Can Progressives Do Arithmetic?

Dean Baker in truthout: Can Progressives Do Arithmetic?:

The reality is that the price tag for most anti-poverty programs is quite small relative to the total federal budget. For example, Head Start accounts for approximately 0.2 percent of the federal budget, or 20 cents of every $100 of spending. Less than 60 cents of every hundred dollars of federal spending goes to TANF [Temporary Assistance to Needy Families]. The appropriations for child care subsidies, assistance for the homeless, and the nutrition programs for young children are considerably smaller.

Yet most people believe that these anti-poverty programs take up a large share of the budget. When the question is asked on opinion polls, people regularly cite welfare as one of the largest items in the federal budget.

The confusion on this point is understandable. Most people never hear that TANF costs 0.6 percent of the budget or that Head Start only takes up 0.2 percent of federal spending. They hear that TANF costs $16 billion a year and that Head Start costs $6 billion. These sums sound very large and scary. They are vastly larger than the amount of money a typical person will see or deal with in his lifetime. Since almost no one, apart from a few DC policy wonks, has any idea of how large the federal budget is, the impression that most people get from these budget numbers is that the country is spending an enormous amount of money on these programs.

If people believe that we are already spending vast sums on welfare-type programs, they are quite reasonably reluctant to spend more. After all, if we are spending a huge amount of money on anti-poverty programs already, and so many people are still in poverty, why would we think that spending even more money would make any difference? Also, if people think that a large portion of the budget is going to anti-poverty programs, then they may think that increasing the size of these programs will mean a big tax hit – or conversely, that cutting these programs would allow for large tax cuts. For these reasons, it is important that the public have some knowledge of the true size of these programs if they are to gain more popular support.

If the Politicians Say It, It Must Be True

Dean Baker illustrates the hazard of taking pronouncements about the effects of trade agreements at face value. Oppose a giveaway to ADM, and you must be against free trade and apple pie.

If the Politicians Say It, It Must Be True:

Look, the people structuring the Doha round are politicians. It should not be news that politicians are not always entirely truthful in their public comments. In other words, just because they say that the purpose of the Doha round is to help developing countries, this does not mean that the real purpose of the round is to help developing countries.

The evidence actually shows that the Doha round is likely to do very little for developing countries and will actually hurt some who are net importers of agricultural products. (The removal of rich country subsidies causes agricultural prices to rise, which means that these countries will have to pay more for their imports.) Based on projections of gains, a reasonable person might be led to believe that the main purpose of the Doha round is to assist politically connected grain traders like Archer Daniels Midland.

Economists are from Mars, Europeans from Venus

John Thornhill at Economists are from Mars, Europeans from Venus:

A Martian economist visits earth. Not only does its arrival prove — as many suspected — that some economists really do live on other planets, it also provides fresh perspectives on our world.

Earthling economists chatter excitedly to our visitor about the stunning growth rates in China. This miracle economy of the 21st century has overtaken France and the UK to become the world’s fourth biggest. Europe is the past; the US is the present; and China is the future, they proclaim. The centre of economic gravity in the world has shifted decisively towards north-east Asia.

Our Martian friend scratches its heads. “When my economics professor last visited earth in 1945 he told me that the Europeans had just experienced a terrible civil war in which 36m people had been killed, including many of their most brilliant minds. Now you tell me that 60m French people produce almost as much economic output each year as 1.3bn Chinese, who have been the dominant economic power for most of your planet’s history. What is more, the French can do this while working 35-hour weeks and producing 246 different types of cheese. How did this economic miracle come about?”

The earthling economists stare at each other and then down at their feet. “We don’t normally look at things that way. We tend to say that Europe is suffering from ‘eurosclerosis’, you know, low growth, high unemployment, bloated welfare states and a looming demographic crisis.”

“Maybe I need to talk to historians rather than economists to see how all this came about,” says our Martian friend, blinking his eyes and flitting back several months in time to hear a lecture in Washington on The Future of Decadent Europe.

