Archive for the ‘International Relations’ Category

Export restrictions the way of the future, question mark

The known exacerbator of Peak Oil is the decline in exports (i.e. not only is less oil being pumped out of the ground, but even less of that is being let out of the country, after domestic use). E.g. the Export Land Model (pic is from the Oil Drum)

wikipedia pic

So to the Financial Times. They put up an interesting article today concerning much the same thing about, in this instance, rice:

Rice prices jumped 30 per cent to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5bn people.

The increase came after Egypt, a leading exporter, imposed a formal ban on selling rice abroad to keep local prices down, and the Philippines announced plans for a major purchase of the grain in the international market to boost supplies. Global rice stocks are at their lowest since 1976.

The Egyptian export ban formalises a previously poorly enforced curb and follows similar restrictions imposed by Vietnam and India, the world’s second- and third-largest exporters. Cambodia, a small seller, also on Thursday announced an export ban.

These foreign sales restrictions have removed about a third of the rice traded in the international market.

The immediate price effects of course are about as “no” as brainers get. This is an interesting phenomenon to watch, though going forward. Will it expand into other sectors of the agriculture economy? It ought to scatter no end of eggshells beneath international relations.

If the days of tit-for-tat diplomacy (referring to tariffs) were to return, we really ought to ask ourselves, country by country: what can we threaten to withhold in retaliation? Some countries, currently wealthy and powerful, may not much like their answer.

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Cafe Hayek, meet the Treasury Department

The US Treasury Department on Thursday said it agreed with Abu Dhabi and Singapore on a set of principles for sovereign wealth funds that specifies politics should not influence their decisions.

The foreign-controlled funds, many based in the Middle East, have aroused U.S. lawmakers’ concern because they have poured billions of dollars into large stakes in Wall Street firms and other businesses and fanned fears the U.S. was losing control of its destiny.

The Treasury has been pressing since last autumn for the IMF to develop the ”best practices” guide. The funds have become increasingly active in buying U.S. assets with growing foreign exchange reserves from oil and international trade.

And that would be Don Boudreaux of Cafe Hayek – who would most likely remind us of the practicalities of trade: running up monster deficits, needing and attracting capital, one gets the idea.

Mostly I’m just unsympathetic to such boorishness by a system that desperately needs the food, even while it bites the hand providing it. I sure do like to see tribalism weed its way into both international relations and international finance, though.

Sovereign Wealth Funds

My position on Sovereign Wealth Funds (“i” before “e” except after “c” and in “sovereign” – very confusing) has hopefully-consistently been with regard to their potential for destabilisation. I don’t trust them any less – in fact, probably more – than hedge funds. Mostly because I would expect Sovereign Wealth Funds for most nations to (a) take very long and stable positions, and (b) take very solid and far-horizon’d positions specifically when, say, bailing out banks in tanking developed markets.

This was reinforced when I was discussing the matter with a colleague from Saudi Arabia, and who works within their finance ministry, and who worked within the setup for the Gulf Common Market. As far as he was aware, there was little more at work in the gulf funds than taking up cheap exposure in foreign financial markets. I still distrust, say, Chinese Sovereign Wealth Funds (because their government has stated publicly their willingness to do things like push economies around when beneficial).

At Davos, it seems, the issue looms large:

The funds are controversial in countries like the U.S. because they already have a lot of firepower, and it is growing fast thanks to high oil prices and U.S.trade imbalances. Richard Fuld, chairman and chief executive officer of Lehman Brothers (LEH) said the wealth funds, whose present value he pegged at as much as $3 trillion, could command as much as $20 trillion in five years. “The impact will be huge,” he said, though he noted pension funds command some $60 trillion.

