastion of progressive values, opposed the legislation.

And this is where we came in. Thank goodness the champion of the cause of American big labour has been knocked out of the presidential race once and for all. May his influence not linger with the remaining candidates.

Democrats against the world

I wrote a week or so ago about the trade policies of Richard Gephardt, who astonishingly is seen as one of the mainstream candidates for the Democratic presidential nomination. It's getting serious.

Four years ago the Gore-Lieberman ticket campaigned on a platform that had a non-serious approach to trade. It stated:

Trade has been an important part of our economic expansion - about a third of our economic growth in recent years has come from selling American goods and services overseas. There is no doubt that with trade - and with investments in giving American workers the skills they need - we can out-compete workers anywhere in the world.

It's clear we live in a globalized world - and that there is no turning back. But globalization is neither good nor evil. It is a fact - and we have to deal with it. Democrats believe we must be leaders in the new global economy, not followers. We believe that globalization will work for all Americans only if there are rules of the road, as in the domestic economy, that promote both a strong economy and our basic American values.

We need to make the global economy work for all. That means making sure that all trade agreements contain provisions that will protect the environment and labor standards, as well as open markets in other countries. Al Gore will insist on and use the authority to enforce worker rights, human rights, and environmental protections in those agreements. We should use trade to lift up standards around the world not drag down standards here at home.

On the face of it, it's downright alarming that the Vice-President in an administration that, after an initial ill-advised foray into strategic trade policy, had a highly creditable record on international economics should be under the impression that the task of trade is to 'out-compete' other countries. Competition takes place between companies, not nations. Trade is not a zero-sum game: it's a mutually enriching exchange that allows gains in living standards through each country's being able to specialise in what it produces. But Gore knows this, and the most likely explanation for the appearance of this passage in the Democrat programme was its role as a talisman for party activists (especially among organised labour). Linking trade to labour and environmental measures performs much the same role in Democratic politics as opposition to abortion plays among Republicans. It is an issue on which activists feel very strongly, and no responsible administration will legislate in the way that party activists desire.

This time it's different. With one noble exception, the Democrats are out-bidding each other in opposing trade agreements worthy of the name. Lamentably this is a major issue in the Iowa campaign according to Associated Press:

Democrat Dick Gephardt has stepped up his criticism of Howard Dean, accusing his chief rival of favoring deep cuts in health programs and bad trade policies.

The Missouri congressman, who's in northern Iowa today, says Dean would have pushed through cuts in Medicare costing average taxpayers thousands of dollars. During a stop in Britt, he also said Dean would have backed trade policies that have sparked "a race to the bottom.''

Richard Gephardt is too far gone on this issue to care, but the other candidates ought to pay attention to an article by Michael Kinsley in Slate last week. Kinsley coins the useful term 'Free Trade Butter'. This has nothing to do with trade in dairy products: a Free Trade Butter is a politician who prefaces his remarks, "I support free trade" and immediately follows it with the word "but". As Kinsley notes:

Almost everyone acknowledges some exceptions to the general rule that a nation is better off if it doesn't try to tell its citizens what they are allowed to buy from or sell to foreigners. A free trade butter (FTB) is someone whose exceptions take a big bite out of the rule itself.

It's a matter of incredulity and even distress to me that, with the exception of Joe Lieberman (whom I admire and whose political location on the Right-wing of the Left is where I also stand), every one of the candidates for the Democratic nomination - the supposedly mainstream and the undeniably flaky alike - is a Free Trade Butter. Discounting the fringe candidates, the one I hold in greatest contempt is Gephardt, for a reason that Kinsley - whose article is not entirely accurate, but is exactly right in this respect - nicely encapsulates:

[T]he effect of a "level playing field" rule—blocking imports that weren't produced in accord with American-level regulatory standards—will not be to make jobs in poor countries as well-paying, safe, and good for the environment as jobs in America. The effect will be to wipe out those jobs.

And that is not just the effect of the "level playing field" concept. It is the very purpose. "Level playing field" advocates—including, most prominently, the labor unions—say that it will prevent American jobs from being stolen. Another way to say this is that it will prevent jobs in poor countries from being created. Essentially, the "level playing field" concept forbids poor countries to take advantage of their poverty. When poverty is their main asset, this is no favor.

