This idea could be thought of as a loose international version of an argument for economic freedom. As Milton Friedman might have said, let markets work and generate prosperity, and let some minimum guaranteed income (or negative income tax) ensure that nobody loses out, at least to the point of destitution.
It was thus refreshing to see the title of Reed College economist Kimberly Clausing's new book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital. Unfortunately, the book doesn't quite deliver on the promise of its title.
An incomplete defense / Clausing does present a standard economic defense of free trade. She "defends global economic integration, arguing from a perspective that consistently prioritizes the needs of American workers." "The substantial challenges of middle-class economic stagnation and increasing income inequality require bold, serious policy responses. But they don't require a retreat from globalization."
The book shows how free trade generally benefits the poor and middle class. "In the United States," the author writes, "tariffs take a bite out of the aftertax incomes of the poorest 20% of the population three times larger, in percentage terms, than they take from the top 20%." She emphasizes that recent economic disruptions are caused more by technological change than by international trade. She points out that the trade deficit is the consequence of a low domestic savings rate and high budget deficits, which attract foreign capital; net foreign capital inflows are the mirror image of the trade deficit.
Among the many facts marshaled by Open is the observation that, with development of supply chains spurred by comparative advantage, it's not clear the anymore what is a domestic product. "Six out of the ten 'most American' cars (based on the source of their parts) are made by foreign firms," Clausing notes.
Yet, something is not right with her defense of free trade. Perhaps it is her repeated appeals to today's cause-célèbre: fighting income inequality. She writes that the incomes of the lower half of the income distribution have stagnated, a claim that is both exaggerated and based on imperfect and controversial statistics. She also observes that the share of labor income is decreasing relative to capital income. But that doesn't mean that real wages have decreased; it just means that they have not increased as much as profits, interest, and rents.
To the extent that this picture of growing inequality is correct (and there is something true here), the reader would have hoped for an inquiry into the role played by direct government interventions other than protectionism: professional licensure, zoning regulations, stifling regulation in general, crony capitalism, the criminalization of drugs and the carceral state, etc. Clausing does allude to the growing protection of "intellectual property" as another possible factor, but only in regard to pharmaceutical companies.
As she notes, the workers most affected by economic change are the least-skilled and least-educated ones. At least before college, education is financed and provided mainly by governments. And more of gross domestic product goes to education in America than in most of the rest of the world. It's thus hard to be persuaded when she writes that more public education and ("ideally," she writes) free community college would solve American workers' problems.
Like many progressives, Clausing falters when she discusses labor and income distribution. For example, she writes, "When companies earn outsized returns, this squeezes the returns for other factors of production throughout the economy." Of course, there is no fixed quantity of wealth to share and the economy is not a zero-sum game. She is especially critical of multinational corporations, which she claims escape their supposedly fair share of taxes. She notes that multinational corporations undertake the vast majority of foreign trade. We might emphasize—and she would agree—that this is ultimately on behalf, and for the benefit, of consumers.
Value of imports / What is missing from this defense of free trade is what's also missing from the conservative (and formerly Republican) defense: recognition of the importance of imports. Clausing defends free trade mainly because of exports. As Princeton economist and New York Times columnist Paul Krugman has argued, this amounts to defending free trade largely for the wrong reasons. Essentially, the benefits of trade come from exchanging the fewest exports for the most imports. I suspect that Clausing would agree with this point, but she doesn't seem to appreciate the implications that follow.
For example, she pays too much attention to free trade agreements, even writing that "the case for trade agreements is akin to the case for government." By this she means that a free trade agreement represents a sort of international government complementary to the domestic kind, one being as endearing as the other. In fact, the advantage of trade agreements is that they constrain one's own government from indulging in protectionism; that they constrain foreign governments too is a means to that end. It's because you don't trust your own government to unilaterally maintain your freedom of trade and resist the pressures of special producer interests that you want it to bind itself with free trade agreements. Clausing hints at this argument but she doesn't fully acknowledge it.
She seems to be deeply fearful of limiting her own Leviathan, for example by letting free trade proceed even when it leads to deregulation. It can lead to deregulation because importers may try to avoid domestic regulation by buying foreign goods that evade costly domestic mandates and prohibitions, or because exporters will complain about regulations that make them less competitive. Clausing replies that this regulatory competition leads to a "race to the bottom," a frequent invocation in her book. But if competition were a race to the bottom, Cuba, North Korea, and Venezuela would be at the top of the economic barrel. The real race to the bottom occurs when different Leviathans cartelize in order to better control their subjects, for instance when agreeing on common regulations in "free trade" agreements.
Clausing's case for free trade is buried under a pile of arguments that not only have nothing to do with free trade, but that make it so regulated and controlled that we may wonder what is left of the "free." She argues that free trade agreements should, as they have started to do, contain labor and environmental requirements. (Minimum wages imposed on Mexico in the proposed new North American trade pact are one example.) "Trade agreements can and should be about more than trade," she writes. Fighting "harmful policy competition"—including tax competition—is part of her embrace of globalization. She often seems to believe in all the regulations she proposes more than in free trade, which is the freedom of individuals and private entities to trade internationally if others want to trade with them.
If other national governments encumber their subjects' trade with regulations, that is unfortunate. But it is no reason for our own government to do the same. As economist Joan Robinson once wrote, protectionist retaliation looks like a decision "to dump rocks into our harbors because other nations have rocky coasts."
Immigration and progressivism / Clausing's argument for immigration is more coherent. She emphasizes the benefits of immigration for Americans—the importers of immigrants, as it were. American companies started by immigrants include Google, AT&T, Goldman Sachs, Kohl's, DuPont, and Qualcomm. When, in 2016, Bob Dylan won the Nobel Prize for Literature, six scientists from American institutions won other Nobels; all of them were foreign-born. Also foreign-born were two-thirds of the scientists based in American institutions who won Nobels between 1977 and 2015. Less-skilled immigrants also offer to natives more opportunities for mutually beneficial exchange by adding their labor to the U.S. labor pool.
