Mankiw on Trade

N. Gregory Mankiw, "Economists Actually Agree on This: The Wisdom of Free Trade," the New York Times, April 24, 2015

If Congress were to take an exam in Economics 101, would it pass? We are about to find out.

The issue at hand is whether Congress will give President Obama “fast track” authority to negotiate a trade deal with our trading partners in the Pacific. The bill is favored by some congressional leaders of both parties, including Senator Orrin G. Hatch, the Republican chairman of the Finance Committee, Senator Ron Wyden, the committee’s ranking Democrat, and Representative Paul D. Ryan, the Republican chairman of the House Ways and Means Committee.

House and Senate committees approved versions of the legislation last week. But with influential lawmakers like Senator Elizabeth Warren, a Democrat, opposed to the measure, final congressional approval is far from certain.

Among economists, the issue is a no-brainer. Last month, I signed an open letter to John Boehner, Mitch McConnell, Nancy Pelosi and Harry Reid. I was joined by 13 other economists who have led the President’s Council of Economic Advisers, a post I held from 2003 to 2005. The group spanned every administration from Gerald Ford’s to Barack Obama’s.

Unloading a container ship in Tokyo last year. The 18th-century economist Adam Smith wrote that nations can benefit as much from imports as from exports, turning the conventional wisdom on its head.

We wrote, “International trade is fundamentally good for the U.S. economy, beneficial to American families over time, and consonant with our domestic priorities. That is why we support the renewal of Trade Promotion Authority (TPA) to make it possible for the United States to reach international agreements with our economic partners in Asia through the Trans-Pacific Partnership (TPP) and in Europe through the Trans-Atlantic Trade and Investment Partnership (TTIP).”

Economists are famous for disagreeing with one another, and indeed, seminars in economics departments are known for their vociferous debate. But economists reach near unanimity on some topics, including international trade.

The economic argument for free trade dates back to Adam Smith, the 18th-century author of “The Wealth of Nations” and the grandfather of modern economics. Smith recognized that the case for trading with other nations was no different from the case for trading with other individuals within a society.

According to Smith, “it is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.” Just as no sensible person tries to make all his own clothes and grow all his own food, he said, no sensible nation will aim to achieve prosperity by isolating itself from other nations around the world.

Smith was responding to a then-prevalent doctrine called mercantilism. The mercantilists favored exports but were wary of imports. In their view, the revenue from exports allowed the accumulation of gold, whereas the purchase of imports drained a nation’s gold reserves.

Smith turned this perspective on its head. A nation benefits from imports, he argued, because they expand its opportunities for consumption. Exports are necessary only because other nations have the temerity to want to be paid for the goods they provide.

Fetishism about gold is now rare, but a new form of mercantilism pervades the modern debate about trade. Politicians and pundits often recoil at imports because they destroy domestic jobs, while they applaud exports because they create jobs.

Economists respond that full employment is possible with any pattern of trade. The main issue is not the number of jobs, but which jobs. Americans should work in those industries in which we have an advantage compared with other nations, and we should import from abroad those goods that can be produced more cheaply there.

If economists are so sure about the benefits of free trade, why are the public and their elected representatives often skeptical? One answer comes from a 2007 book by Bryan Caplan, a George Mason University professor, called “The Myth of the Rational Voter: Why Democracies Choose Bad Policies.”

Mr. Caplan argues that voters are worse than ignorant about the principles of good policy. Ignorance would be random and might average out in a large population. Instead of being merely ignorant, voters hold on to mistaken beliefs.

Politicians, whose main goal is to get elected, mold those mistaken beliefs into bad policy. Mr. Caplan writes: “What happens if fully rational politicians compete for the support of irrational voters — specifically, voters with irrational beliefs about the effects of various policies? It is a recipe for mendacity.”

In the case of international trade, three biases that he identifies are most salient.

The first is an anti-foreign bias. People tend to view their own country in competition with other nations and underestimate the benefits of dealing with foreigners. Yet economics teaches that international trade is not like war but can be win-win.

The second is an anti-market bias. People tend to underestimate the benefits of the market mechanism as a guide to allocating resources. Yet history has taught repeatedly that the alternative — a planned economy — works poorly.

The third is a make-work bias. People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries.

The Princeton economist Alan Blinder once proposed Murphy’s Law of economic policy: “Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.”

The debate about international trade is a case in point. In the coming weeks, members of Congress will have an opportunity to prove Mr. Blinder wrong. Let’s hope they take it.

