The Davos lie
I am intrigued by a comment the often provacative Larry Summers made at a Davos seminar:
Lawrence Summers, the former U.S. Treasury Secretary and Harvard University president, delivered some harsh criticism of the way globalization has been pitched to the public. Making the intellectual case for free trade and then simply “paying off” some of the losers in globalization, Mr. Summers said, will not work for world leaders trying to sell the current round of global trade talks to a skeptical polity.
“That’s the Davos lie,” Mr. Summers said during a dinner Friday night.
I wonder what Summers thinks would work?
One of the things that has struck me about the current politics of trade is that the losers aren't really paid off — either formally or informally. The various government programs that help displaced workers are small. The heads of private equity firms don't, for example, don't tend to raise funds for charities to help workers displaced by booming US imports of auto parts, even though private equity firms clearly have been among those who have benefited heavily from the United States ability to import China's savings surplus.
In some areas, paying people off the losers is rather hard. Compensating US farmers for the loss in market value of their land should the US ever really give up its agricultural subsidies would be quite expensive – as, for that matter, would compensating US homeowners for their losses should the US every stop subsidizing mortgage interest. Once a subsidy gets capitalized into asset values, watch out …
I suspect Summers believes that the integration of China and India into the world economy have such profound implications – including such profound implications for who wins and who loses from trade — that old policies for managing trade-related dislocation aren't enough. But I don't really know …
One way of "selling" trade is to emphasize the benefits from imports — not just the gains from exports. It is pretty hard to argue, for example, that the majority of the gains from US trade with China have come from expanding US goods exports. Sure China buys some Boeings, but China clearly buys far more US debt than US goods. Steve Roach of Morgan Stanley never tires of emphasizing how much the US gains from importing cheap Chinese goods and cheap Chinese financing.
But that doesn't address the concerns of those worried about competition from cheap Chinese labor — or the concerns of those of us who worry that the US has become a bit too dependent on cheap Chinese financing.
Update: For more, see the Economist's (libertarian-tending) blog, Free exchange, which basically argues that the business men who see the opportunites brought by globalization are right, and the intellectuals worried about its risks are wrong. Business, the argument goes, must do a better job of explaining globalization's broad benefits (i.e. cheap goods – big profits and big CEO salaries don't count as broad benefits). I suspect that won't work. I would be surprised if the average American hasn't already figured out that Walmart's everyday low prices are largely made in China. The average American also, I suspect, has figured out that the latest round of globalization — the one that has made the Russian businessmen and their "nieces" the toast of Davos — hasn't brough with it lower prices for many other things they buy, little things like oil and gas …
The winners in global labor artitrage have thrown the bone of cheap credit to the losers in the Western world. Not using their own money, of course, but Saudi Arabia’s and China’s. If there was ever any doubt that Wall Street was predatory, the rising difficulties of high debt consumers will flush out the winners and losers in unmistakable fashion. Households, unlike businesses and governments, are no longer rolling in surplus liquidity. When Asian and other central banks start complaining about a falling dollar and rising MBS defaults, the obvious answer will be “Let the lender beware.” Wall Street will have gotten its cut, and moved on.
No longer constrained by Washington Corporate special interest groups, former Treasury Secretary Larry Summers is finally free to speak his mind and the truth about the multinational corporate globalization that remains exclusively pro-capital and anti-labor. Neo-liberal Rubinomics, a set of economic policies named after Robert Rubin, Treasury Secretary under President Clinton, has been forced to be on the defensive by rising economic populism in the US and around the world. When Henry Paulson travels to Beijing to lecture the Chinese, his ulterior motives are to open the Chinese economy to predatory Wall Street finance capitalism and further the Neo-liberalism exploitation of sweatshop labor for US corporations. The Chinese people are equally a victim of Walmart and Corporate America’s outsourcing practices that has worsened income disparity, created life-threatening environmental pollution, exacerbated economic and developmental imbalances, and worst of all, promoted Enron-style systemic corruption. China is not about to drive its economy further down any road that leads to an economic equivalent of a dangerous cliff merely to appease US ideological displeasure.
As John Berry noted in a column you linked to back in 2005, on the subject of what would happen to housing prices if the mortgage-interest deduction were abolished,
There is no reason that home prices would not continue to rise over time as personal incomes gradually grow.
That certainly has been the case in Britain, which dropped its deduction about five years ago. Over the past two or three years, home prices have skyrocketed there even without the deduction.
If we abolished mortgage-interest tax relief tomorrow, but grandfathered it in for people who are already benefitting from it, I think the effect on housing prices would be small. Maybe now is a bad time to do it, so let’s just pass a law saying it WILL be abolished for all purchases from 2012 onwards. I don’t think such a law would have any immediate effect on house prices.
By “selling” it implies countries actually have a choice to stay out of globalization. But do they really?
Oh, and could you clarify, please, exactly what “The Davos Lie” is? Both you and L Summers seem to understand what it is, but it’s not clear to me. Is it the proposition that globalisation’s losers are being “paid off” in some sense by globalisation’s winners? Clearly that proposition is false, but does anybody actually think that it’s true, or even pretend to think that it’s true? Something can’t be a lie if it isn’t actually put forward by anybody in the first place.
Felix — I don’t really understand fully what Larry Summers understands the Davos lie to be … other than small payoffs to the losers aren’t going to be enough to win broad support. That could mean that small payoffs aren’t worth the effort, so get rid of them –or that you need much bigger and more broad based payoffs to those not benefitting (or not benefitting much) from globalization.
My definition of the Davos lie would be that the standard boilerpoint on trade — trade is good but it needs to be offset with more investment in education and a bit of job retraining — is a satisfactory response to current concerns about globalization. but on this, I would not dare to presume to speak for Larry Summers.
DC — I am pretty sure Larry Summers still talks regularly with Bob Rubin. They may not always see eye to eye on every issue, but they definately aren’t worlds apart either. Did you see Rubin on Charlie Rose last week? He wasn’t the Mr. uncaring neoliberal — maybe it is defensiveness, but I think it reflects Rubin’s deep commitment to empiricism.