(Via Mark Thoma )

The incompetent Henry Paulson

The blogospheric response to the appointment of Henry Paulson to replace John Snow has been generally, if not uniformly, positive. Max Sawicky
begs to disagree:

All this swooning over the new Bush appointee for Treasury Secretary, not least from leading Democrats like Chuck Shumer and Robert Rubin, makes me want to puke. I suppose some of it is relief that we didn’t get someone certifiable, like my pal Steve Moore. Standards continue to fall. …

Update: Menzie Chinn suggests that, whether he’s competent or not, Paulson’s accession isn’t likely to have much impact on administration economic policy. Nice graph.

Update: Paul Krugman offers Paulson some advice, and Mark Thoma kindly leaks a bit of it through the NYT paywall (thanks!).

Right now, you’re being flattered. You have a natural urge to be a team player. But if you play the game your new bosses want you to play, your credibility with the public will evaporate in no time at all. And when you’re no longer useful to your new friends, you’ll be tossed aside.

Where did all the money go?

Kevin Drum:

The average 40-year-old guy made $44,000 in 1973, and that was as good as it ever got. Today that number is about $40,000. It’s gone down even though the American economy has nearly doubled on a per-person basis during that time.

So where did all the money go? What happened in 1973 that suddenly stopped wage growth for half the population in its tracks? And what should we do about it?

The New York Times Discovers Sweden

Dean Baker: The New York Times Discovers Sweden:

The Times had an article this morning that reports on Sweden’s success in sustaining healthy rates of economic growth, while also ensuring a high degree of economic security for its workforce. The article is mostly fair, but is misleading on a few points.For example, the article reports that Sweden overhauled its Social Security system in the mid-nineties and added private accounts. This is true, but it would have been helpful to add that the defined benefit portion of Sweden’s system is still approximately one-third larger (relative to wages) than the current U.S. system.

Feeding the Beast

Kevin Drum:

FEEDING THE BEAST….What happens if you lower the cost of something? People buy more of it. What if you raise the cost? People buy less of it.

So: what happens if the federal government reduces taxes and runs a deficit — thus lowering the “cost” of government? People will “buy” more government.

This actually makes a strange kind of sense — if there are no additional taxes to cause you pain, why shouldn’t you support big government? — and William Niskanen, the chairman of the Cato Institute, says he now has research to back this up:

Niskanen recently analyzed data from 1981 to 2005 and found….”no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.

….”I would like to be proven wrong,” says Niskanen. No wonder: for the modern conservative coalition, the implications of his findings are discomfiting, and in a sense tragic.

In other words, “starve the beast” doesn’t work. If you cut taxes, all you do is encourage additional spending.

The article quoted is in the June issue of The Atlantic Monthly, which as of yesterday was not on our local newsstands.

What’s the Problem With Less Crowding?

Dean Baker, What’s the Problem With Less Crowding?:

It would be reasonable to think that a densely populated island with exorbitant land and housing prices would be happy to alleviate its crowding problem. That’s not the thinking at the Washington Post.

The Post had an article this morning noting the surprising fact that the number of obstetricians in Japan is declining along with its dropping birth rate. The article notes that Japan’s population is currently shrinking, and that if current trends continue, its population will fall from over 127 million to just 100 million by 2050. The Post then describes this drop in population as a “problem.”

Well, fewer people, rising capital labor to ratios (and therefore higher wages), less crowding, and less pollution is not a problem in any economics I know. Maybe the Post will explain its reasoning in some future article, but for now, this front page story simply doesn’t make sense.

Might a similar argument not apply to the San Mateo County coastside? Or to the Bay Area in general? The population of San Mateo County has declined in recent years; why is that not a good thing?

Were the French students right after all?

David R. Howell and John Schmitt suggest [PDF] that they were.

