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Richmans' Trade and Taxes Blog
Dani Rodrik, Straight Talk on Trade, Ideas for a Sane World Economy (Princeton, Princeton U. Press, 2018)
Reviewed by Raymond L. Richman
Economists usually obfuscate the facts about international trade in their zeal to promote free trade. They ignore the fact that some countries deliberately seek a trade surplus, to export more than they import, to accelerate their rates of economic growth. But their growth is at the expense of countries which import more than they export. They ignore the fact that the trade deficits the U.S. has been experiencing for decades has converted the U.S. from being the world’s leading creditor nation to the world’s leading debtor nation, has caused U.S. growth to stagnate, and has caused millions of American workers to lose good-paying manufacturing jobs. The author is not one of those who ignores the negative impact of international trade on the U.S. economy but he does not blame the trade deficits. In his preface, he writes that economists have overstated the magnitude of aggregate gains from trade and elsewhere, “Economists do not fully understand why expanded trade has interacted with the macroeconomy to produce the negative consequences for wages and employment that it has. “Adam Smith and David Ricardo”, he writes, “would turn over in their graves if they read the details of, say, the Trans-Pacific Partnership” agreement.” (All the multi-lateral agreements involve substantial losses of sovereignty with topics ranging from child labor, minimum wages, global warming, compulsory arbitration, etc., etc. even creating new international institutions like the World Trade Organization.)
Prof. Rodrik does not limit himself to the economists’ views on trade but addresses many other economic and political issues. Industrialization was, he writes, “traditionally a powerful growth engine” but developing countries “typically have neither numbers nor resources on their side” and “low-income countries are running out of industrialization opportunities” for export-led growth. This is an opinion we so not share. As though export-led growth was the only means to achieve growth!. In large part, the book reads like an essay because of similar non-sequiturs. Nevertheless, the author’s insights are worth considering. He talks about “premature globalization” caused by the creation of the World Trade Organization and ensuring trade deficits which led to today’s “globalization backlash”. Imposition of any tariff is called “protectionism” by economists and the media. But he is wrong to describe tariffs intended to remove a deficit as protective. In our view globalization is a nonsense goal. Our goal should be balanced trade, the exchange of domestically produced goods for an equal value of foreign-produced goods. When trade is balanced both trading nations gain from trade. Those sectors that are injured in each country can be compensated by those who gain leaving a net gain overall.
We agree with the author that the nation-state deserves to continue to exist while Communists and liberal thinkers believe the nation-state is archaic. Markets require rules and one set of rules for the whole is inconceivable. After all, some countries are committed to relatively free markets and some to authoritarian rule. The problems of the European Union suggest the difficulty if not the impossibility of uniting the world. But this is not an issue we want to dwell upon. We shall concentrate on what the author has to say about trade.
An interesting chapter entitled “Economists and Their Models” reveals the author’s strengths and weaknesses. For example he discusses at length the pros and cons of the Trans-Pacific Partnerships and the fact that economists are divided on its effects, one group believes that liberalizing (freeing!) trade affects the composition of employment but not its overall level. But the evidence shows that there have not been sufficient offsetting gains to prevent stagnation and slow growth in the U.S. For markets to function efficiently, government investments in infrastructure, legal rights assured, and a financial system that includes a central bank. He goes further, writing that markets require regulation to ensure that consumers make “informed choices, that externalities are internalized, and market power is not decisions abused”. Also needed are “social protections and safety nets to legitimize distributional outcomes”. “That is why the world’s wealthier economies, those with the most productive market systems, also have large public sectors.” Maybe not. Maybe power corrupts and strives for more power. We agree with the author on most of his conditions for functioning markets. But even he admits “too much government meddling can make markets dysfunctional.” The author discusses the economics of Milton Friedman and others concluding that government interventions, e.g. China, “have succeeded in economic history, where it really matters.” In our view, China has been successful thus far because it enabled its people to engage in capitalist enterprises, sent its children abroad to be educated, and ran trade surpluses.