Not only is it 'no favour': it's morally reprehensible. No party of the liberal Left should regard it with anything other than the deepest distaste. The sight of Democratic politicians - with, as I say, the one outstanding and honourable exception, who thus has no chance of winning the nomination - vying with each other to see who can proclaim fidelity to the 'level playing field' the loudest is a betrayal of liberal internationalist principles, which the Democrats once stood for.

ADDENDUM: Brad DeLong succinctly states both the rationale and the defects of the type of strategic trade policy that was widely popular but sensibly rejected in the early days of the Clinton administration:

[A] strategic trader [is] someone who believes that the government, by imposing selective tariffs and quotas in the interest of important and strategic industries, can "pick winners" and shape the distribution of industries across nations in such a way as to ultimately enhance productivity.

Back in the Clinton administration, we economists spent a lot of time arguing against this strategic-trader belief: we argued that the U.S. government lacked the analytical capacity to make such judgments, that the U.S. political process was much too subject to industry lobbying for the government to be able to make good trade-industrial policy even if it did have the analytical capacity, and that the consequences of attempting such policies would be disastrous for world economic growth--that even if we did manage to grab a slightly smaller share of the surplus from world trade, the fact that we were endorsing beggar-thy-neighbor policies meant that others would as well, and that the size of the pie would shrink much faster than our relative share of the pie would grow.

By and large, we prevailed. And I think the expansion of world trade and the benefits to the U.S. of participation in the international division of labor have shown that we were right.

Amen to that. Yet the current popularity of protectionism (for that is what it is) among Democratic politicians lacks even the theoretical case behind strategic trade policy. It's a form of nativism, and it doesn't belong on a civilised liberal-Left.

Regulation and the market

My immediately preceding post, on transport and the environment, has prompted some interesting debate in the comments section. I'm not competent to judge the question of what is and what is not a pollutant, but there's one comment on the economics of air pollution that merits a direct response and has a wide application. This is the criticism directed at my remarks, beginning with a quotation from my post:

"...unlike the advocate of laissez-faire I believe there is an important role for regulation on air quality..."

Since I can't imagine A. Smith or M. Friedman etc. tolerating with good humor cyanide or sulfuric acid or what-not raining down on their properties and persons, I'm also having a hard time imagining the particular advocate of laissez-faire you had in mind, Oliver.

Even the most "hands offish" free-marketer, after all, makes exceptions regarding force (i.e. polluting) and fraud (i.e. lying about it).

The only points of contention surrounding such issues, or so it seems to me, concern degrees, proofs, and definitions of harm.

Since I know you don't cotton to straw men, I'm going to assume that you intended to suggest merely that you value the state's regulation of air quality more than some advocates of laissez-faire.

In fact that wasn't what I intended to suggest, and my depiction of the laissez-faire position wasn't a straw man. Advocates of what is known in the US as libertarianism do typically believe that the way to deal with so-called negative externalities such as air pollution is to introduce private property rights so that it pays someone directly to conserve scarce resources. There are of course transactions costs in establishing private property rights - the cost of negotiating, instituting and implementing a contract - but so long as the benefit is greater than those costs then the advocate of laissez-faire would prefer this solution to government regulation. More to the point, even where the transactions costs are greater than the presumed benefit, libertarians (in the American sense of the word) would still generally rely on private contracts rather than state regulation.

The classic formulation of this issue in the economic literature derives from the work of the Nobel laureate James Meade, who gave the example of bee keepers and apple farmers. Apple farmers grow the apple blossom that, as an unintended by-product, provides sustenance (i.e. pollen) for bees. Meade argued that this was a case where taxes and subsidies would bring the private costs into line with the social costs. Yet one free-market economist (Steven Cheung in a paper published by the Institute of Economic Affairs and entitled The Myth of Social Cost) has argued that in Washington state this issue was indeed resolved by a system of freely-negotiated private contracts. In practice, the bees fertilised the apple blossom, and apple farmers were happy to pay bee keepers to site their hives close to farms in order to secure this benefit, with the value of honey extracted deducted from the rental payment.