While few U.S. and European politicians have raised objections to the large stakes various funds have taken (BusinessWeek.com, 12/7/07) in blue chip U.S. and European banks such as Citigroup (C), Morgan Stanley (MS), Merrill Lynch (MER), and UBS (UBS), greater tensions may well be brewing as the funds grow larger and more ambitious. The notion of foreign entities buying up blue chip assets goes against the grain in the U.S. and other Western countries. Perhaps the greatest danger arising from the huge growth of these funds isn’t that they will buy strategic assets in the U.S. and elsewhere, but rather that they will trigger a wave of protectionism that could gum up the international financial system.

One of the interesting things about them is that, while hedge funds and equity groups were ‘ours’, we have no money for a Sovereign Wealth Fund (or we did, but we blew it in Iraq). So we have at best a small seat in the room – probably not at the table. That frightens us. I like the idea, though, that non-US/EU Sovereign Wealth Funds are bad because of our protectionist reaction to them. Are we seriously suggesting that the Gulf, China and Russia have to save us from ourselves? Sit by while we continue in smugness with our business as usual.

We’ve been trying for a while now to make OPEC bend itself to our macroeconomic convenience. It’s probably time we just stopped trying.

Only briefly seen was this sort of response:

Muhammad al Jasser, the deputy governor of the Saudi Arabian Monetary Agency, the central bank, which manages most of Saudi Arabia’s overseas assets, was more relaxed. But he brushed off Summers’ suggestion that the funds would be wise to adopt a good-conduct code to ease worries, claiming there has been huge resistance in the U.S. to regulating hedge funds and rating agencies—even those “who created turmoil in the world economy.”

He might also have reminded us that the money controlled by Sovereign Wealth Funds currently is still a lot less than the amount that said turmoil is going to cost the world economy (how much, already, in central bank intervention money, has it cost? A few Sovereign Wealth Funds’ worth, certainly).

Should remittances count as foreign aid?

This is no small matter. The US, for example, has consistently (until recently) given the least (per GNI) amongst the OECD:

ODA chart

They recently moved off the bottom (while pipping Japan as the no. 1 in dollar terms). More generally, the fabled promise in the 1970s to double aid as a percentage of GNI has gone walkabout for everyone – it has about halved, as I understand it. The shortfall on this promise is some USD3.1tr, now (with USD2.6tr having been spent – 2005 dollars). Denmark, Norway, Sweden, Luxembourg and the Netherlands the generous exceptions to that rule.

Using the US as an examplar, again, the concept of Foreign Aid is also repeateadly muddied by Military Aid (accounting practices that called military assistance ‘foreign aid’ to make the money numbers look better after the Asian tsunami, an excellent example in international relations) and Food Aid (previously seen here, last Summer).

Across the world, aid aid is declining in proportion to our wealth – illustrated well, I think, by the Davos World Economic Forum consisting almost entirely, this year, of financial murmuring and jumping at the shadows of Sovereign Wealth Funds.

This is context and motive. If we send the army to help dig out a village, is that budgeting expense not Foreign Aid? If we give migrants jobs, and then those migrants send USD300bn of the money they earn back home (and with remittances growing substantially faster than Foreign Aid or Foreign Direct Investment), is that not Foreign Aid?

No way, says Ambassador Munir Akram of Pakistan, until recently chairman of the 130-member Group of 77 developing nations.

“We have to be very careful not to allow these remittances to be portrayed by the North as contributions on their part to development. They are trying to do this,” he told IPS.

Akram said Pakistan receives about 4.5 billion dollars annually as remittances from workers worldwide.

As a general rule, he pointed out, those who are poorest among the migrants send the most money to their families back home.

“These are our people, our workers. We invested in them, they studied in our countries, they got their education, and they are sending a small proportion of their earnings back home,” he said.

Akram said there is a move by Western donors to treat expatriate earnings as part of development assistance to developing nations.

He said these unnamed donors want to count remittances from North to South, but at the same time, they don’t want count repatriation of profits — from South to North.

“They will try and project expatriate remittances as an element of the contribution from the North to the South as a reason for not meeting other aid targets. We need to expose them,” said Akram, the permanent representative of Pakistan to the United Nations.