He views mercantilism as a positive force. He writes, “it is more accurate to think of mercantilism as a different way to organize the relationship between the state and the economy…The mercantilist model can be derided as state capitalism or cronyism. But when it works, as it has so often in Asia…” No, it has not worked in African, Asian, or Latin American countries until they allowed free competitive private enterprises.
Perhaps, nothing reveals the author’s biases more than his discussion in a chapter labelled Economics, Politics, and Ideas. He believes that studies have shown that “when the elite’s [defined as the upper ten percent of the income distribution] interests differ from those of the rest of society, it is their views that count—almost exclusively.” He writes, “Political systems are stuck in suboptimal situations, we argue, because powerful special interests block and progress toward better outcomes.” We can think of no case where the elite can ignore the other 90 percent.
He does not mention that the elites pay most of the personal income taxes nor why they allowed progressive taxes to pass. They exist nearly everywhere. Why haven’t we adopted the flat tax? And you never know whether the inequality he is concerned about is that of income or wealth. In our view, “excessive” inequality of income can be satisfactorily dealt with by progressive income taxation and enormous accumulations of wealth by progressive estate and gift taxes. Aside from existence of poverty, inequality is not a problem that progressive income and estate taxes cannot control.
In the chapter labelled “What Will Not Work”, the author writes, “Today the advanced countries that are the most exposed to the international economy are those where safety nets and social insurance programs are the most extensive.” He believes there is a trade-off between open-trading and the need for safety nets. He discusses what he calls e hasH the “False Promise of Global Governance”, and “The Muddled Case for Trade Agreements”. Regarding the TPP, he writes, “In the end, there was much uncertainty about the economic and political consequences of these trade agreements, and considerable room for concern.” Beggar-thy-neighbor policies, he writes “need to be regulated at the international level.” Who is to do the regulating and enforcement?
In Chapter 10, “New Rules for the Global Economy”, he lists seven principles:
The author then discusses “Fair Trade and Free Trade”, “Trade experts have long been wary of opening up the WTO regime to questions about labor and environmental standards, or human rights, fearing the slippery slope of protectionism. But it is becoming increasingly clear that failure to take these issues on board does greater damage.” He asserts that “economists rightly point out that trade is only weakly implicated in the major economic problems of the day—deindustrialization and inequality”. We do not considers that other economists are right in this regard. To the contrary, we believe the chronic trade deficits, which the author does not consider a problem at all, has caused millions of American workers to lose good-paying manufacturing jobs. Unlike the author, we believe that it is the major international trade problem.
The enterprises of a country should be able to trade what they want to but trade should be an exchange of goods for goods, not goods for debt instruments. When it is an exchange for debt instruments, there is no assurance of any gains from trade. A country does not need to have a trade balance with every country but it does need to have a balance in its total trade in the long-run. A chronic trade deficit means that it is a net exporter of factories and jobs and sentenced to a lower economic growth rate.
The author’s discussion of “Growth Policies for the Future” has little if anything to do with trade. His biases and ignorance are illustrated by his foolish statement that, “The future of our planet depends on the world economy’s rapid transition to green growth” based on clean technologies—mode of production that emit substantially fewer greenhouse gases.” The author writes, “When democracy fails to deliver economically or politically, it is perhaps not surprising that many people look for authoritarian solutions…Europe faces a choice between more political union and less economic union. As long as it delays making the choice, democracy will suffer.” Obviously, he not only considers himself to be an economic scientist but an environmental scientist and a political scientist. We doubt that he is any of those. e wites
The author obviously has no policy to balance trade. The truth seems to be that the author has written a book about trade that has little to do and offers no solution to our trade problems. The book has nothing in it about exchange rates, nothing about chronic trade deficits, no solutions at all.
Dr. Raymond L. Richman holds a Ph.D. in Economics from the University of Chicago, is Prof. Emeritus of Public and International Affairs at the University of Pittsburgh, and President of Ideal Taxes Association. Dani Rodrik is the Ford Foundation Professor of International Political Economy at Harvard's John F. Kennedy School of Government. He rejoined the Kennedy School in July 2015 after two years at the Institute for Advanced Study as the Albert O. Hirschman Professor in the School of Social Science. Professor Rodrik is an economist whose research covers globalization, economic growth and development, and political economy.
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