I stick with my point that laissez-faire advocates are opposed as a matter of course to relying on state regulation, or at least that they will go to great - and often implausible - lengths to avoid it. One example is the issue of banning smoking in public places. It should be obvious that instituting private property rights is no solution at all to the problem of air pollution caused by cigarette smoke: the difficulties of identifying exactly who is inconvenienced by smoke and whom to draw up a contract with in order to purchase the right to pollute the air are so complex as to make the notion wholly impracticable. Yet as a matter of fact advocates of laissez-faire are resolutely opposed to bans on smoking in public places. I noted this when my fellow-leftist blogger Stephen Pollard argued in The Independent a couple of months ago for just such a ban, and received much abuse as a result. I was sorry that Stephen changed his mind on this on receiving the barrage of criticism, because in truth - once you strip away the pseudo-scientific nannying of the anti-smoking lobby - there is a respectable liberal case for a ban. That case need have nothing to do with the alleged health risks of passive smoking, but merely reflects the fact that polluting the air with smoke is a private good that is inconvenient to many people, that in principle smokers ought thus to pay for the right to pollute, and that instituting private property rights to the air is in this case not practical.

On balance I would probably come down against a ban, merely out of my experience that, while I intensely dislike being in the presence of cigarette smoke, the culture does change such that it becomes possible to rely on the good manners of smokers to take their habit outside. Fifteen or 20 years ago it was standard for business meetings in the UK to be conducted in a haze of smoke; even five years ago offices in Germany were in a semi-permanent fog, as I recall to my revulsion. This is no longer the case, because peer pressure has been brought to bear. But the libertarian objection to a ban on smoking in public places is not a compelling one in principle, and the libertarian aversion to state regulation of externalities often has the appearance of dogma rather than economic reasoning.

"Stay at home! Restrict your horizons!" - Lib Dems

The Liberal Democrat Environment spokesman, Norman Baker MP, issues a considered statement:

Given the enormous scale of the climate change problem, it is right to consider drastic measures. But the main thrust of our efforts must be to reduce carbon emissions by adopting sensible energy and transport strategies.

Sadly, energy consumption is going up and today we have learned that car sales have reached a record high.

While it is true that new cars are cleaner than older cars, far more should be done to reduce the need to travel at all. Where travel is necessary, we must make sure there is a clean, safe, reliable and affordable public transport alternative.

I'm the total layman on climate change, but I do understand how it's possible for reasonable people to place differing values on the control of carbon emissions. Air pollution is the price of material progress. There is no virtue in imposing international environmental standards that fail to acknowledge that poorer nations will tend to place a lower value on clean air than on economic development. Clean air fits the economist's definition of a public good - it can't be provided in discrete amounts to individual purchasers, and can't be withheld from non-payers - and unlike the advocate of laissez-faire I believe there is an important role for regulation on air quality. But it must be regulation that sees clean air as an economic good - the choice of which forecloses other choices - to be traded against other desirable things. It should also be regulation that encourages innovation rather than stymies economic growth.

That has been the approach that has prevailed over the past 30 years in the development of cleaner motor cars, where the setting of performance standards rather than the prescription of particular technologies has reduced air pollution while stimulating tremendous technological advance. Catalytic converters began to appear on American cars only in the mid-70s, and became mandatory in the UK only a dozen years ago. From these beginnings in the control of car emissions has come a small industry of engineering studies for the burning of alternative fuels such as ethanol that release hardly any pollution. Even by the mid-90s the environmental journalist Gregg Easterbrook was able to comment, in his book A Moment on the Earth, that technology in the production of cleaner cars had advanced so far that:

... although bus transportation does save fuel, from a pollution-control standpoint the riders of a city bus might do better for the Earth by all being the sole occupants of new cars.

This seems to me an admirable outcome of well-constructed regulation, good economics, a respect for personal liberty, a concern for the environment and the commercial application of scientific inquiry. Yet note the preferred alternative scheme of what is generally considered to be a mainstream party in British politics and a vehicle for liberal ideals. The party believes that the control of car emissions should be accomplished by "reduc[ing] the need to travel at all".