Felix — if you grandfather in the existing mortgage interest deduction, the impact is limited — tis sort of like grandfathering in all existing ag subsdidies. It would mean though that it is hard to sell homes for a while … as the existing stock is worth more to its existing occupants (with the deduction) than to any new buyer.
Of course, over time, rising incomes and generally rising price levels would imply that the nominal prices of housing would fall.
But any standard model for housing valuation would say that a one off increase in the effective cost of borrowing (via a smaller deduction) would lead to a one-off fall in the valaution of most homes. It wouldn’t say that the valuation of most homes would then stay at that level over time. Prices adjust to the one off change. Then they move along.
Moreover, the UK may not be the best example. Zoning around London has limited supply in the area where demand growth has been strongest. Plus the City has been absolutely booming. It took off when you came to NYC … go figure ;). I wouldn’t want to infer the course of housing prices in suburban Orange county california (or better yet Dallas/ Houston — where there aren’t big zoning constraints) from the UK experience alone.
Pardon me for saying so, but it’s a bit incongruous for Larry Summers and even RGE to be taking a globalization skeptic stance!
From what I understand, the lie is that we can pretend everything is hunky-dory as the share of returns to capital become even greater than that to labor. To patch things up, the capital holders simply need to pay off the losers and things are A-OK. Sorry you lost your job, here are a few temporary benefits, etc. The problem here is that no one-time payment is going to stop the trend towards more capital concentration.
Was Marx right? The squeeze on labor in favor of capital holders is today’s headline for globalization. There’s no denying it. Until Larry Summers and RGE choose to attend the World Social Forum in Nairobi, Kenya (Felix Salmon–are you up to it?) instead of hobnobbing with the global elite in Davos, Switzerland, I’ll have my doubts over their credentials. Can you imagine Nouriel Roubini yukking it up with Hugo Chavez? We can all dream, no?
Brad, you say that “a one off increase in the effective cost of borrowing (via a smaller deduction) would lead to a one-off fall in the valaution of most homes”. Allow me to disagree. First of all, some 70% of homeowners don’t claim the deduction. This is either because they’ve had their mortgage for long enough that they’re now mostly paying down principal rather than interest, or because they have no mortgage at all, or because the size of the standard deduction is larger than the amount of mortgage interest that they pay.
If you buy a house with a mortgage and then pay that mortgage down steadily over time, the amount you benefit from the tax deduction also falls over time. The tax deduction, then, is to a large degree an incentive to refinance, rather than being an incentive to buy. So I’m sure the amount of refinancings would fall if the deduction were abolished, but that won’t mean too many tears shed.
In the UK, mortgage interest deductibility applied to everyone with a mortgage, not just to people with very big mortgages. But even there, there was no discernible drop in property taxes when it was abolished. I’m not just talking about London here — I’m talking about Lancashire too. Anywhere you looked, the consequences of the abolition of deductibility were basically invisible.
Look at it this way. Mortgage rates have moved around a fair amount over the past few years. In the 12 months from mid 2005 to mid 2006, they rose from 5.15% to 6.40%, and in a period of just a few months at the beginning of 2004, they rose from about 5.0% all the way up to more than 6%. House prices did not fall during those periods: there’s more to the cost of housing than the cost of buying. And I’m sure that most buyers would rather have a 5% mortgage with no deductibility than a 6% mortgage with deductibility.
Emmanuel — I’m afraid I managed to go neither to Davos nor to Nairobi, although I would have been happy to go to either. Any idea where WSF2008 will be?
Brad–I think Summers is honest and serious, while Rubin is not. Anyway, the compensation principle under welfare economics has never been tested since it has not been implemented. Now, because of severe income loss by large numbers of people, ecoonmists are forced to seriously consider compensation.
I suspect that if full conpensation is made, globalization would have to be substantially reversed, and the Doha round would have to be reconsidered. Specifically, agricultural liberalization would loose relevance and should be given up. Neither China nor India would complain, but be greatly relieved. Agricultural liberalization benefits only Argentina, Australia, Canada, and the United States, and will not benefit Africa or Asia so much.
The Doha round should be restructured in such a way that mining, manufacturing and service trade be further liberalized, while agriculture be left out. Agriculture in many countries needs to be maitained in order to protect environment and culture.
Felix Salmon–you may have missed your chance. It appears that there will be no WSF 2008. Given the limited press attention this year’s event received with no high-profile guests like Hugo Chavez, the anti-globalization folks need to rethink their marketing strategy:
Following a decision in October 2006 of the international Council on the forum process, there will be no 8th WSF in 2008. In its place, there is to be a global and worldwide action whose precise form has yet to be defined.
HK–??? We can debate how beneficial dismantling agricultural subsidies will be for developing world agricultural exporters in the G-20, but there is no doubt that agriculture is the sticking point in the Doha Development Agenda.
It’s simple: no real concessions on developed world agricultural subsidies and the like, no deal.
The Group is committed to the program set out in the Doha Development Agenda, in which agriculture constitutes its center piece. In particular, the Group seeks to address distortions and restrictions affecting agricultural trade, regarding export subsidies and other export enhancement measures, trade-distorting domestic support and hindrances to the access of developing countries products.
If the return on capital is so good why don’t labor just buy out their employers. Think it impossible? Can’t UAW afford Ford or GM? United Airlines was only $2B a couple of months ago — don’t think the pilots’ union could afford that? Not wanting to take the risk of equity capital? Then stop complaining about return on capital.
Oh, don’t pretend it is the debt capital that is unaffordable. Not on a board discussing the conundrum of low interest rate and low risk premium anyway.
HK — I have a lot of sympathy for your views on agriculture. Agricultural policy is effectively social policy designed (imperfectly) to sustain a larger number of farmers than is economically efficient (see Japan, rice, France, cheese, US, family farms … etc). It just happens to be social policy that is often implemented at the border. And there are some big externalities/ costs — i.e. the US sugar tariff makes imported brazilian ethanol impossible, even tho it is more energy efficient than us corn ethanol, US cotton subsidies have a big impact on parts of West Africa and so on. I would be a lot happier if China has a more appreciated RMB even if that meant a rice tariff to sustain domestic Chinese rice prices and in effect, transfer income from urban to rural China. so my preferred regime would be one that tries to limit the negative externalities from what amounts to domestic social policy –i.e. subsidize inefficent farmers, but not efficient ones that have a big impact on global markets.