N. Gregory Mankiw is a professor of economics at Harvard.

Gramm on Secular Stagnation

Phil Gramm, "What's Wrong With the Golden Goose," The Wall Street Journal, April 20, 2015

Secular stagnation’ isn’t to blame for lousy U.S. growth rates. Obama’s higher taxes and regulatory assault are.

Since the Obama recovery began in the second quarter of 2009, public and private projections of economic growth have consistently overestimated actual performance. Six years later, projections of prosperity being just around the corner have given way to a debate over whether the U.S. has fallen into “secular stagnation,” a fancy phrase for the chronic low growth seen in much of Europe.

This is just another in a long line of excuses. America’s historic ability to outperform Europe is well documented; we call it American exceptionalism. It has always been based on the fact that the U.S has had better, more market-driven economic policies and our economy therefore worked better. But, as the U.S. economy is Europeanized through higher taxes and greater regulatory burdens, American exceptionalism is fading away, taking economic growth with it.

How bad is the Obama recovery? Compared with the average postwar recovery, the economy in the past six years has created 12.1 million fewer jobs and $6,175 less income on average for every man, woman and child in the country. Had this recovery been as strong as previous postwar recoveries, some 1.6 million more Americans would have been lifted out of poverty and middle-income families would have a stunning $11,629 more annual income. At the present rate of growth in per capita GDP, it will take another 31 years for this recovery to match the per capita income growth already achieved at this point in previous postwar recoveries.

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When the recession ended, the Federal Reserve projected future real GDP growth would average between 3.8% and 5% in 2011-14. Based on America’s past economic resilience, these projections were well within the norm for a postwar recovery. Even though the economy never came close to those projections in 2011-13, the Fed continued to predict a strong recovery, projecting a 2014 growth rate in excess of 4%. Yet the economy underperformed for the sixth year in a row, growing at only 2.4%.

Implicit in these projections and in the headlines of most economic news stories—which to this day blame cold winters, wet springs, strikes, hiccups and blips for America’s failed recovery—is the belief that there has been no fundamental change in the U.S. economy. Underlying this belief is the assumption that either the economic policies of the Obama administration are not fundamentally different from the policies America has followed in the postwar period or that economic policy doesn’t really matter.

And yet we know that the Obama program represents the most dramatic change in U.S. economic policy in over three-quarters of a century. We also know from the experience of our individual states and the historic performance of other nations that policy choices have profound effects on economic outcomes.

The literature on economic development shows that U.S. states and nations tend to prosper when tax rates are low, regulatory burden is restrained by the rule of law, government debt is limited, labor markets are flexible and capital markets are dominated by private decision making. While many other factors are important, economists generally agree on these fundamental conditions.

As measured by virtually every economic policy known historically to promote growth, the structure of the U.S. economy is less conducive to growth today than it was when Mr. Obama became president in 2009.

Marginal tax rates on ordinary income are up 24%, a burden that falls directly on small businesses. Tax rates on capital gains and dividends are up 59%, and the estate-tax rate is up 14%. While tax reform has languished in the U.S., other nations have cut corporate tax rates. The U.S. now has the highest corporate rate in the world and the most punitive treatment of foreign earnings.

Meanwhile, federal debt held by the public has doubled, so a return of interest rates to their postwar norms, roughly 5% on a five-year Treasury note, will send the cost of servicing the debt up by $439 billion, almost doubling the current deficit.

Large banks, under aggressive interpretation of the 2010 Dodd-Frank financial law, are regulated as if they were public utilities. Federal bureaucrats are embedded in their executive offices like political officers in the old Soviet Union. Across the financial sector the rule of law is in tatters as tens of billions of dollars are extorted from large banks in legal settlements; insurance companies and money managers are subject to regulations set by international bodies; and the Consumer Financial Protection Bureau, formed in 2011, faces few checks, balances or restraints.

With ObamaCare the government now effectively controls the health-care market—one seventh of the economy. The administration’s anti-carbon policies hamstring the energy market, distort investment and lower efficiency. Despite the extraordinary bounty that has flowed to America from an unfettered Internet, Mr. Obama has dictated that the Web be regulated as a 1930s monopoly, bringing the cold dead hand of government down on what was once called the “new economy.”

During Mr. Obama’s presidency, the number of Americans receiving food stamps has risen by two-thirds and the number of people drawing disability insurance is up more than 20%. Not surprisingly, labor-force participation has plummeted. Crony capitalism and artificially low interest rates have distorted the capital markets, misallocating capital, overpricing assets and underpricing debt.