The answer is “no”, any more than my purchase of Oxfam coffee should be counted as Foreign Aid, for a couple of reasons. First, as above, it’s a scam. We can’t let our international aid accounting consist of shenanigans – that’s what we call a slippery slope (yes, before we know it, Rick Santorum will be given dogs to countries for their people to marry. Or something).

The second is more straight-forward for me, probably less straight-forward for some. Migrant workers are no different from any other worker (besides getting a rawer deal in just about every dimension, of course). They are hired according to the market supply of their labour, and paid according to demand for what they help produce, and the Marginal Revenue Product of Labour in what they produce. Less so, actually (refer to the part about them getting the raw deal).

There is no factor in the labour market for migrants that includes remittances. They do not demand higher wages because of the higher costs they incur as remitting migrants (trademark, I think, for that one), and firms most certainly do not factor in that need when they make a wage-offer. There is nothing deliberate about financing remittancing, from the perspective of the domestic OECD labour market.

The domestic economy involved loses income from remittances, yes – but (a) it allows, freely, the markets that service remittances to form, and make a profit, which means everything is working smoothly (in fact a lot of remittances are still made through unofficial channels, meaning the domestic economy is inefficiently benefitting from the practice, and should improve market-based services for remittances), and (b) the destruction of domestic income/money supply due to remittances pales in comparison to things like military expenditure.

If anything, remittances should be considered a better investment than expenditure by migrants: bullets are destroyed, yet their manufacture means a job. Given their income, a migrant’s spending of that money would be on consumption, which is the slow contributor to economic growth. Well, by sending money home, migrants are boosting the GDP in, and living standards of, underdeveloped countries, strengthening them as markets for exports – and future sources of skilled labour – for the OECD.

Making remittances not aid.

As the IPS article also details, the emigration of skilled labour – particularly health professionals – is a serious and growing public health and human capital development issue for under-developed nations.

So, a compromise. The OECD should start adding remittances by skilled migrants to our Foreign Aid, but we should subtract the balance of their wage or salary from Foreign Aid, since our having them means their own country is left behind. Seems only fair.

Davos: hypocrisy at day one

Wow. Just… wow. I mentioned, previously, that Davos sounded like it’d be a rich man’s burden kind of event, but this is just mind-blowing.

The chief executives of Coca-Cola Co., Nestlé SA and others will warn the World Economic Forum in Davos this week that the world is running out of water, threatening conflict, higher prices and lost production.

Some will likely then strap on skis to take advantage of the Swiss resort’s glistening slopes. But the pistes of the Alps are also contributing to the world’s water woes.

Europe’s ski resorts have been racing to install snow-making machines to bed the slopes with artificial snow as snowfall becomes less reliable and resorts compete with one another to offer guaranteed good skiing. That is great for skiers and businesses that rely on them, but not so great for local water supplies.

Snow cannons suck up a lot of water. As much as 35% of all water used in Davos now goes to making artificial snow, according to a report released last month by the Swiss Federal Institute for Snow and Avalanche Research to examine the net benefits of snow-making machines. Davos bought 16 additional snow cannons for this season, according to town authorities.

wsj pic

The article is kind enough to include some non-comforting information, too often not seen in such information, concerning water use generally, “moving forward”:

Based on current usage patterns, about 30 countries will be short of water by 2025, according to the Sri Lanka-based International Water Management Institute, a nonprofit supported by 60 governments. That is mainly because most irrigation for agriculture is inefficient, while demand for meat, wheat and other high-protein foods that require a lot of water is growing rapidly as people in China and India become wealthier and more urban.

But the battle against climate change is sucking up water, too, creating what analysts in the field call an accelerator effect. Take biofuels, produced to cut use of fossil fuels such as gasoline that spew the carbon dioxide that causes global warming. Biofuels are mostly made from crops that have to be grown, which puts pressure on land and food prices, as well as on water resources. It takes on average 1,000 liters (260 gallons) of water to make one liter of ethanol-based biofuel, according to the IWMI. For gasoline, it takes 2.5 liters.