The widely held view, repeatedly parroted in the U.S. media, that French economic performance is poor and that French employment performance is catastrophic, flies in the face of the evidence. And the conventional wisdom that the French students are wholly misguided in their desire to maintain stronger employment protections than prevail in the United States is mistaken and offers a striking example of the ability of free market ideology to trump the facts.

With substantially higher hourly productivity, the French economy has produced almost as much employment growth as the U.S. since President Bush came into office (3.1 vs 3.5 percent growth between 2000 and 2005).12 The two countries have almost identical shares of young people in unemployment — the high youth unemployment rates so often cited in the media give a distorted view of the situation in France because so few French youth enrolled in school are employed. And perhaps most importantly, the shares of French and U.S. youth not employed and not enrolled in school – by far the most important measure of social dysfunction – are nearly identical.

At the same time, the French have far higher shares of the young adult (20-24) population enrolled in school, which on balance must be a good thing. And as American students will be the first to appreciate, French students do not enter the labor market with crushing debt burdens (school tuition in France is negligible compared to the U.S.).

Sick Europe and the Italian Elections

Dean Baker: Sick Europe and the Italian Elections:

The elections in Italy prompted another round of knowing comments about how Europeans must get over their silly attachment to employment security (e.g. “Europe Stalls on the Road to Economic Change”). None of the comments I saw even considered the possibility that the contractionary policies of the European Central Bank (ECB) play any role in Europe’s economic weakness.

The basic story here is fairly simple. While Alan Greenspan lowered the overnight interest rate in the United States to 1.0 percent in the summer of 2003, the ECB never lowered its overnight rate below 2.0 percent. This is in spite of the fact that inflation in the euro zone has been the same or lower than in the United States and the euro zone has consistently had higher rates of unemployment. The story does get more complicated (the Fed’s overnight rate is now 4.75 percent, compared to 2.5 percent in the euro zone), but I would argue that the ECB has consistently been more contractionary than the Fed in its policies. Everyone recognizes that the Fed can stimulate the economy with low interest rates and slow growth with high interest rates, why don’t we think that the European economy works the same way?

The countries on which the Europe critics focus their wrath (France, Italy, and Germany) have small current account deficits or surpluses, meaning they don’t face the painful adjustments that loom for the Spain, the United States, and New Zealand. This means that when the adjustments actually occur, we may have a different assessment of which countries’ economies look good and which ones look bad. Until then, we will have to listen to many more tirades from the Europe critics, whose voices go virtually unanswered in the media.

Development in defiance of the Washington consensus

Stiglitz in the Guardian: Development in defiance of the Washington consensus:

China is about to adopt its 11th five-year plan, setting the stage for the continuation of probably the most remarkable economic transformation in history, while improving the wellbeing of almost a quarter of the world’s population. Never before has the world seen such sustained growth; never before has there been so much poverty reduction.

(Via Robot Wisdom.)

Immigrants and “Low Wage” Jobs

Dean Baker: Immigrants and “Low Wage” Jobs:

One of the great absurdities in the debate over immigration policy is the frequently repeated claim that the U.S. economy is generating more ‘low wage’ jobs than can be filled by the domestic workforce. This line has been endlessly repeated in news stories on the issue.

Quick trip back to econ 101: recall the concepts ‘supply’ and ‘demand.’ What makes a job a ‘low wage’ job? In econ 101 world, a job will be a ‘low wage’ job if the supply is high relative to the demand. When there is insufficient supply, then the wage rises. My students didn’t pass the course if they couldn’t get this one right. Econ 101 tells us that there is not a shortage of workers for low wage jobs; it tells us that there are employers who want to keep the wages for these jobs from rising.