However, I worked for both Rubin and Summers and I would strongly disagree with “Summers is honest and serious, while Rubin is not.” rubin always struck me as extremely serious, in every sense of the word. he took the responsibilities of being treasury secretary very, very seriously. rubin is a bit more diplomatic than summers, so he doesn’t always state explicitly everything he thinks. but that doesn’t make him any less serious.
Felix — my parents have paid off their mortgage long ago. So they fit perfectly into your 70% that doesn’t benefit from the mortgage tax deduction in the US. but unless they are selling their home to someone who doesn’t benefit from the mortgage tax deduction (or who isn’t bidding against someone who benefits from the mortgage tax deduction), the current market value of their home is a function of the mortgage interest tax deduction.
If you are right, I would assume that the home builders lobby has no incentive to lobby for the mortage tax deduction, and the standard view that taking it on is political suicide is wrong. and on this, though, i tend to trust the homebuilders to lobby for their self-interest … and they haven’t been taking the felix salmon position on it. maybe they are misguided tho — and haven’t looked into the UK example enough.
HZ–Ford and GM don’t have any returns
In all fairness, our host does a very good job describing how global economic imbalances–not just dastardly ol’ globalization–tilts the rewards, like towards financial service providers and away from manufacturers in the USA. Which, of course, is the last thing it needs to regain its export competitiveness.
Brad — If I didn’t know you better, I’d swear you were acting just like an economist, never letting empirical data interfere with your theory-based conclusions. Let’s do some math here. The standard deduction for a married couple is $10,300. Let’s say your parents own a median home, worth $225,000. And let’s say the buyers are putting 15% down, and applying for a $190,000 mortgage, at, say, 5.7%. Then their mortgage interest payments will be $10,830 per year. The amount they save by deducting their mortgage interest, rather than taking the standard deduction, is their marginal tax rate multiplied by $580. And that’s in the first year of their mortgage, when their mortgage interest payments are at their maximum. A few years in, when interest repayments go down and principal repayments go up, they’ll be better off taking the standard deduction. Basically, the NPV to the buyers of having mortgage-interest tax relief available to them is de minimis, and the current market value of your parents home is NOT a function of the mortgage interest tax deduction.
Homebuilders, of course, build McMansions where buyers are taking out mortgages closer to $1 million than to $100,000. So the buyers there will indeed get quite a lot of benefit from the mortgage-interest deduction. On the other hand, anybody who buys with cash (really rich people and trust-fund babies, or people downsizing after the kids have left home from a house which is too big for them) won’t be taking the mortgage-interest deduction even initially after they buy.
To reiterate: The overwhelming benefit of the mortgage-interest deduction goes to buyers of very expensive real estate in California and New York. If prices are skewed because of it, then they’re skewed in a few enclaves on the coasts. Most of America — and the value of most houses in America — is simply unaffected by the deduction.
Felix — OK, my parents live in a part of the country where the mortgage interest tax deduction isn’t worth much, so that may be a bad example. But the bigger point is that it does support the price of housing in some parts of the country (tho i guess the expanding reach of the AMT will eventually cut into that … right). In any case, let me quote the John Berry article you dug up …
“It’s clear from the Wharton economists’ study that the extremely rapid rise in home prices in some high-income markets and the subsidies, including the mortgage-interest deduction, feed on one another. Certainly the existence of the deduction encourages purchase of larger, more expensive homes.
Eliminating the deduction probably would help cool off the overheated housing markets in some parts of the country, and in some areas home values could well decline. While that would lower the net worth of some households, it undoubtedly would also encourage them to save more out of current income.”
I simply don’t believe you could withdraw a $60b subsidy(OK — somewhat less because of how it interacts with other parts of the tax code, per Berry) with no impact on the housing market.
An interesting calculation would be to compare the mortgage interest tax deduction revenue loss to the total US mortgage interest bill … that would provide some sense of the scale. But the reduction in the average mortgage rate would be misleading, since — as you note Felix — the impact is concentrated in upper income demographics in regions where homes are rather costly.
To reiterate: The overwhelming benefit of the mortgage-interest deduction goes to buyers of very expensive real estate in California and New York. If prices are skewed because of it, then they’re skewed in a few enclaves on the coasts. Most of America — and the value of most houses in America — is simply unaffected by the deduction.
And if that changes, there is always the option of raising the standard deduction even higher so that even fewer lose out, but benefit of this change flows from the bottom up, not trickles from the top down… and if that bothers folks because it isn’t ‘revenue neutral’… raise the marginal rates slightly to offset the increased benefit at the bottom.
There are options - we aren’t one trick ponies.
The mortgage interest deduction affects the states inequitably, in three ways: the effect of state income taxes, disparity in state incomes, and disparity in house prices.
The state income tax effect: in Florida the mortgage deduction affects relatively few, because there is no state income tax. Thus, there is no federal deduction for payment of state income tax, and more homeowners take the standard deduction. The mortgage interest deduction benefits states with higher state income taxes.
State income disparity: since the standard deduction is constant nationwide, the mortgage interest deduction benefits states with higher incomes, even among states with equal state income taxes.
Home price disparity: as explained by Felix above.
Added bonus: these three factors are highly correlated. New Jersey has comparatively high state income taxes, high incomes, and high home prices. Alabama has low, low, low.
Added bonus #2: these three factors are correlated with political party affiliation.
The United States (the world for that matter) is an individual rights-poor environment. That’s what Summers is talking about. I wonder who told him?
To state the obvious, agricultural subsidies also impact the states inequitabably, though in a very different way. They also deliver the biggest benefits to those toward the top — though they also do deliver some benefits anyone with farmland suited for growing a subsidized, no matter how small the acreage.