The same goes for some of the alternatives to coal-fired power plants that produce less carbon dioxide. Hydroelectric power requires large quantities of water. So do the cooling systems in nuclear-power plants. Clean-coal technologies, too, use more water than regular coal. Overall, industry accounts for around 23% of global fresh water use, compared with around 70% for agriculture and 7% for residential use. Demand is rising in all three areas.

“Some people call water the oil of the 21st century. Whether you like that description or not, one thing is clear, availability of water will be a key driver in the development of the world’s economy and government policies in the next decade,” said Andrew N. Liveris, chairman and chief executive of Dow Chemical, in a statement.

Still, though – blowing water out of snow-cannons during a World Economic Forum meeting is pretty moronic. Particularly compared to, say, not doing so, thereby highlighting exactly one of the world’s most significant problems.

I’m sure the poor countries of the world will be delighted when they hear about how their saviours treat fresh water, while meeting to discuss the needs of the global economy.

Economic uncertainty to dominate Davos

From today’s Financial Times:

The hot ticket at Davos last year was the “dialogue in the dark” event, when delegates at the World Economic Forum were plunged into complete darkness to experience the loss of sight. This seems an apt metaphor for the blindness of the world’s elite to the fragility of the global financial system.

Unlike the Financial Times itself, of course, whose writers all saw this coming from miles away…

To continue.

With the state of the financial world having seen a dramatic turnabout in the past year, WEF organisers have staged a series of high-profile debates on financial stability and banking risk, and there will be a flurry of senior bankers in attendance, ranging from JPMorgan’s Jamie Dimon to Goldman Sachs’ Lloyd Blankfein – as well as some of the newly appointed Wall Street chief executives such as John Thain at Merrill Lynch.

They will be joined by a clutch of senior European policymakers – such as Jean Claude Trichet of the European Central Bank and many European finance ministers – allowing a flurry of transatlantic behind-the-scenes debate about global policy responses to the credit crunch before next month’s crucial meeting of the Group of Seven finance ministers and the spring meetings of the International Monetary Fund and World Bank.

Another notable swathe of attendees – which marks a contrast with earlier years – comes from the sovereign wealth funds, and other manifestations of the cash that continues to swirl around Asia’s exporters and the oil-rich Gulf. Officials from the China Investment Corporation and Dubai International Capital, for example, will all be in attendance – and a planned debate on their investments could be a highlight of the meeting.

Indeed, sovereign wealth funds could overshadow one topic that was prominent at last year’s event: the role that private equity now plays in the global economy. For while the Harvard professor Josh Lerner is due to release a landmark report on the sector – which was commissioned at last year’s Davos event – the turn in the credit cycle means that buy-out funds are no longer generating so much fear.

It would appear, then, that the days of Davos meeting concerning themselves with what to do about the world’s poor and the world’s problems are over, for now. We have our own problems – the poor are on their own. I should be very surprised if these rooms of wealthy elite are brimming with debate over the Copenhagen Consensus.

This, specifically, was actually worrying (for me):

Another sign of the shift in sentiment is the inclusion of a new set of topics on this year’s agenda: competition for global commodity resources. For the first time Davos is staging a series of debates about food supplies – a topic that could generate lively debate given the recent sharp rise in many agricultural commodity prices, and the political challenges this is generating in emerging economies.

Yes, that’s the OECD core of economic power, getting together to trade notes on securing the world’s stockpiles of commodities. Meaning the developing world is probably about to fall about another century behind.

Going postal

I have such a thing for postal economics.

EU delaying opening up of competition in Europe’s postal sector

European Union governments on Monday pushed back the full opening up of competition in Europe’s €88 billion postal sector by two years, until 2011, in the face of strong pressure from some national postal monopolies.

Although resistance was led by countries nervous about foreign competitors poised to swoop in, EU officials rejected suggestions that nationalist politics were at play in the $125 billion market.

Well, yes. They would.