Immigration has been one of the tools that have been used to depress wages for less-skilled workers over the last quarter century. Many of the ‘low-wage’ jobs that cannot be filled today, such as jobs in construction and meat-packing, were not ‘low-wage’ jobs thirty years ago. Thirty years ago, these were often high-paying union jobs that plenty of native born workers would have been happy to fill. These jobs have become hard to fill because the wages in these jobs have drifted down towards a minimum wage that is 30 percent lower than its 1970s level.

In response to this logic, the ‘low wage’ job crew claims that if the wages in these jobs rose, then businesses couldn’t afford to hire the workers. It’s time for more econ 101. Businesses that can’t make money paying the prevailing prices go out of business – that is how a market economy works. Labor goes from less productive to more productive uses. This is why we don’t still have 20 percent of our workforce in agriculture.

So the economic side of the debate over immigration is a question about employers wanting access to cheap labor. That part is pretty simple. There are other questions in this debate about human rights and basic decency. It’s outrageous to threaten people with deportation and imprisonment who have worked in this country as part of a conscious government policy. (No one enforced employer sanctions. That was a deliberate decision by the government.)

…[U.S.] trade and immigration policy has been deliberately intended to redistribute income upward. We can debate whether this is a desirable goal for trade policy, but only if the media stops making silly claims about ‘low wage’ jobs.

(Via Dean Baker.)

Goods over people?

Josh Bivens argues that those who favor free trade in goods ought to oppose restrictions on immigration.

I’m a professional worrier about the impact of trade on the American income distribution. The optimal response to my worries is to strike grand bargains that compensate American workers for the harm done to them by globalization. The corporate class gets NAFTA, American workers should have gotten universal health care. The corporate class gets membership in the World Trade Organization (WTO), American workers should have gotten labor law reform to help willing workers more easily form unions.

Unlike trade, I’m personally not willing to call for immigration restrictions, even in the absence of the optimal response. Why not, if I’m willing to risk professional approbation in the trade debate? First, it’s just a fact that embargoing people at national borders is an inherently uglier business than embargoing goods. Second, immigration offers truly enormous economic benefits to the immigrants themselves. Some argue that tariff-free access to the US market offers huge benefits to workers in developing nations. They’re wrong: the gains (to developing country workers) from immigration dwarf the gains from market access.

To take this further, if one is concerned about the economic prospects of low-wage workers, why not respond to potential distributional problems caused by immigration with trade tariffs? How serious am I about this? Not very. There’s still an ideal response to both – using broader tools to bolster economic security for all Americans. But, the odd deference given to the movement of goods over the movement of people in the global economy remains pretty jarring to me.

(Via MaxSpeak, You Listen!.)

The Nation: Taming Global Capitalism Anew

From a series in The Nation.

Taming Predatory Capitalism, James K Galbraith:

In 1899 Thorstein Veblen described predation as a phase in the evolution of culture, “attained only when the predatory attitude has become the habitual and accredited spiritual attitude…when the fight has become the dominant note in the current theory of life.” After an entire century’s struggle to escape from this phase, we’ve suffered a relapse. The predators are everywhere unleashed; and the institutions built to contain them, from the United Nations to the AFL-CIO to the SEC, are everywhere under siege. Predation has again become the defining feature of economic life. Our first problem is to grasp this reality in full.

The truths are that egalitarian growth is efficient, that speculation must be regulated, that crime starts at the top and that peace is the primary public good. These truths are poison to predators and are the reason predators have fostered and subsidized an entire cynical intellectual movement devoted to “free” markets made up of a class of professor-courtiers now everywhere in view. Taming predatory capitalism could start with breaking this econo-corporate analytical axis, and reviving the concept of countervailing power, first formulated by John Kenneth Galbraith in 1952.

A Progressive Response to Globalization, Joseph E Stiglitz:

Globalization is often viewed as posing a major threat to “capitalism with a human face.” Trade liberalization puts downward pressure on unskilled wages (and increasingly even skilled wages), increasing inequality in more developed countries. Countries trying to compete are repeatedly told to increase labor-market flexibility, code words for lowering the minimum wage and weakening worker protections. Competition for business puts pressure to reduce taxes on corporate income and on capital more generally, decreasing funds available for supporting basic investments in people and the safety net. And international agreements, such as Chapter 11 of NAFTA and the intellectual property provisions of the Uruguay Round of trade talks, have been used to short-circuit national democratic processes.