My general point was that once an expected future subsidy gets incorporated into asset values, it is hard to eliminate — since there are very large concentrated losers from any change. This discussion has convinced me that the benefits of the mortgage tax deduction are much concentrated thatI would have initially guessed (not so big for FL — that is a surprise to me, tho it makes sense), but I don’t think that really challenges the broader point.
“Compensating US farmers for the loss in market value of their land should the US ever really give up its agricultural subsidies”
Hold on a second. If it is only the subsidy that keeps the value at a certain point, then that cannot be said to be the ‘market value’, can it?
Now, let’s apply that to homes (considering the interest rate deduction subsidy), garment manufacturing jobs (quotas) and auto workers (import duties).
Can we even calculate a ‘market value’ for any of these? And, if not, then how can we so convincingly determine that globalization is harming competitiveness?
The big lie is that the effects of globalization are only felt in America and other rich countries, and that the benefits that keep hundreds of millions of third world people alive are somehow, in some strange way, unimportant.
DOR — replace market value with “going price” — it doesn’t change the fact that if you borrowed a lot of money to buy an asset whose current “going price” reflects expectationso of an ongoing subsidy, and that subsidy changes you are in trouble …
The same argument of course applies to anyone who buys a facility in China that benefits from the subsidy for the external consumption of Chinese goods now made available by the PBoC, at a considerable future cost to poor Chinese tax payers (at least according to some). That is why I don’t want expectations of Chinese exchange rate management to become as entrenched in a range of market prices as expectations of agricultural price support now are in the US.
I would feel a bit more comfortable defending the status quo, incidentally, if there was a bit more evidence that Chinese wage income was rising relative to Chinese GDP … that isn’t to say that urban Chinese wages aren’t rising, only that overall labor income doesn’t seem to be rising as fast as GDP.
DOR — arguments about how much globalizations helps people outside the US (or other rich countries) also don’t have much political resonance in the US, I suspect, not matter how strong their moral force. US voters don’t classically vote on altruistic grounds, at least not consistently. Reagan’s famous question was are you better off (or more secure — if you want a question that picks up on concerns about income volatility) now than four years ago, not are the world’s poor better off now than ..
Dr. Setser & DOR–If I’m not mistaken, what you both are referring to are “shadow prices” or “social prices.” That is, the prices of various commodities once various distortions like subsidies are removed. It used to be an area of academic interest in the 80s, but it’s since gone out of fashion.
The Policy Analysis Matrix (PAM) is often used to compute for shadow or social prices. It’s quite interesting if you’re a policy wonk, really.
I really disagree with Mr. Summers:
“Making the intellectual case for free trade and then simply “paying off” some of the losers in globalization, Mr. Summers said, will not work for world leaders trying to sell the current round of global trade talks to a skeptical polity. ”
If I recall correctly most of the people here in the US were against NAFTA but Congress somehow passed it anyway. Even NPR tried “selling” Nafta to the people and talking about how it was only “undeserving” people (i.e. those without skills and education) would be affected but everyone else would benefit.
However the real problem is not free the real problem is stagnant job and wage growth in the US and EU. The price of everything(excepted for manufactured goods) has gone up and wages just aren’t keeping up with the increases in housing costs, energy and healthcare.
Perhaps certain sectors are doing well but I strongly believe that the vast majority of people in the US at least are falling behind as real inflation eclipses real wages. Also as Roach as said many times US companies just aren’t hiring anymore because its so much cheapier to do work in China and India. Roach said that China and India for all practical intents and purposes have infinite labor.
Of course one of the “benefits” of massive Chinese financing has been low interest rates for US mortgage borrowers, which provided fuel for the housing bubbl. This has also increased misery for wage earners by and increasing housing costs .
However on a realistic level its hard to imagine any of the key players pulling out of globalization voluntarily. Everyone benefits(the US gets cheap credit and manufactured goods) and the Chinese get economic growth. The Arabs and Russians of course get a place to recycle their money.
I started reading econ blogs 3 years ago, and at that time the standard line re: globalization was simply to assure workers in the developed world that, as globalization took some of our jobs, our advanced economies would replace those lost jobs with ‘leading edge’ better jobs.
That was the old line. Now we know better, and our leading lights like Summers twitter with concern about the discontent of the masses.
But American politicians have been bought by the corporate class. It’s hard to imagine a voter revolt big enough to wash the Rubinomics out of Hillary Clinton’s hair.
On the other hand, there has been a huge shift over the past few years as the nature of our circumstances has become clear. If the political tensions continue to worsen (as they are, in a period of growth) and indeed soar (in the next recession) than the reaction to popular discontent could be interesting indeed.
US voters don’t classically vote on altruistic grounds, at least not consistently.
Generally true, with a notable exception: the SF Bay Area. Yes, we tend to be pinko socialists here. We are also one of the richest, best-educated populations around, including three of the most powerful women in the world: Speaker of the House Nancy Pelosi and Senators Dianne Feinstein and Barbara Boxer.
Altruism? I prefer to call it enlightened self-interest, not to be confused with greed. I’d say the average American is not mean-spirited, but perhaps too easily led astray by cynical hype. Don’t forget that Reagan followed Jimmy Carter, the least cynical President of modern times. Too bad Carter wasn’t effective.
Chinese Central Bank tells US yuan critics to back off
http://www.iht.com/articles/2007/01/28/news/dyuan.php
DAVOS, Switzerland: China wants the rest of the world to respect its gradual pace of economic reform, a senior Chinese central banker said here, telling critics to “clean your own house first.”
Wu Xiaoling, deputy governor of the People’s Bank of China, avoided naming names but handed out the advice only a few weeks after top U.S. financial policy makers visited Beijing to press China to act faster on liberalizing the yuan.
“There is a Chinese saying that you should put yourself in others’ shoes; you need to respect others,” she said at the World Economic Forum in Davos. “We respect other people’s policies. The Chinese say, ‘clean your own house first.’