This is, of course (and as I painfully revisit) while Britain’s Royal Mail lost its monopoly, lost it early, lost more customers than we could count, faster than we could count them anyway, and now faces the likes of TNT.

So … Britain’s reaction?

The commission, backed by Britain and Germany, has said that it was unfair that some countries had fully opened competition while others had done nothing. It has demanded that all EU nations open up their postal services and put independent regulators in charge.

So far Sweden, Britain and Finland are the only EU countries to have scrapped their postal monopolies completely. Plans are under way do so in Germany and the Netherlands by January. In Germany, new competitors have already emerged to challenge Deutsche Post in certain areas, giving them ready-made networks when full competition takes effect.

British officials welcomed the proposal, saying that the opening up of the British postal sector in January 2006 had vastly improved the performance of Royal Mail, the national postal operator.

Given this whole agenda was apparently laid out some 15 years ago, it is taking on positively NAFTA-esque dimensions (Eco 1 students will recognise that as a reference to Mexican sugar).

Finally, the International Herald Tribune was also kind enough to bring this to our delighted attention:

“This does not signal a victory for the forces of protectionism in Europe,” said Oliver Drewes, a spokesman for Charlie McCreevy, the EU’s internal market commissioner. “This will enhance competition.”

Brussels. The gift that keeps on giving (go read about Boris Johnson’s poor daughter, some time).

Royal mail update x

Oh, Royal Mail. Why do your workers insist you bleed slowly to death?

The main postal union, the Communication Workers’ Union (CWU), has announced further details of its forthcoming UK-wide strike action.

Its 130,000 Royal Mail members will walk-out for 48 hours between noon on Thursday, 4 October, and the same time on Saturday, 6 October.

A second 48-hour strike will take place from 0300 BST on Monday, 8 October, to the same time on Wednesday, 10 October.

What is it about this time? The same thing it’s been about every time.

At the centre of the dispute is the CWU’s objection to the Royal Mail’s 2.5% pay offer and modernisation plans.

The union claims the shake-up plans will put about 40,000 jobs at risk.

It just doesn’t change. This time around, managers look like joining:

Royal Mail managers look set to join postal strike action over cuts to pensions.

The managers have previously stepped in to provide cover during strikes by Royal Mail workers but they look likely to join the strikes, according to the Unite union, which represents 12,000 Royal Mail managers.

I’m somewhat sympathetic to the Royal Mail. Somewhat – as I’ve said before, irregardless of the reasons why the Royal Mail has come to this point, 40,000 of its jobs are at risk because it has lost its monopoly on mail delivery in the UK. Soon it will also lose its functioning monopoly on “lest-leg” (i.e. to your door) deliveries. And it’s bleeding customers.

It can lose 40,000 jobs and fit in, in this new world, or it can keep the 40,000 jobs and lose itself. The insistence of workers on striking just seems to me cutting off one’s nose to spite one’s face. Or however that goes. This insistence is common, and commonly justified, by unions. It can easily be true that the a company is being pared back while its own executive level bathes in cocaine and leather-upholstered meeting rooms. I just don’t see that at the Royal Mail.

And I’m Australian – I won’t even cross a picket-line. Also, I’m less sympathetic to going after pensions. These people worked to your conditions, for the fixed income in retirement that you promise. Leave them alone.

In the interests of balance (not to mention interest), another perspective:

Mail Bosses Want to Smash Union

With the announcement of new strike dates by the Communication Workers’ Union (all out on 5, 6, 8 and 9 October, with rolling action after that), the Royal Mail bosses have decided to go for broke — for instance by announcing a drastic attack on postal workers’ pensions.

Okay.

He said the Prime Minister, John Howard, had been “drunk on power”

Ah, politics:

The Labor leader Kevin Rudd and his deputy Julia Gillard today unveiled the long-awaited transition details of Labor’s plan to rip-up the Howard Government’s WorkChoices plan and abolish Australian Workplace Agreements.