Yet Sweden and the other Scandinavian countries have shown that there is an alternative way to cope with globalization. These countries are highly integrated into the global economy; but they are highly successful economies that still provide strong social protections and make high levels of investments in people. They have been successful in part because of these policies, not in spite of them. Full employment and strong safety nets enable individuals to undertake more risk (with the commensurate high rewards) without unduly worrying about the downside of failure. These countries have not abandoned the welfare state but have fine-tuned it to meet globalization’s new demands. We should do the same.

At the same time, we must temper globalization itself–not by withdrawing behind protectionist borders and not by trying to enhance the well-being of our citizens at the expense of those abroad who are even poorer. Rather, we should reshape globalization to make it more democratic, and we should moderate its pace to give countries more time to cope. There will still be losers in a reshaped globalization, but the vast majority of citizens in both the North and the South will be better off with the right policies.

Reich on Stiglitz

Robert Reich reviews Fair Trade for All, by Joseph Stiglitz and Andrew Charlton, in which the authors maintain that the current program of global trade liberalization is not benefiting poorer countries, contrary to the hype associated with NAFTA and various WTO trade rounds. (Stiglitz is quoted more extensively in an earlier post.

Hence, the authors argue, the pace at which poorer nations open their markets to trade should coincide with the development of new institutions — roads, schools, banks and the like — that make such transitions easier and generate real opportunities. Since many poor nations can’t afford the investments required to build these institutions, rich nations have a responsibility to help.

Without these other institutions in place, the authors say, trade by itself can do more harm than good. They point out that inequality increased after trade was liberalized in Argentina, Chile, Colombia, Costa Rica and Uruguay. Ten years after the North American Free Trade Agreement went into effect, Mexico’s real wages are lower than they were before, and both inequality and poverty have grown. Many of the manufacturing jobs that came to Mexico in the wake of Nafta have since been lost to China, partly because China invested heavily in education and infrastructure while Mexico, lacking tariff revenues, couldn’t afford to do so. According to Stiglitz and Charlton, every developing country that has succeeded in achieving rapid growth has protected its market to some extent until it was ready to dismantle trade barriers. China’s growth, for example, escalated in the 1970’s, before it lowered its barriers.

Stiglitz and Charlton, Reich argues, fail to suggest how this might be fixed, and that in their analysis of inequality created by globalization, they don’t go far enough.

Surprisingly, though Stiglitz has spent some years in Washington, he doesn’t answer the obvious next question: How can this commendable agenda be sold to richer nations? Their political leaders are in a bind since so many of their own citizens are also losing jobs and experiencing declining incomes and, rightly or wrongly, blaming globalization for their plight. This is one of the major reasons the antiglobalization movement is as strong in the developed world as in the developing. It was, after all, Americans who marched and demonstrated against the World Trade Organization in Seattle in December 1999, at what was to have been the start of the new round of trade liberalization. And just months ago, with a Republican in the White House and a Republican-controlled Congress and with the solid support of American business leaders, the modest Central American Free Trade Agreement squeaked through the House of Representatives by only two votes.

While Stiglitz and Charlton nobly assert that trade agreements should be viewed as presumptively unfair if they bestow disproportionate benefits on richer nations, they fail to acknowledge that within richer nations free trade is already disproportionately benefiting the best educated and best connected. The wealthy are growing much wealthier while the middle class is being squeezed. In fact, the adjustment mechanisms the authors find lacking in most developing economies — good public schools, modern infrastructure and adequate social safety nets — are coming to be less and less available even in America. Free trade surely generates the gains Ricardo claimed for it. But until those gains are more widely shared — within richer countries as well as between richer and poorer — we can kiss any further round of trade liberalization goodbye.