Despite the largest fiscal stimulus program in history and the most expansive monetary policy in more than 150 years, the U.S. economy is underperforming today because we have bad economic policies. America succeeded in the Reagan and post-Reagan era because of good economic policies. Economic policies have consequences.

With better economic policies America was like the fabled farmer with the goose that laid golden eggs. He kept the pond clean and full, he erected a nice coop, threw out corn for the goose and every day the goose laid a golden egg. Mr. Obama has drained the pond, burned down the coop and let the dogs loose to chase the goose around the barnyard. Now that the goose has stopped laying golden eggs, the administration’s apologists—arguing that we are now in “secular stagnation”—add insult to injury by suggesting that something is wrong with the goose.

Mr. Gramm, a former Republican senator from Texas, is a visiting scholar at the American Enterprise Institute.

Tananto on Media Hypocracy and Authoritarianism

James Taranto, “The Authoritarian Media, II,” The Wall Street Journal, April 14, 2015

Over the past couple of weeks we were keeping an eye on the Indiana kerfuffle, and we were struck by an editorial from the New York Times in praise of corporate speech: “Big corporations like Walmart, Apple, Salesforce.com and General Electric and their executives have done the right thing by calling on officials in Indiana and Arkansas to reject ‘religious freedom’ laws designed to give businesses and religious groups legal cover should they deny service to gay couples.”

The Times editors were pleased but not satisfied: “Just issuing corporate statements against such a law is relatively easy and actually doesn’t provide protection against discrimination.” The Times wants corporate America to engage in far broader political activism. For one thing, “corporations and their executives . . . should make clear that they will not donate to or support the campaigns of politicians who back such regressive legislation.” (Actually, campaign donations by corporations are legally prohibited at the federal level.)

The editorial adds: “Another thing businesses can do is to make clear that they want lawmakers in all states to pass anti-discrimination protections for lesbians, gay men, bisexuals and transgender people. More than three dozen chief executives of technology companies did just that in a statement released on [April 1].”

“Hypocrisy,” charged HotAir.com’s “Jazz Shaw” who compared this Times editorial with one from January 2010, prompted by the free-speech victory in Citizens United v. Federal Election Commission:

With a single, disastrous 5-to-4 ruling, the Supreme Court has thrust politics back to the robber-baron era of the 19th century. Disingenuously waving the flag of the First Amendment, the court’s conservative majority has paved the way for corporations to use their vast treasuries to overwhelm elections and intimidate elected officials into doing their bidding.

Congress must act immediately to limit the damage of this radical decision, which strikes at the heart of democracy.

The charge of hypocrisy certainly fits. What the Times now urges is that corporations attempt to “intimidate elected officials into doing their bidding”—precisely what it found objectionable five years ago. On the other hand, it is possible to reconcile the paper’s objection to Citizens United with its support for corporate political activism—but that resolution reveals something worse than hypocrisy.

The Times’s position is that corporations (with the convenient exception of “media corporations” like the New York Times Co. itself) have no rights under the First Amendment. That view underlay its histrionic objections to both Citizens United and last year’s Hobby Lobby v. Burwell, in which the high court extended the religious-liberty protection of the federal Religious Freedom Restoration Act to corporations that objected to the ObamaCare abortifacient mandate on conscientious grounds.

But now the Times is urging corporations, and executives acting in their corporate capacity, to speak out aggressively in favor of a political cause the Times supports. How could they even do so without free speech?

That seems like a rhetorical question but isn’t. Opponents of free speech, such as the Times editorial board, do not oppose speech. They oppose freedom. Authoritarian and totalitarian regimes may not brook dissent, but they encourage speech in favor of the regime. Totalitarian regimes frequently compel pro-regime speech.

To be sure, the New York Times is not a government; its editorials have the force of wishes, not laws. But the aspirations here are authoritarian in character. In the Times’s ideal world, corporate speech would be permitted, but only in the service of permissible viewpoints. That is the antithesis of free speech, a central feature of which is viewpoint-neutrality.

Or is the aspiration totalitarian? Silence, after all, would not be an option for the baker, florist or photographer conscripted into participation in a same-sex wedding by the antidiscrimination laws the Times supports. They would be—and in some places have been—compelled to engage in expressive activity that violates their deepest convictions.

As the legal scholar Richard Epstein notes: “It is easy to tolerate people with whom you agree. It is necessary in a free society to tolerate those with whom you disagree. It is this loss of tolerance, this self-righteous indignation, this vilification of a vulnerable religious minority that makes this recent chorus of incivility so disgraceful.”

Sumner on "Sticky Wages"

http://econlog.econlib.org/archives/2015/04/dont_blame_the.html