It also announced it would keep the Government’s rules on secondary boycotts and preventing union bosses from demanding entry into a workplace without notice.

The Prime Minister, John Howard, said Labor’s policy was “by the union bosses for the union bosses” and accused Mr Rudd of going through a “charade” that he had stood up to the unions.

“Labor’s policy will mean more power to the union bosses to push industry wide wage claims, leading to increased inflation and upward pressure on interest rates,” Mr Howard said.

He said Labor’s plan would overturn the rights that small business have to run their businesses free of interference from the trade union movement.

ACTU president Sharan Burrow welcomed Labor’s policy, saying it would improve rights in the workplace but said the union movement did not support elements of the transition plan.

Ms Burrow said the ACTU believed Labor could have abolished AWAs sooner, opposed the decision to keep the Government’s limits on union right of entry into workplaces and opposed the decision to allow workers earning over $100,000 to not be covered by awards.

Australian Industry Group chief executive Heather Ridout said “important concerns” remained about Labor’s plan and business was still unhappy about the policy to scrap AWAs but the transition arrangements announced today “appear workable”.

Making it rather a nice move, what? I did skip, in the interests of making everybody look criminaly vacuous while a country’s industrial relations would rather have, say, grown-ups in charge, some other details that demonstrate the policy is more worker-friendly than not. I wouldn’t say it’s especially Union-friendly, though but, then, I’m not the Prime Minister. Even the wankers at the Wall Street Journal feel inspired to be dicks in Rudd’s direction, for Cliff’s sake.

Another of the Prime Minister’s responses is, by now, a familiar friend:

“Labor’s industrial relations policy is not a plan to keep the economy strong. It is a deal cobbled together to buy the further financial support of the union bosses until election day.

One can almost hear, within Howard’s whiny voice, a cry of despair that, unlike his BFF Bush, he does not live in a country in which he just say Labor will cause terrorist attacks. I can’t imagine that he seriously thinks that being a crybaby will alter the opinion polls favouring Labor as economic managers – although the fact that it was 39% to 36%, with fully 25% undecided, should demonstrate to both sides that the rest of us would like them to grow up.

Excellent article on protectionism in Foreign Affairs

It took me a while to get around to the July/August issue of Foreign Affairs (journal of the Council on Foreign Relations). Interesting episodes in the souring of West-Western Communism relations (I’m not sure how to describe it):

The Ukraine is just wasting perfectly good health-care or child-services money (they truly are like the rest of us), but Russia’s isolationism is quickly becoming quite stark. If Bush employs his North Korea diplomacy, I imagine he’ll just pretend Russia doesn’t exist, while invading Iran. It should all go exceedingly well.

But back to the very good article in Foreign Affairs:

A New Deal for Globalization

Globalization has brought huge overall benefits, but earnings for most U.S. workers – even those with college degrees – have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.

Non-increasing real incomes is not news, but it is nice to see it addressed more widely, as well as the false meme that wealth is exploding for all of us (in some of our faces, in fact). Electorally, the feeling is more and more that globalisation is too much for us, and protectionist tendencies are on the rise.

Advocates of engagement with the world economy are now warning of a protectionist drift in public policy. This drift is commonly blamed on narrow industry concerns or a failure to explain globalization’s benefits or the war on terrorism. These explanations miss a more basic point: U.S. policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.

The best way to avert the rise in protectionism is by instituting a New Deal for globalization — one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system. The notion of more aggressively redistributing income may sound radical, but ensuring that most American workers are benefiting is the best way of saving globalization from a protectionist backlash.

Just what the “war on terror” reference is for, I don’t know (?). The problem, though, is an example of economic rationalism – the assumption in basic neo-classical economics that economic agents (you) are fully-informed, and making rational decisions. Why are we blaming globalisation and China for something that ought to lie, first, at the feet of good old US of A manufacturers and other industry, and the government? Is the US just some weak crybaby? Other countries are in the global market and doing fine (so fine in Australia, in fact, we’re going to fall apart if we vote for the wrong party).