Stiglitz: Social Justice and Global Trade

“Today, liberalization discriminates against developing countries. It needs to discriminate in their favor.”

Joseph Stiglitz’s critique of global trade liberalization is behind FEER’s paywall. Thanks to Mark Thoma for this extended excerpt.

FEER: Joseph Stiglitz, professor of economics at Columbia University, argues that trade liberalization must be re-examined to take into account how it damages poor countries.

Economists are in near-univeral agreement that globalization is a Good Thing. But the globalization that economists theorize about isn’t the globalization that politicians negotiate.

Social Justice and Global Trade, FEER, March 2006, By Joseph Stiglitz.

The history of recent trade meetings—from Seattle to Doha to Cancun to Hong Kong—shows that something is wrong with the global trading system. Behind the discontent are some facts and theories.

The facts: Current economic arrangements disadvantage the poor. Tariff levels by the advanced industrial countries against the developing countries are four times higher than against the developed countries. The last round of trade negotiations, the Uruguay Round, actually left the poorest countries worse off. While the developing countries were forced to open up their markets and eliminate subsidies, the advanced developed countries continued to subsidize agriculture and kept trade barriers against those products which are central to the economies of the developing world.

Indeed, the tariff structures are designed to make it more difficult for developing countries to move up the value added chain… As tariffs have come down, America has increasingly resorted to the use of non-tariff barriers as the new forms of protectionism. Trade agreements do not eliminate protectionist sentiments or the willingness of governments to attempt to protect producer and worker interests.

The theories: Trade liberalization leads to economic growth, benefiting all. This is the prevalent mantra. Political leaders champion liberalization. Those who oppose it are cast as behind the times, trying to roll back history. Yet the fact that so many seem to have been hurt so much by globalization seems to belie their claims. …the details of the trade agreements—make a great deal of difference.

That Mexico has done so poorly under NAFTA has not helped the case for liberalization. If there ever was a free trade agreement that should have promoted growth, that was it, for it opened up for Mexico the largest market of the world. But growth in the decade since has been slower than in the decades before 1980, and the poorest in the country, the corn farmers, have been particularly hurt by subsidized American corn.

The fact of the matter is that the economics of trade liberalization are far more complicated than political leaders have portrayed them. There are some circumstances in which trade liberalization brings enormous benefits—when there are good risk markets, when there is full employment, when an economy is mature. But none of these conditions are satisfied in developing countries. With full employment, a worker who loses his job to new imports quickly finds another; and the movement from low-productivity protected sectors to high-productivity export sectors leads to growth and increased wages. But if there is high unemployment, a worker who loses his job may remain unemployed. A move from a low-productivity, protected sector to the unemployment pool does not increase growth, but it does increase poverty. Liberalization can expose countries to enormous risks…

Perhaps most importantly, successful development means going stagnant traditional sectors with low productivity to more modern sectors with faster increases in productivity. But without protection, developing countries cannot compete in the modern sector. They are condemned to remain in the low growth part of the global economy. South Korea understood this. Thirty-five years ago, those who advocated free trade essentially told South Korea to stick with rice farming. But South Korea knew that even if it were successful in improving productivity in rice farming, it would be a poor country. It had to industrialize.

What are we to make of the oft-quoted studies that show that countries that have liberalized more have grown faster? Put aside the numerous statistical problems that plague almost all such “cross country” studies. Most of the studies that claim that liberalization leads to growth do no such thing. … Studies that focus directly on liberalization—that is, what happens when countries take away trade barriers—present a less convincing picture that liberalization is good for growth.