“Economics seemed to be the last thing on anyone’s mind this year at the World Economic Forum… After listening for years to prophecies of doom about the dangerous instability of the global economy — inflation and deflation, trade imbalances and currency chaos, house price and stock market bubbles, financial speculation and profligate consumer borrowing — the world’s business leaders have stopped paying attention… Instead, the buzz in the corridors was about the deeper existential threats to our prosperous way of life: the unquestionable reality of global warming; the threat of an all-embracing conflict in the Middle East on the scale of a world war; the protectionist backlash against globalisation; the seeming inevitability of nuclear proliferation to alarmingly unpredictable countries… To try to summarise the “view from Davos” on all of these issues would not only be impossible, it would also be dishonest — for there really was no coherent view. There was concern, puzzlement and hand-wringing, but nobody seemed to have many new or constructive ideas about how to respond to religious fundamentalism, protectionism, Chinese and Russian authoritarianism, Middle Eastern violence or accelerating climate change…” http://business.timesonline.co.uk/article/0,,8210-2571761,00.html
It is not globalisation that takes your jobs or lowers your living standards, it is competition, and there is nothing that America or any other relatively rich country can do about it. You might as well discuss whether it is easier to for the man at the top of the hill to accept gravity than the man at the bottom! Globalisation is about how you respond to that competition, and you do not need much economics to see why unilateral openness is the best response except possibly in the very short term. Altruism has little to do with it.
If China is directing its purchases to American things of any kind, including bonds, then it seems to me that such preferential treatment surely ought to give America some kind of advantage, as long as its people recognise what is going on, and exploit it wisely.
As always, the problem is that ignorant people vote for politicians who tell them what they want to hear. As Winston Churchill said, democracy is the worst form of government except the others, but I wonder if it could be improved by requiring voters to hold a licence.
Either get real, America, or learn the hard way, like Britain did in the 1970s (not that we learned it all then, and have not forgotten a lot since)!
‘authority without responsibility’ - an appropriate catchphrase for Wu?
good to hear Wu admit that China’s a mess, although disappointing that she seems to feel no obligation to do anything about it, or concern herself with the ramifications.
According to Chi Hung Kwan, Senior Fellow with Research Institute Economy, Trade and Industry, in 2002, the average wage in China was 2.1% of that in the states.
http://www.rieti.go.jp/en/china/02083001.html
(Nice graph and table included.) Kwan concludes that
“So long as China depends on low wage levels to compete in international markets, it can at best be a “factory of the world,” rather than an “industrial power” that would rule over such high value-added areas as product standards, brand names, and core technologies. Since low wages also imply a low standard of living, no doubt they should be understood as a sign of China’s weakness rather than its strength.”
There is no question that industrialized countries have capitalized on cheap, third world labor—as have indigenous third world companies. I could also point out that third world labor has little if any protection from sweatshop conditions. Keep them poor; keep them busy. Labor arbitrage is the name of the game. Labor in all countries suffer the consequences.
I am continually surprised that economists that sing the praises of globalization say the “fix” to growing inequities is more education. The great mass of humanity cannot all be Phd’s or financiers. Work has to be done at all levels. The “fix” is for those at the top to take a far smaller share of the pie. Oh my, socialism! Naughty, naughty!
Perhaps Rubin et al would do well to visit third world working factories and homes; maybe even spend a month or so actually “living the life.”
There will be increasing pressure on the WTO to include both labor and environmental standards. The inequities are growing both in the industrialized countries and in the third world. Globalization is structured so that the inequities will increase.
Brad — You say that “An interesting calculation would be to compare the mortgage interest tax deduction revenue loss to the total US mortgage interest bill”. According to the flow of funds report, total home mortgages as of Q3 2006 were just over $10 trillion. If they average 6%, then total mortgage interest payments are running at a rate of $600 billion per year. If, as you say, mortgage-interest tax relief costs $60 billion per year, then we have a 10:1 ratio. But I’d be interested in seeing your source for that $60 billion figure, since I suspect it might not take account of the fact that if people didn’t claim the mortgage-interest deduction they’d just claim the standard deduction instead.
So far, I haven’t seen any real proposal for what would help “sell” globalization to a skeptical public in the advanced economies. Saying it is inevitable that we live in a more competitive world so get used to it is one answer, but manufacturing workers would say that “hey, nothing requires that Chinese products not be taxed at the border — that is a policy choice” and they presumably would be right. The level of competition in some segments of the market could be scaled down. Dean Baker has noted that professional licencing has limited competition in Medicine and Law … and that patents have as a matter of public policy limited competition for some drugs.
Part of globalization is technology, but part of it is policy …
Taxing imports at the border would be a reasonable policy choice. Taxing Chinese imports only would be flaunting the WTO rules and itching for a fight.
HZ — on current trends, in a few years there won’t be much of a difference between taxing imported goods at the border and taxing imported Chinese goods at the border, especially if you exclude oil and exempt NAFTA countries.
but there are big WTO issues (withdrawal of past concessions).
Brad,
You are probably right about the past concessions, though overall U.S. tariff rate is very low so I don’t know how much a rise it needs to be to contravene WTO agreements. I am not advocating import tax, except for maybe luxury goods, but it is not untouchable holy cow to me. What I object to in the ’selling’ analogy is the implication that Americans and other advanced economies are somehow doing the Chinese and other third world countries a favor in buying T shirts for $.50 per. No, they just like the bargain. The cheap price more reflects the incompetence of the Chinese and other underdeveloped economies at managing their domestic economies than anything else. The bargain does not please everyone for sure, but it is still a bargain.
In other words, Americans were never sold on globalization. They shopped for it. They voted with their wallets on it. It is the other way around that requires ’selling’. It will take some ’selling’ to convince them that paying more for the same goods is somehow better for them.
Needless to say, Govts can and do tax in response to undesired externalities that result from the market awry, distorted, or manipulated. A consumption-oriented tax of whatever flavour or characterization would, it seems, be a reasonable course since the undesired externalities, are, presently, fiscal and consumption-biased policies are currently, and continue to move in, the opposite direction of any sustainable equilibrium, thereby jeopardizing future growth, systemic stability, political & monetary independence, not to mention expending all “dry powder” that one might need in the future.