Actually, I find the crying about the harshness of international trade, by a country (i) so subversively protectionist as the US, anyway, and (ii) so tough-posing, near enough to ironic to qualify, by modern standards.

Trade Protectionism

As it is called – which I don’t like much. Trade Preventionism is more appropriate, for it protects very little. At best it forces consumers to pay very high amounts to keep relatively few jobs in the hands of American workers, without offering them a choice in the matter.

Consider the two basic approaches to protectionsim – tariffs and quotas. Tariffs are a tax on imports. Quotas are a strict limit. Both are designed to increase the price of imported goods, when the world price of something is less than the US price. They are ‘preventionist’ because they amount to a withdrawal from international competitiveness, and favour focussing solely upon the ability of domestic producers to make money in a skewed domestic economy.

Consider the basic example (you’ll find this over at Wikipedia):

tariff graph

If we call this the US, we have a domestic equilibrium price of USD70, with Y* being sold and Producer Surplus (you can consider it profit, for our purposes) equal to the LAB triangle.

Enter international competitors, though, and the price drops to the world price Sw = $50. Now we’re buying Y2, but we’re importing the amount (Y2-Y1). US producers are only selling Y1 at $50, and their Producer Surplus has fallen to the triangle LFG.

Now we know where protectionism comes in. Those producers hire some lobbyists. They complain about this loss of Producer Surplus, loss of money, loss of American jobs as production scales back from Y* to Y1, etc. Similarly we complain to our representatives, either as our jobs are lost or our wages, benefits, etc. are scaled back. Either way, pressure is on the government to defend us against the evil world supply curve Sw.

Suppose – as in this case, a tariff is introduced. A tax of $10 per item on imported goods. The world price Sw = $60, now. We only consume Y4, and we only import (Y4-Y3) because US producers can now sell Y3, up from Y1. Producer Surplus increases to the area LCD, and we have more jobs, and (possibly, though unlikely) higher wages and benefits.

Now the flipside – who pays for this? Being a tariff, the government actually makes money from this (in the case of a quota, restricting imports will have the effect of increasing the price, but the government won’t make any money). Instead of Producers and Workers, what about the effect on you as a Consumer? What once was $50 is now $60. What you once consumed Y2 of, you now consume only Y4. Your Consumer Surplus was only the area KBA without trade, was KJF with free trade, and declines now to KEC with restricted trade.

You’ve lost out. Have you lost money? Consumer Surplus is hard to quantify, still less monetise. Think of it as the difference between what you would have paid be what the price was (so, ladies? When men make fun of you arguments about saving money buying shoes on sale, you are in fact behaving rationally. So kick them in the nuts). The loss in Consumer Surplus overall, though, can be. The areas of those triangles are money: Price x Quantity (halving one axis, yes I know).

The textbook I use for Economics lists numbers from the book, Measuring the Costs of Protection in Japan, to demonstrate the costs, in loss of Consumer Surplus, per job saved (all US dollars):

  • Rice: $51,233,000
  • Natural Gas: $29,987,000
  • Gasoline: $6,329,000
  • Paper: $3,818,000
  • Beef, Pork and Poultry: $1,933,000
  • Cosmetics: $1,778,000

That’s per job. Now, per individual consumer that may not come to much, but is USD51m a reasonable amount to spend on one job for a rice producer? This is key to trade protectionism: understanding what, as a consumer, you lose.

Wikipedia’s discussion of this extends beyond this simple example, which has kept Consumers and Producers separate, but the principle remains. I’m not suggesting politicians try to frighten us with stories of price increases – I’ve long-since had enough of being treated like an idiot child by the US government – but this should enter somewhere as a reality of the situation. All that money poured into protecting relatively few jobs is taken away from something else for which it could be used.

Similarly that grey rectangle in the graph, area DEIH: this is called Deadweight Loss, and it means exactly that. It used to exist, as goods bought and sold, and now doesn’t. It represents resources not being allocated to this market, when we want them there. Remember, economics is all about allocating scarce resources.