But we know which countries around the world have grown the fastest: they are the countries of East Asia, and their growth was based on export-driven trade. They did not pursue policies of unfettered liberalization. Indeed, they actively intervened in markets to encourage exports, and only took away trade barriers as their exports grew…

The point is that no country approaches liberalization as an abstract concept… Every country wants to know: For a country with its unemployment rate, with its characteristics, with its financial markets, will liberalization lead to faster growth?

If the economics are nuanced, the politics are simple. Trade negotiations provide a field day for special interests. … Exporters want others’ markets opened up; those threatened by competition do not. Trade negotiators pay little attention to principles… They pay attention to campaign contributions and votes.

In the most recent trade talks, for example, enormous attention has been focused on developed countries’ protection of their agricultural sectors—protections that exist because of the power of vested agricultural interests there. Such protectionism has become emblematic of the hypocrisy of the West … Some 25,000 rich American cotton farmers, reliant on government subsidies for cotton, divide among themselves some $3 billion to $4 billion a year, leading to higher production and lower prices. The damage that these subsidies wreak on some 10 million cotton farmers eking out a subsistence living in sub-Saharan Africa is enormous. Yet the U.S. seems willing to put the interests of 25,000 American cotton farmers above that of the global trading system and the well-being of millions in the developing world. If those in the developing world respond with anger, it is understandable.

The anger is increased by the United States’s almost cynical attitude in “marketing” its offers. For instance, at the Hong Kong meeting, U.S. trade officials reportedly offered to eliminate import restrictions on cotton but refused to do anything about subsidies. The cotton subsidies actually allow the United States to export cotton. When a country can export a particular commodity, it does little good to allow imports of that commodity. The U.S., to great fanfare, has made an offer worth essentially zero to the developing countries and berated them for not taking it up on its “generous” offer. …

In short, trade liberalization should be “asymmetric”, but it needs to be asymmetric in a precisely opposite way to its present configuration. Today, liberalization discriminates against developing countries. It needs to discriminate in their favor. Europe has shown the way by opening up its economy to the poorest countries of the world in an initiative called Everything But Arms. Partly because of complicated regulations (“rules of origin”), however, the amount of increased trade that this policy has led to has been very disappointing thus far. Because agriculture is still highly subsidized and restricted, some call the policy “Everything But Farms.” There is a need for this initiative to be broadened. … In fact, the advanced industrial countries as a whole would be better off, and special interests in these countries would suffer.

There is, in fact, a broad agenda of trade liberalization (going well beyond agriculture) that would help the developing countries. But trade is too important to be left to trade ministers. If the global trade regime is to reflect common shared values, then negotiations over the terms of that trade regime cannot be left to ministers who, at least in most countries, are more beholden to corporate and special interests than almost any other ministry. In the last round, trade ministers negotiated over the terms of the intellectual property agreement. This is a subject of enormous concern to almost everyone in today’s society. … It reflected the interests of U.S. drug and entertainment industries, not the most important producers of knowledge, those in academia. And it certainly did not reflect the interests of users, either in the developed or less-developed countries. But the negotiations were conducted in secret, in Geneva. The U.S. Trade Representative (like most other trade ministers) was not an expert in intellectual property; he received his short course from the drug companies, and he quickly learned how to espouse their views. The agreement reflected this one-sided perspective.

Several reforms in the structure of trade talks are likely to lead to better outcomes. The first is that the basic way in which trade talks are approached should be changed. Now they are commercial negotiations. Each country seeks to get the best deal for its firms. This stands in marked contrast to how legislation in all other arenas of public policy is approached. Typically, we ask what our objectives are, and how we can best achieve them. … If we began trade talks from this position of debate and inquiry, we could arrive at a picture of what a true development round look like. …

As more and more countries have demanded a voice in trade negotiations, there is often nostalgia for the old system in which four partners (the U.S., EU, Canada and Japan) could hammer out a deal. There are complaints that the current system with so many members is simply unworkable. We have learned how to deal with this problem in other contexts, however, using the principles of representation. We must form a governing council with representatives of various “groups”—a group of the least developed countries, of the agricultural exporting countries, etc. Each representative makes sure that the concerns of his or her constituency are heard. …

Finally, trade talks need to have more focus. Broadening the agenda also puts developing countries at a particular disadvantage, because they do not have the resources to engage on a broad front of issues.