Of course, I said the same in FY2000. But the USA needn’t wait for a trainwreck, or for neo-mercantilists to become more magnanimous in their ostensibly more-coordinated suite of policy, for the USA to take policy matters into their own hands.
Blocking goods at the border just does not work. You keep your home market in those goods, but you cannot keep the overseas market, and you are burdening the competitive sectors of your economy with buying more expensive or inferior home produced goods. The protected industries usually get flabbier, but even if they do use the breathing space to improve, they may well then find their products excluded by competitor countries in retaliation. And if America restricts trade when it suits it, why should other countries observe its patents, copyrights etc?
Mrs Thatcher managed to sell such ideas in the UK, but we had to sink very low first.
Rebel,
Not so much blocking goods as reduction in amount purchased. “Buy America” does not make much sense, but neither does buy on credit forever. There may be a middle road somewhere?
I guess that, some day, many chinese workers that have spent decades working 11 hours a day and 29 days a month will realise that they are globalization loosers.
There is a thinking about general economy and free trade that amazes me. Economists always account any economical event as positive. Something that invariably creates net wealth. For instance, a fatal car crash, triggers a bunch of economical transactions and trade. As a consequence of the accident the GDP increases. It is positive for the economy! We should promote free trade and car crashes!
I don’t see anything so surprising about this statement out of Summers. In fact while Clinton was president a small program of adjustment assistance to those laid off because of trade was instituted, only to be eliminated after Bush took over. I would guess that Summers supported it. Might well have supported a bigger program, but budgetary and political limits probably interfered.
It is an unfortunate fact that in the US there is little support for such assistance by both sides of the debate. The free trading pro-management types support laissez-faire and thus do not want to help the laid-off, and the protectionist AFL-CIO would prefer to fight for protectionism rather than going with assistance that would weaken their case.
In Sweden and some other countries such assistance has been quite successful. Too bad it has so little support politically in the US.
Liberalize trade in physicians services lawyers’ services, economists’ services and other highly paid proifessions. This would make the winners losers and the losers winners. then we could all support freer trade.
Is this about protecting & maintaining the globalization that has already taken place or striving for some new round of globalization?
If it’s the latter, has it ever been considered by the pro-globalization crowd that another big round of globalization may not be needed?
In the last 50-60 years, the tariff rates for most countries have already been reduced substantially, and a lot of non-tariff barrier issues have been addressed as well. In a sense, the globe has already reaped most of the benefits globalization has had to offer long before it became a buzzword. The remaining barriers to trade & access are relatively small historically speaking, and most of the forecasts of the predicted benefits of just that teeny bit more liberalization have been modest at best. And that’s assuming a one time full liberalization, rather than the more likely gradual, grandfathered system.
In this age of anxiety in the first world over globalization, one has to consider that if the powers that be make that herculean effort to get the Doha round completed, and the AFL-CIO & EPI get together to complain that Laos hasn’t matched Belgium’s GDP in the two years since the Doha round was completed and condemning “the washington consensus” once more, the political costs will have outweighed the economic benefits.
HZ,
“In other words, Americans were never sold on globalization. They shopped for it. They voted with their wallets on it. It is the other way around that requires ’selling’. It will take some ’selling’ to convince them that paying more for the same goods is somehow better for them.”
The problem is that selling protectionism is far easier than selling $3 off a shirt or $200 off a TV.
Dean Baker,
You propose liberalizing trade in some of the most global services. Have a look at what services America sells to the rest of the world.
Too damn long. Sorry, but…
In their advocacy of the benefits that would accrue from globalization, the Davos elite underestimated the extent that globalization’s success would alter basic international economics parameters. They were particularly purblind about the effect that globalization would have upon their own behavior.
Under the paradigm, the transfer of work to lower-wage countries would “free up labor in advanced economies to move into emerging or non-tradable occupations.” However, the speed at which this transfer took place exceeded estimates, removing work from the advanced economies, lowering the wages and benefits that labor could demand.
The elites also missed the syllogism that since multinational corporate labor costs were going to be so much lower, corporate profits were going to be so much higher–and that since corporate profits had increased, the corporate elite was going to reward itself for its probity–and the rest of the elite would see to it also was recognized as worthy of better remuneration as well.
Unless the corporate elites paid their remaining workers a higher wage and forewent paying themselves better, inequality within nations would skyrocket. No amount of retraining and goods price decreases was going to halt the relative decline in the economic status (note the wording: economic status, not the quality of life) of the numerical majority.
The elites, most of which hail from democratic societies, nevertheless failed to appreciate that globalization could not only erode the majority’s economic status, it would erode its political status as well. When the elites amass vast fortunes that they can use to buy political influence or pay for deceptive political campaigns, the purportedly sovereign majority finds itself effectively disenfranchised.
Globalization has improved in the aggregate the physical welfare of the populations brought into contact with the new global market. The “Davos lie” was that the number of individuals suffering traumatic adjustment effects would be small and the price of remediation would be limited. The truth was that if the elites did not curb their avarice voluntarily, globalization was going to shift power from labor and government to capital, with unforeseen deleterious effects upon political and economic justice.
MTC:
It’s easy to understand why Davos types would have difficulty anticipating bad consequences of increased returns to capital (vs. labor) or of increased political leverage for themselves. What’s not to like?
A few of the more perceptive, including Summers and Rubin, are just starting to show a little discomfort with the long range consequences. But they are in the position of Paul O’Neill trying to put conditions on tax cuts. Their peers are replying as Bush did to O’Neill. “I’m *not* going to negotiate with myself!” Democratic politicians have to make this case. Technocrats like Summers and Rubin can’t do it for them.
All,
I won’t claim that my survey is definitive or even statistically significant. However, I talk about trade and economics to folks across a wide spectrum of circumstances with some regularity. In my opinion at least, everyone knows that the cheap stuff in Wal*Mart comes from China and that liberal trade policies make this possible.