In short, "restricting immigration, trade, and international business is more likely to harm workers than help them," Clausing notes, and "tighter immigration restrictions are a bad idea." She argues for more liberal immigration rules, like for foreign students who are often forced to leave the country after obtaining degrees from American universities.
In today's usage, "progressive" seems to mean everything that's good, so Clausing apparently believes there is no need to define the term in her book. Still, it would have been useful if she had explained what the label means to her. The early-20th-century progressive reformists were ambivalent on free trade, although President Woodrow Wilson, himself a progressive, vigorously led the Democratic Party to reduce tariffs. The progressive movement was generally racist, eugenicist, and anti-immigration. (See "Progressivism's Tainted Label," Spring 2016.) The Democratic Party, which became the standard bearer of progressivism, was also the party most favorable to free trade, including through Franklin D. Roosevelt's administrations. It is these more enlightened Democrats whom Clausing represents.
Like modern-day progressives as well as traditional conservatives, she wonders what "we" should do "as a society," using a common and usefully obscure bit of collective-speak. Illustrating the danger of collective-speak, she calls for "a better partnership between society and the business community," as if "the business community" was not part of "society." What about "inclusion," a mantra that appears two dozen times in the book? Is the business community to be included by force?
To be fair, Clausing is not anti-business like so many other progressives are. And she once uses "common interests," a concept easier to define. In a diverse society, which she presumably favors, she should realize that few interests are genuinely common to all individuals; individual liberty (with some side bargains, Nobel economist James Buchanan would add) may be the only one. She should investigate this approach.
Romantic politics / What may ultimately explain Clausing's disappointing defense of free trade and certainly her optimistic view of government intervention is her romantic politics. She seems to ignore the insights of public-choice economics, which, as Buchanan said, is "politics without romance." For example, she writes about the "vital role" played by "the US Congress (and the president), by avoiding deficits and debt in good times, so that deficit expansion is more feasible when recessions arrive." This is a strange statement or formulation because she certainly knows that, since 1960, the federal budget has shown an annual surplus only twice, in 1999 and 2000 (six times if we include off-budget transactions like Social Security).
"Unfortunately," she adds, Trump's tax cuts "will increase deficits by about $1.5 trillion over the coming ten-year period." It would be worth mentioning that the total deficits over a 10-year horizon were already forecasted at $10 trillion before Trump took power. Trump is just adding to forecasted deficits that were already very high.
Clausing implicitly assumes that government is a naturally benevolent organization that will raise the minimum amount of taxes to produce essential public services, efficient redistribution, and absolutely necessary regulations. If only multinationals and the rich would pay their "fair share" of taxes, everybody would be happy!
A carbon tax is one of her pet projects. She writes, "By taxing environmental harms … revenue can be raised to help fund civilized society." "Government," she previously affirmed, "must ultimately be responsible for civilization itself." She wants to impose on "every US resident company" an annual "sunshine tax report" on its global, country-by-country operations, revenues, and taxes (in addition to the information firms currently must provide), plus an annual "sunshine labor report … on a set of benchmarks on pay structure and labor inclusion." She claims that the latter would be "only a reporting requirement, not a regulation"!
As she later says about politics, it's "an area in which economists can be naive." My friendly and respectful prescription for this naiveté would be an antidote of public-choice economics.
It is not enough to have great ideas about what a virtuous government elected by enlightened voters and run by omniscient bureaucrats should do. Reforms must be achievable with individuals as they are and with feasible institutions. Otherwise, we fall into what economist Harold Demsetz called the "nirvana approach" to public policy.
Clausing has a blind spot for government failures. The budget deficit is one example. Another is what she calls the "insufficient financial market regulation" that "was instrumental in generating the Great Recession of 2008." This seriously underplays the fact that the crisis originated in government-introduced (by Ginnie May in 1970), government-guaranteed, and government-promoted mortgage-backed securities. Other government regulations also played a major role.
She has only good words for the post-crisis and regulation-heavy Dodd–Frank Act. A few years before the crisis, one of the legislation's namesakes, Rep. Barney Frank (D, MA), claimed that the federal government had "probably done too little rather than too much" to meet the goal of "affordable housing"; he wanted "to get Fannie [Mae] and Freddie [Mac] more deeply into helping low-income housing" and "to roll the dice a little bit more" on housing. We know how that turned out.
Thinking outside the box? / I don't think that Clausing makes a case for free trade that satisfies what I suggested would be a good "progressive" argument. She does propose a sort of minimum income in the form of refundable tax credits (an extension of the current Earned Income Tax Credit), but she does not pair it with a general deregulation of markets. On the contrary, she proposes an expansion of the regulatory state. She does not think outside of the box, or it is a small "progressive" box.
I have focused mainly on the failings of Open, but this is not to deny the book's qualities. It is well documented and much superior to standard progressive-speak (granted, that bar is low). It does teach some basic economic principles and facts about the world. For example, Clausing writes:
It is difficult to find a good economist who does not recognize the merits, and even the magic, of international trade for raising the standard of living and contributing to the felicity of humankind. At root, the case for international trade is not much different from the case for markets; the presence of international borders does not change this basic logic.
As we saw, the thrust of her practical recommendations is not consistent with this orientation. Will her book help progressives understand that protectionism is a betrayal of the individuals they want to defend? Perhaps, but it is not certain. Progressives, just like conservatives, may have their revelation only after a radical realization that primacy must be given to individual choices, not to collective choices. This is the crux of the matter, in free trade as in other policy areas.