How is it remotely within the scope of government to know what travel is "necessary" and what is merely frivolous? How can government possibly judge what policies will "reduce the need to travel at all", as opposed to stimulating new demands? Of what possible interest can it be to government where, when and how much the citizens of a liberal democracy choose to travel beyond their homes, localities and nations?

These are not rhetorical questions. I'd genuinely be fascinated to know the answers, especially from those who profess to believe - as this blog does - in encouraging international exchange, welcoming immigration, stimulating economic development, protecting civil liberties and advancing liberal values.

Democrats and the Presidency

The Herald Tribune reports on the Iowa debate among the Democratic contenders for the presidential nomination.

[Howard] Dean’s rivals — and particularly a feisty Senator Joseph Lieberman of Connecticut — sought vigorously to shake the former Vermont governor from what increasingly appears to be a dominant position built around a strong antiwar stance and a potent fund-raising apparatus…. [W]hen Dean repeated an assertion that the country had not been made safer by the capture of Saddam Hussein — he noted that U.S. fighter jets were now escorting commercial airline flights out of terrorism fears — Lieberman pounced. Lieberman, who strongly supported the Iraq war, said, ‘‘I don’t know how anybody could say that we’re not safer’’ with what he called a ‘‘homicidal maniac’’ in prison instead of on the loose.

It’s cheering to see the one serious candidate for the Democrat presidential nomination say this, but dispiriting that it needs to be said in what is traditionally a party of liberal internationalism. Just as Senator Henry ‘Scoop’ Jackson, the greatest post-war President America never had, failed comprehensively in his bids for the Democratic nomination in 1972 and 1976, so Lieberman is commendably unacceptable to the mood of his party’s activists.

Yet, excluding the obvious fringe candidates such as Dennis Kucinich, there is one candidate for the Democratic nomination who would be even more of an affront to liberal principle than Dean. That man is Richard Gephardt. (In fairness I should record that whatever I happen to think of Kucinich, he has received the endorsement of a children’s book character called Grandfather Twilight, who declares, “Every night, I see children snuggling with moms and dads who read them a story, and kiss them goodnight. They are the lucky ones. They go to sleep under the pearl of the moon, who spreads her light over everyone. But the world is not at peace. The air is full of smoke and sorrow. The trees tell me they feel it too, even the waves of the sea.” Presumably the air was indeed full of smoke when he said this.)

I first properly noticed Gephardt when he ran for the Democrat nomination in 1988. A centrepiece of his campaign was a demand for a ‘results-oriented’ trade policy with regard to Japan. What this meant was quotas on imports. The campaign was founded on the hair-raisingly tendentious twin assumptions that the size of the Japanese current account surplus could only be attributable to ‘unfair’ trading practice, and that it was in the interests of American jobs to attempt direct action to curb that bilateral surplus with the US.

Unfortunately, while Gephardt lost the nomination and the Democrats lost the election, this discreditable campaign did increase the political pressure on an inexperienced President Clinton five years later to ‘get tough’ with Japan. With good advice from leading economists associated with the Democratic Party (several Nobel laureates, including James Tobin, Paul Samuelson, Franco Modigliani and Lawrence Klein, signed an open letter to Clinton in 1993 protesting against his populist economic stance on Japanese trade), the international economic policies of the Clinton administration did improve markedly from that point. On Nafta and in successive global currency crises (Mexico in 1994, Asia in 1997-8) the administration did a good job against which the international economic diplomacy of the Bush administration compares unfavourably. But bad economic ideas are resilient beasts (resurfacing in Clinton’s declared sympathies with the aims of the rioters at the Seattle World Trade Organisation summit), and the case for liberal internationalist principles in trade policy appears to be an enfeebled one within the Democratic Party once more.

Gephardt is the prime culprit. I’m baffled that some perfectly sensible and liberal (in the best sense) Democrats take this demagogue seriously, for his policies would damage and disrupt an international trading system that is the best hope for developing countries seeking to lift themselves out of poverty. Gephardt sets out his ideas here, in one of the most ignorant and inflammatory speeches I can recall from a supposedly mainstream presidential candidate:

The trade imbalance is both an American crisis and a global tragedy. Around the world, millions of workers have no choice but to work for meager wages under inhumane conditions. In the race to the bottom, multinational corporations have thrown morality to the winds and sought out those countries where exploitation knows no bounds.