The New Deal for Globalisation

This is the authors’ recommended response. Of the two effects of world price Sw, the loss of jobs and income is the important one. The loss of Producer Surplus is, frankly, not. As long as the industry is profitable, producers will exist, at the most efficient scale. Free Trade and US manufacturers on the scale Y1 is the efficient level. Tariffs and Y2-scale manufacturers is not. In some instances, the protection also is demanded not of industries or firms but of profits, which is less important. I hear this, as a health economist, from PhRMA all the bloody time, crying about how non-obscene their profits are. I’m not sympathetic. This is why Adam Smith despised corporations (and, by extension, shareholders).

From the article:

Truly expanding the political support for open borders requires a radical change in fiscal policy. This does not, however, mean making the personal income tax more progressive, as is often suggested. U.S. taxation of personal income is already quite progressive. Instead, policymakers should remember that workers do not pay only income taxes; they also pay the FICA (Federal Insurance Contributions Act) payroll tax for social insurance. This tax offers the best way to redistribute income.

The payroll tax contains a Social Security portion and a Medicare portion, each of which is paid half by the worker and half by the employer. The overall payroll tax is a flat tax of 15.3 percent on the first $94,200 of gross income for every worker, with an ongoing 2.9 percent flat tax for the Medicare portion beyond that. Because it is a flat-rate tax on a (largely) capped base, it is a regressive tax – that is, it tends to reinforce rather than offset pretax inequality. At $760 billion in 2005, the regressive payroll tax was nearly as big as the progressive income tax ($1.1 trillion). Because it is large and regressive, the payroll tax is an obvious candidate for meaningful income redistribution linked to globalization.

A New Deal for globalization would combine further trade and investment liberalization with eliminating the full payroll tax for all workers earning below the national median. In 2005, the median total money earnings of all workers was $32,140, and there were about 67 million workers at or below this level. Assuming a mean labor income for this group of about $25,000, these 67 million workers would receive a tax cut of about $3,800 each. Because the economic burden of this tax falls largely on workers, this tax cut would be a direct gain in after-tax real income for them. With a total price tag of about $256 billion, the proposal could be paid for by raising the cap of $94,200, raising payroll tax rates (for progressivity, rates could escalate as they do with the income tax), or some combination of the two.

This is, of course, only an outline of the needed policy reform, and there would be many implementation details to address. For example, rather than a single on-off point for this tax cut, a phase-in of it (like with the earned-income tax credit) would avoid incentive-distorting jumps in effective tax rates.

This may sound like a radical proposal. But keep in mind the figure of $500 billion: the annual U.S. income gain from trade and investment liberalization to date and the additional U.S. gain a successful Doha Round could deliver.

Successive Treasury Secretaries, Reserve Chairs, etc. also fall against protectionism. The current Treasury Secretary also wants corporate taxation fixed (fat chance for the next few years)

Personally I just don’t see the Doha round coming off successfully, but who knows. Stranger things have happened. The authors’ argument about the payroll tax is also one found, every now and then, in relation to the minimum wage (just increased for the first time in a decade). Both arguments are assuming, perhaps naively, that payroll-tax savings will be passed on as income, although there’s no reason why legislation could not force the matter. It would be popular to pass, and it would not distort the labour market.

Can it work? It can, but in the same field in which universal health care and no more lobbyists can work. It is easy to look at a political economy of creating fixes for problems that used to be fixes for problems that used to be fixes… just look at the greater mess the tax code has become, under Bush. It’s paradoxically something only a government can fix, but at the same time something only a government could cock up this badly. We’re more likely to get trade barriers, lose consumer surplus, get all manner of needless lobbyist-lawyer legislation helping out this or that or the other industry or labour group, and so on and so on.

When a government has the temerity to ban all private campaign financing, then some of this intelligent government, about which we read, might begin to be observed. Until then, I won’t hold my cynical breath.