The most important changes are, however, not institutional changes, but changes in mindset. There should be an effort on the part of each of the countries to think about what kind of international rules and regulations would contribute to a global trading system that would be fair and efficient, and that would promote development.

Fifteen years ago, there was a great deal of optimism about the benefits which globalization and trade would bring to all countries. It has brought enormous benefits to some countries; but not to all. Some have even been made worse off. Development is hard enough. An unfair trade regime makes it even more difficult. Reforming the WTO would not guarantee that we would get a fair and efficient global trade regime, but it would enhance the chances that trade and globalization come closer to living up to their potential for enhancing the welfare of everyone.

A Way to Cut Fuel Consumption That Everyone Likes, Except the Politicians

Robert Frank in the NY Times., via Mark Thoma.

Suppose a politician promised to reveal the details of a simple proposal that would, if adopted, produce hundreds of billions of dollars in savings for American consumers, significant reductions in traffic congestion, major improvements in urban air quality, large reductions in greenhouse gas emissions, and substantially reduced dependence on Middle East oil. The politician also promised that the plan would require no net cash outlays from American families, no additional regulations and no expansion of the bureaucracy.

As economists often remind their students, if something sounds too good to be true, it probably is. So this politician’s announcement would almost surely be greeted skeptically. Yet a policy that would deliver precisely the outcomes described could be enacted by Congress tomorrow — namely, a $2-a-gallon tax on gasoline whose proceeds were refunded to American families in reduced payroll taxes.

Drugs, patents and profits

“We recognize that patents are a way to provide incentives for research, but where is the economic research that shows that they are the most efficient way? You won’t find it, because economists have mostly chosen to ignore the issue.”

Dean Baker has a pair of posts (Bird flu, bird brains, and economists and Drug patents v. the free market: where are the economists?) on the subject of the social and economic costs of drug patents, with an endorsement of an approach that might work better.

…to restate the basic case, drug patents are government granted monopolies that impose huge economic and social costs (such as people being denied access to life-saving drugs). Drug patents serve a purpose, they provide incentives to research new drugs, but it is far from clear that patents are the best way to provide such incentives. While economists have researched endlessly the cost of much smaller protectionist barriers (e.g. tariffs and quotas on shoes and pants), the literature examining the relative merits of drug patents and alternative methods of supporting research is extremely thin. It is hard to explain why economists pay so much attention to a relatively unimportant policy and so little to a policy that has huge implications.

We recognize that patents are a way to provide incentives for research, but where is the economic research that shows that they are the most efficient way? You won’t find it, because economists have mostly chosen to ignore the issue.

My favored alternative is direct public funding of approximately $30 billion a year, as would be provided under the Free Market Drug Act (FMDA) introduced by Dennis Kucinch in the last session of Congress. This would effectively double government funding for biomedical research, since it already is spending approximately $30 billion a year through the National Institutes of Health (NIH).

One last point on the risk issue: it is important to be clear on who does what. The vast majority of the drug industry’s research is contracted out, mostly to university based researchers. Presumably, this would continue to be the case with the FMDA, so the argument has to be that the results would be far worse if the contracts and the checks came from a government sponsored corporation, rather than the drug industry.

Public policy and climate change

John Quiggin argues that a dramatic reduction in (carbon-based) fuel use can be accomplished via an accumulation of small reductions through a combination of price responsiveness and public policy.

Adding all of these modest changes together would yield a reduction in fuel use of more than 50 per cent Some of these changes would be imperceptible, others would require marginal adjustments over a couple of decades. Taken all together, they would be barely noticeable relative to the changes in lifestyle that most people experience over such a period.