Relatively few folks have ever even considered the linkage between China’s industrialization and soaring commodity prices, including oil. A few people who work in the oil business, know this kind of thing. Others as well. However, the public as a whole doesn’t.
On many occasions, I have asked folks the following question. What is the relationship between the housing bubble and China’s economic boom and/or the U.S. trade deficit? Invariably, the answer has been a blank stare. Perhaps my associates aren’t sophisticated enough. However, awareness of the role of EM (not just China) financing of the U.S. current account deficit is extremely limited.
Stated differently, essentially none of the housing bubble winners see any connection to the trade deficit and/or U.S. dependence on foreign capital. Some view it as luck. Others think soaring housing prices are some sort of right… guaranteed to them as a reward for having bought into a good neighborhood.
The converse is that economic discontent is widespread. Even the winners think the country is headed in the wrong direction. Relatively few individuals can articulate something like “globalization is killing the American dream”. However, suspicions along these lines (well founded of course) are widespread. CFR publishes polling data showing a wide gap between elite and public views on several issues. The biggest divide is immigration (the public is strongly restrictionist). However, the gap on trade is quite large as well. With stagnant wages and a $16 billion Goldman bonus pool is anyone surprised?
Peter — I agree with your assessment of what Americans understand about how china impacts the US economy, and what they don’t really understand. I rather suspect that the only way americans will come to realize the extent the uS economy now depends on imported savings is if it suddenly disappears.
DRR. You have a point. The remaining restrictions — the really big ones — are hard to remove b/c they serve various social purposes (see my riff on agricultural policy, which is really an attempt to slow the corporatization of ag/ preserve more farmers than is efficient for social reasons). and the biggest restriction — as Dani Rodrik has pointed out — is on the free movement of people. but that is also the one where the elite/ popular disconnect is widest. Moreover, while Doha has gone now where, china’s exprots have quadrupled — somehow doha seems a bit tangental to many of the real issues. But us yanks also have to think of the consequences of torpedoing a major international initiative …
STS — I wouldn’t describe Rubin as a technocrat. Summers is, to a degree. But Rubin isn’t, at least not really. He just has a great deal of respect for the technocrats … or at least he was good at flattering his international staff when he was the Secretary.
I like the “we won’t negotiate” with ourselves thought. My sense is that summers and rubin both increasingly think that just paying lip service to helping the losers while not doing much in reality isn’t a viable strategy anymore.
Let’s see if I got this straight -
1. Globalization raises the standards of living of more people around the world, faster and more consistently, than any other factor in all of human history.
2. Some of the advocates of globalization expected the adjustment in rich countries to be quicker or smoother than it has been in the last five years or so.
3. Some politicians seized on this unfulfilled expectation to win votes, or to position themselves to win.
4. Therefore, globalization must be bad.
Is that about right?
* * *
Peter Schaeffer,
“essentially none of the housing bubble winners see any connection to the trade deficit and/or U.S. dependence on foreign capital.”
Bravo, bravo. This line and the entire post are very well said.
As for the “technocrat” status or otherwise of Rubin and Summers — I really only meant non-politicians. They’re Democratic policy figures (and fundraisers in Rubin’s case at least), but not exactly credible as rabble-rousing populist political figures. It’s people who can credibly speak “for the workers” who need to be pushing back on “the Davos lie”, not deep insiders like Rubin and Summers. Ideally some of the presidential candidates running as populists would take some time to discuss possible remedies with them before ad libbing some dumb promises during a stump speech. But being seen to do so could undermine their populist credibility
DOR:
You’re confusing me. You quote Peter Schaeffer approvingly, yet seem to miss his underlying premise that the “housing bubble winners” are living in a fool’s paradise.
I for one don’t think globalization is bad and especially not as a consequence of your little 4 step (spoof) argument. But I do think that globalization creates linkages to which our economic intuition has not yet adapted.
When Warren Buffett spins a yarn about two islands entitled ‘Squanderville vs. Thriftville’ and publishes it in Fortune magazine — here’s a link I just found by googling: http://www.dailyreckoning.com/Squanderville.html (you have to scroll down a fair way) — he’s attempting to help his fellow citizens develop a feeling for these counterintuitive changes in the world economy. Maybe Buffett is too old-fashioned and pessimistic, but I suspect some of those “housing bubble winners” with IO mortgages are erring a bit on the optimistic side as well.
I still say “globalisation” is a misleading word, because it implies that it is increasing economic openness that is making life harder for Americans. I do not think that this is the main cause of the change. The key event is simply the fact that China, India etc, have decided to wake up and take their share. From then on, the terms of any trade between America and the rest of world will be worse, because you have more competition (unless you can get third party countries to trade with you preferentially of course). Even if all economies were becoming more closed, the US would still get relatively poorer, and of course, to the extent that trade really is welfare-improving, every country would be absolutely poorer than otherwise.
The key event is simply the fact that China, India etc, have decided to wake up and take their share.
‘China’ and ‘India’ may be finally taking their share. Now let’s hope that the billions of Chinese and Indians also get theirs.
Even if all economies were becoming more closed, the US would still get relatively poorer, and of course, to the extent that trade really is welfare-improving, every country would be absolutely poorer than otherwise.
One benefit of this, in the U.S. at least, could be a leveling of the disparities of wealth. Envy is a powerful emotion. Let’s face it, people are bummed when they see others doing much better than themselves. If not too severe, the increase in absolute poverty may actually lead to an increase in happiness.
BTW, I’m not advocating a closed economy, just pointing out a potential silver lining.
Ponzi:
Per your distinction between ‘China’ and ‘the Chinese’ getting their share, I think we need to remember that the distributional effects of globalization here in the US are quite the reverse of leveling. If the upper tiers had been losing ground these past few years, we’d already have returned to the McKinley Tariff so central to 1890’s Republicanism and every talking head on TV would be reciting the credo of Protection!
Great handle btw, you hardly need to type anything else to make your point
STS,
Don’t feel bad; sometimes I confuse myself.