So far from being a tragedy, the US trade imbalance (specifically demand from US consumers) has lately been an important factor supporting a sluggish global economy. So far from seeking ‘exploitation [that] knows no bounds’, multinational companies typically bid for relatively skilled labour in overseas markets, such that their workers earn a wage premium compared with what they would have been paid in the absence of foreign direct investment. (The empirical evidence suggests that this wage premium associated with foreign direct investment happens in developed countries – even the United States - as well as developing countries, so a consistent economic populist, if there can be such a thing, ought to favour the abolition of all restrictions on foreign ownership of domestic industry.)

Wages in developing countries are of course low compared with US wage levels, but that is because productivity is lower. One of the most important benefits of an open economy is that, by allowing specialisation, productivity and thereby living standards can be enhanced. There is evidence that multinationals assist this process by means of ‘technological spillover’, or transfer of technology to local firms. Introducing labour and environmental standards as a matter of course into trade agreements is a policy that I can only politely describe as colonialist in its aims. As Fareed Zakaria of Newsweek rightly noted a couple of years ago:

Gephardt's insistence on dictating labor standards to the world is particularly hypocritical given that the United States refuses to ratify such standards itself. The International Labor Organization has four "core standards": freedom to unionize, no child labor, no prison labor, freedom of association. The United States has ratified only one of them! It's not that we don't believe in or adhere to such standards, but we don't think it proper for international law to trump our national and state laws on something as complex and local as the rights and responsibilities of employers and workers. And yet we would be asking countries such as India, Mexico and Malaysia to do what we will not do ourselves.

It’s also a transparent protectionist device to prevent developing countries from deploying their relatively cheap resources – such as land, water, air and labour - in order to make themselves richer.

I principally oppose Gephardt’s policies because they would damage the economic prospects of developing countries. But they would also damage living standards in the United States, with an especially regressive impact on poorer consumers.

Gephardt erroneously frames the issue in terms of the supposed effects of trade on American jobs:

The truth is, when you look at our national trade policy, the real outsiders are American workers. They are the ones losing their jobs because of bad trade agreements that are not good for anybody.

No, they’re not. The net effect of trade on US employment is approximately zero. In an open economy, jobs will be lost in import-competing industries, and these will be balanced by the creation of jobs elsewhere in the economy. It is not possible – even supposing it were desirable – for a government to act directly to restrict imports without at the same time depressing exports. On Planet Gephardt, exports are seen as a benefit, but in fact they are a cost: they are the goods America has to give up in order to acquire imports. If foreign countries find their ability to sell into the US market constrained, they will thereby find it more difficult to earn the foreign exchange necessary to buy US goods. And the irony of the professedly pro-labour Gephardt’s policy is that the jobs that would be saved by restricting imports are on average low-wage jobs, while those that could be created in export-competing industries are on average high-wage jobs. The US tends to import labour-intensive products, such as textiles and shoes, and export skill-intensive products, such as aircraft and industrial chemicals.

Any policy that causes a change in the relative prices of goods in an economy also changes the returns to the factors of production. Trade does this by affecting the distribution of employment and income. By distribution of income, I mean the distribution between skilled and unskilled labour, not that between labour and capital. Typically, Gephardt gets this wrong:

Well, we now face the reality that the jobs of the twenty-first century may not be American jobs. We are shipping them all overseas in pursuit of higher corporate profits and lower corporate overhead, a fool's bargain that can only end with fewer American consumers and a weaker American economy.

The profit share of national income did rise in the 1990s, but that was not at the expense of the labour share, which has remained at roughly 70% for decades. What declined was not labour income but net interest accruing to the owners of capital, owing to a fall in interest rates.

There is an important and legitimate question in public policy for liberals to raise about assistance programmes for workers who lose their jobs in import-competing industries. But instead of examining ways of assisting those workers directly, the Gephardt programme engages in aggressive unilateralist rhetoric to the detriment of US living standards and in violation of internationalist principle.

What a shambles of a campaign. What a disgraceful politician.