Sunday, December 9, 2007

Slightly stale, but I just found this interesting editorial by Dean Baker at the Center for Economic and Policy Research on leveling out the gains from free trade by introducing more developing-country competition for Wall Street:
...we should sit down with state and local treasurers and ask them what prevents them from taking advantage of the lower bond underwriting commissions that could be charged by investment banks in Mumbai or Hong Kong. This could save taxpayers nationwide billions of dollars each year in bond underwriting fees...

Free trade policies that removed barriers to financial firms in the developing world would both hasten growth by increasing efficiency and also lead to a more equal distribution of income. Of course, all the editorial writers and columnists who hold free trade to be most sacred would have to support this agenda, otherwise they would be a bunch of knuckle-scraping Neanderthals. Put simply, we need a new free trade agenda that will do for Wall Street exactly what the current free trade agenda has done for Detroit.
A fascinating idea, but Wall Street is largely a reputation- and experience-driven business. There isn't really anything that keeps developing country firms from setting up shop in the U.S. and trying to compete; the players in that market are entrenched for reasons that have nothing to do with trade policy.

If we really wanted to introduce more competition for Wall Street bankers, we would allow the banks to hire more foreign workers on immigrant visas in the U.S. But that is not a popular idea among the middle-income workers Baker wants to help.

Saturday, December 8, 2007

Reframing the debate over taxes - NYT

And by "reframing" we mean "using intellectually dishonest arguments to get our way":

Because of our inability to talk sensibly about taxes, the United States has been sliding toward second-class status in the world economy. Our national debt, for example, has increased by more than $3 trillion since 2002. Once the world’s largest creditor nation, we are now its largest debtor. We are currently borrowing more than $800 billion a year from the Chinese, Japanese, South Koreans and others — loans that will have to be repaid in full with interest. These imbalances have sent the dollar plummeting....

One strategy would be to inform voters that the “it’s your money” argument is incoherent. Taken to its logical conclusion, it implies that it is illegitimate for the government to collect taxes. But if that were true, there could be no government and no army, in which case, the United States would have long ago been conquered by another country. Then we’d be paying compulsory taxes to that country’s government...
Progressive taxation is not about envy. Top earners have captured the big share of all income and wealth gains during the last three decades. They’re where the money is. If we’re to pay for public services they and others want, they must carry a disproportionate share of the tax burden...

First, we are not "sliding toward second-class status in the world economy." Our status in the world economy is determined by GDP, not by the level of government debt. By that measure, we are doing just fine, thank you.

Second, it is intellectually dishonest to say that we are the largest debtor nation (in absolute terms) without pointing out that, as a percentage of GDP, our debt is lower than Japan and many continental European countries, many of whom have far higher tax rates.

Third, no one is proposing we take the "it's your money" argument to its logical conclusion and eliminate all taxes, so Frank is knocking down a straw man. The argument refers to the marginal tax dollar, and resonates with many taxpayers who justifiably feel that much of any tax hike will be squandered.

Fourth, progressive taxation is not necessary to ensure that big earners pay a disproportionate share of the tax burden. Under a flat tax system, big earners also pay more than others - though whether they would pay enough is subject to debate.

Fifth, although America certainly needs to invest more in its infrastructure going forward, many of these investments could be privately funded through the types of build-operate-transfer arrangements that have been successful in other countries. This approach ensure that users of the infrastructure pay for it and helps alleviate taxpayer concerns about squandered revenue.

Finally, Frank is conflating the issue of the government fiscal deficit with the current account deficit. The fiscal deficit certainly doesn't help, but at 1.2% of GDP it is hardly at crisis levels. I know of no knowledgable observer who believes the fiscal deficit is a primary cause of the dollar devaluation. After all, Europe is hardly a paragon of fiscal responsibility.

The end of cheap food

I thought it was going to be about the prices at Whole Foods, but it turns out The Economist has an excellent piece on the effects of a reversal of decades of stagnating food prices.

Ending food subsidies seems to be one of those things everyone knows would instantly make the world a better place, but that the political system is incapable of delivering:
The trillions of dollars spent supporting farmers in rich countries have led to higher taxes, worse food, intensively farmed monocultures, overproduction and world prices that wreck the lives of poor farmers in the emerging markets. And for what? Despite the help, plenty of Western farmers have been beset by poverty. Increasing productivity means you need fewer farmers, which steadily drives the least efficient off the land. Even a vast subsidy cannot reverse that.

Stiglitz on climate change

Joseph Stiglitz argues that the only feasible way to control global emissions is through a global carbon tax:

Kyoto's underlying principle - that countries that emitted more in 1990 are allowed to emit more in the future - is unacceptable to developing countries, as is granting greater emission rights to countries with a higher GDP. The only principle that has some ethical basis is equal emission rights per capita (with some adjustments - for instance, the US has already used up its share of the global atmosphere, so it should have fewer emission allowances). But adopting this principle would entail such huge payments from developed countries to developing countries, that, regrettably, the former are unlikely to accept it.

Economic efficiency requires that those who generate emissions pay the cost, and the simplest way of forcing them to do so is through a carbon tax. There could be an international agreement that every country would impose a carbon tax at an agreed rate (reflecting the global social cost).

I disagree. There is a good reason that developed countries are given more emission credits than developing countries under Kyoto: it is far more costly to replace an existing carbon-intensive energy infrastructure than to build a new one from scratch. Kyoto recognizes this through its allocation of emission permits on the basis of 1990 emissions levels. Through the trading system, it encourages emission abatement to happen where it is most cost-effective. That usually means in developing countries, who get paid to abate.

If Stiglitz believes that allocating emissions rights to countries on the basis of population is a non-starter for developed countries, then a global tax is even more of a non-starter for developing countries. China would be required to pay more than the United States, even though it is far poorer and had little part in the atmospheric carbon build-up of the past century.

Kyoto may not be perfect, but it is the best idea we have had so far. Given the unknowably high cost of reducing emissions enough to reverse climate change, we owe it to ourselves to seek the most cost-effective ways to do so. That means, to put it bluntly, outsourcing most of the emission reductions to developing countries, which Kyoto lets us do.