Sure, homeowners are winners, and living in a fool’s paradise. Can’t we have it both ways? Consumers get cheap goods, but less job security. Globalization creates linkages to which our economic intuition has yet to adapt, no argument there.
But, a set of institutions, rules and agreements that has produced so much good for so many people, over such a long time is under threat. The threat is from people - mainly politicians, but also media commentators - who haven’t a clue what a real difference a manufacturing-for-export job means to generations of people in poor countries.
I’ve lived in Asia all of my adult life. I’ve personally seen the results of globalization and the failures of not pursuing it vigorously enough. These opponents to proven success really tick me off.
* * *
RebelEconomist,
You and I agree about a lot of things. I use the word “globalization” very deliberately, both as what I believe to be an accurate term and to get in the face of the anti-globalization crowd.
There is a real threat in America (and Europe) today that the overwhelming success of increasingly open economies is no longer recognized, and that the next trend is in reverse. The WTO is dying, to take one example, because the rich are arguing about the price of the food produced by the poor (and, other things).
I agree that China, India, et al, have decided to wake up and take their share. They added billions to the labor pool, skewing the returns on labor and capital. But, who are we to say they are not entitled to a place at the table?
* * *
Ponzi Q. Globalization (cute),
The next time you’re in a rural Chinese village, one where every single family knew starvation in every single decade for the past millennium, ask yourself this: “What the heck was I thinking when I wrote that glib remark about Chinese and Indians vs. China and India?”
Yeah, people get bummed out about disparity. Still, it beats starving to death by quite a ways.
The next time you’re in a rural Chinese village, one where every single family knew starvation in every single decade for the past millennium, ask yourself this: “What the heck was I thinking when I wrote that glib remark about Chinese and Indians vs. China and India?”
Starvation or Neo-Liberal Globalization. Pretty black and white, eh? How could I have missed it?
Yeah, people get bummed out about disparity. Still, it beats starving to death by quite a ways.
Ditto.
I think we need to remember that the distributional effects of globalization here in the US are quite the reverse of leveling.
STS, there’s nothing to fear about disparities of wealth and, therefore, there’s nothing to fear from globalization. That is, if we assume (1) wealth does not confer political power and (2) political power does not influence the distribution of wealth. If these two assumptions don’t hold, then we got ourselves a nasty feedback going on.
What we have today is the bastard, deformed, step-child of Globalization. The intermediate result may be the same - lifting hordes out of poverty into modernity - as DOR points out, is a an easy choice, and one that few but the most Scrooge-like would argue against. But the path that we’ve chosen, or that’s evolved through a combination of successfully pursued statist (Asian neo-mecantilist) and western corporatist policy coups, will lead to an end result much different from the globalized vision presciently painted by Soros and others in the late 90s, one where the burden is shared amongst the more developed thorugh massive SDR creation and distribution to the less-developed. Instead, we seen bi-polar liquidity creation from USA & Japan, rarely seen before, that’s enabled “Globalization”. But the route, massive leveraged consumption & non-productive over-investment by the US consumer is at once, bizarre, and perverse, given the most basic investment requirements across most of the rest of the planet, not the McMansions, SUVs, and holiday homes delivered to North Americans. So while at the moment, all appears on a nice trajectory for the south, and while macro numbers appear benign for the US, the future is distinctly - and unnecessarily - unpleasant for the main sherpa of the burden, the USA. In the end, the burden will be socialized (as it would have been through coorddinated liquidity creation - across all holders of dollars - through erosion in the exchange value of the currency, inflation, or both, for the American taxpayer cannot and will not make good on their promises as Andy Xie’s pointed out rather often. But the cheated are the young people of the largest accumulators of dollars due to their authorities choices, the people of the developing world who have foregone essential investment in their countries for the sake of American consumption, and future generations of Americans now with an immense ball & chain of debt, juxtaposed a crumbling infrastructure itself crying for investment not coinsumption, and probably all the citizens of the world who will feel the pain from “a large adjustment event” that will result from the extreme imbalances between nations, and rapidly expanding inequalities within nations, accruing to a form of “Globaliztion” that no one, if they were rationally conceiving it, would have ever conceived as thus.
Cassandra
If it’s not too late to add my own sad end-of-thread mot du escalier, I have to agree with Cassandra, if from a very different ideological perspective.
The word “neoliberal,” like “neoconservative,” has become a sick joke. Of course it does not mean “liberal” in the Adlai Stevenson sense. It should be “neolibertarian.” And neolibertarians have pretty much done for libertarianism what neoconservatives did for conservatism - that is, discredited it for about the next 5,000 years. No, really, thanks, guys.
The central fallacy of neolibertarianism is that, since history offers so much evidence that minimalist states (based on simple or negative law) provide better customer service than maximalist states (based on complex or positive law, aka central planning, aka regulation), reducing the scope of law (aka deregulating) can generally be expected to improve the quality of government.
This assertion is so ridiculous that to call it a theology is an insult to theologians. It cannot withstand even a moment’s consideration. If it were true, statism would have disappeared long ago, rather than being anywhere triumphant.
In numerical optimization terms, forgetting of course that we could never describe quality of government as a number, neoliberalism assumes that the optimization surface is one big mountain with the minimal, night-watchman state at the top. A simple hill-climbing strategy will allow us to ascend this lovely monotonic slope.
I have no doubt that such a mountain exists. I just don’t think we’re on it.
I think the maximalist states are enormous Rube Goldberg machines that barely work on a good day. Removing parts from these machines is not liable to fix them. It is liable to make them break down entirely. And the most likely result of this is a whole new Goldberg module which is designed and assembled with absurd haste and attached with 20,000 rolls of duct tape. Sarbox, anyone?
Neoliberalism is not an effective strategy for decreasing the size of government. It is an effective strategy for damaging government, for discrediting libertarian ideas, and ultimately for making government larger and less effective.
So when I look at our present financial imbalances, I see a broken regulatory system. There are many interesting ideas for repairing this system. I believe it would be better to replace it. But I have yet to detect any particles of productive information emanating from those who think that it’s great that this system is broken, or that by pulling out more parts we could break it even better.