Economics

Free Trade Africa

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The Washington Post reported on a new African free-trade deal that would include all 54 countries. Here’s what you need to know about the Continental Free Trade Area (CFTA):

  1. The CFTA would constitute the largest free-trade area in the world.
  2. It’s part of a larger global trend of mega-regional trade agreements.
  3. The CFTA would help African countries develop.
  4. The CFTA would boost African trade by more than 50 percent.
  5. The CFTA will build off the ECOWAS and TFTA agreements.
  6. The CFTA has widespread political and economic support.
  7. 2017 is the target deadline.

This is exciting news, so long as it is more successful than previous trade deals.

The Economic Case for Gender Equality

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A 2015 McKinsey Global Institute report found that–surprise, surprise–gender equality is good for the economy:

A “best in region” scenario in which all countries match the rate of improvement of the fastest-improving country in their region could add as much as $12 trillion, or 11 percent, in annual 2025 GDP. In a “full potential” scenario in which women play an identical role in labor markets to that of men, as much as $28 trillion, or 26 percent, could be added to global annual GDP by 2025. MGI’s full-potential estimate is about double the average estimate of other recent studies, reflecting the fact that MGI has taken a more comprehensive view of gender inequality in work.

MGI focused on 15 gender-equality indicators, all of which fell under the categories (1) equality in work, (2) essential services and enablers of economic opportunity, (3) legal protection and political voice, and (4) physical security and autonomy. Both developing and advanced countries stand to gain from increased gender parity. “MGI’s new Gender Parity Score (GPS) measures the distance each country has traveled toward gender parity, which is set at 1.00. The regional GPS is lowest in South Asia (excluding India) at 0.44 and highest in North America and Oceania at 0.74. Using the GPS, MGI has established a strong link between gender equality in society, attitudes and beliefs about the role of women, and gender equality in work.” Furthermore, “MGI has identified ten “impact zones” (issue–region combinations) where effective action would move more than 75 percent of women affected by gender inequality globally closer to parity. The global impact zones, which are globally pervasive issues, are blocked economic potential, time spent in unpaid care work, fewer legal rights, political underrepresentation, and violence against women.”[ref]Compare this to the findings in the Columbia-published Sex & World Peace.[/ref]

So, if thinking of women as equals on moral and ontological grounds is just too much of a stretch for you,[ref]Shame on you.[/ref] try indulging in a little economic self-interest and fight for gender equality.

Are Safety Standards Relative?

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Five cars for the Indian market were recently awarded a zero-star safety rating by the London-based Global New Car Assessment Program. While this low rating is gaining a bit of negative press, economist Alex Tabarrok thinks we should reconsider:

Let’s take a closer look. These cars are very inexpensive. A Renault Kwid, for example, can be had for under $4000. In the Indian market these cars are competing against motorcycles. Only 6 percent of Indian households own a car but 47% own a motorcycle. Overall, there are more than five times as many motorcycles as cars in India.

Motorcycles are also much more dangerous than cars.

…The GNCAP worries that some Indian cars don’t have airbags but forgets that no Indian motorcycles have airbags. Even a zero-star car is much safer than a motorcycle. Air bags cost about $200-$400 (somewhat older estimates here a, b, c) and are not terribly effective. (Levitt and Porter, for example, calculated that air bags saved 550 lives in 1997 compared to 15,000 lives saved by seatbelts.) At $250, airbags would increase the cost of a $5,000 car by 5%. A higher price for automobiles would reduce the number of relatively safe automobiles and increase the number of relatively dangerous motorcycles and thus an air bag requirement could result in more traffic fatalities.

A broader point is that in India today $250 is about 5% of GDP per capita ($5,700 at PPP) and that’s a high price to pay for the limited protection provided by an air bag. Lots of people in the United States wouldn’t pay $2750–5% of US GDP per capita–for an air bag. Why should Indians be any different?

Intending to save lives and actually saving lives are not the same thing.

Income Mobility vs. Educational Mobility

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Nobel laureate James Heckman has a new paper out with exploring social mobility in the U.S. and Denmark. The abstract reads:

This paper examines the sources of differences in social mobility between the U.S. and Denmark. Measured by income mobility, Denmark is a more mobile society, but not when measured by educational mobility. There are pronounced nonlinearities in income and educational mobility in both countries. Greater Danish income mobility is largely a consequence of redistributional tax, transfer, and wage compression policies. While Danish social policies for children produce more favorable cognitive test scores for disadvantaged children, these do not translate into more favorable educational outcomes, partly because of disincentives to acquire education arising from the redistributional policies that increase income mobility.

In short, the disadvantaged in Denmark are not flourishing and moving up financially because of the labor market, educational attainment, or careers, but simply due to wealth redistribution via high taxes.

The authors conclude,

The failure to promote greater educational mobility in spite of providing generous social services is most likely rooted in the welfare state. Our findings point to wage compression and the higher levels of welfare benefits as being counterproductive in providing incentives to pursue education. The low returns to education observed in Denmark, in particular at the lower levels of education, help explain the disconnect between the egalitarian childhood policies in Denmark and the roughly equal levels of educational mobility in Denmark and the U.S. The sorting of families into neighborhoods and schools by levels of parental advantage is likely another contributing factor. While the Danish welfare state may mitigate some childhood inequalities, substantial skill gaps still remain.

…This paper sends a cautionary note to the many enthusiasts endorsing the Scandinavian welfare state. We make no statements about the optimality and fairness of the U.S. and Danish systems from a philosophical or social choice point of view. The Danish welfare state clearly boosts the cognitive test scores of disadvantaged children compared to their U.S. counterparts. But test scores are not the whole story, or even the main story of child success, despite the emphasis on them in popular discussions. Moreover, substantial gaps in test scores remain across social groups within Denmark.

…The U.S. excels in incentivizing educational attainment. The Danish welfare state promotes cognitive skills for the disadvantaged children. Policies that combine the best features of each system would appear to have the greatest benefit for promoting intergenerational mobility in terms of both income and educational attainment (pgs. 55-56).

Check it out.

Is There a Connection Between Parent-Child Earnings?

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Image result for parent childOver at the St. Louis Federal Reserve, economist George Levi-Gayle describes the research on this potentially important topic:

In a recent paper, my co-authors, Limor Golan and Mehmet Soytas, and I wrote that the structure of the family and the division of labor within the household were the main sources of the correlation of earnings across generations…Besides income, other factors need to be considered: how parents accumulate human capital in the labor market, the availability and returns to part-time jobs versus full-time jobs and the return to parental time invested in children.

In another study, we looked at the difference between blacks and whites in the intergenerational transmission of human capital. We focused on the roles of time and income spent in the early childhood years to see how they impacted educational outcomes, if at all. We found that the time that parents spend talking to and otherwise interacting with their children is the major reason for the disparity in educational outcomes between black and white children. For example, for black and white parents who spent the same amount of time interacting with their children, there is no black-white attainment gap.

Check out his research here.

The Anti-Growth Mentality Behind Zoning Laws

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I’ve mentioned the economic impact of zoning laws here before. A recent article in The New York Times continues to highlight how detrimental these laws can be:

These days, you can find…people who moved somewhere before it exploded and now worry that growth is killing the place they love. But a growing body of economic literature suggests that anti-growth sentiment, when multiplied across countless unheralded local development battles, is a major factor in creating a stagnant and less equal American economy. It has even to some extent changed how Americans of different incomes view opportunity. Unlike past decades, when people of different socioeconomic backgrounds tended to move to similar areas, today, less-skilled workers often go where jobs are scarcer but housing is cheap, instead of heading to places with the most promising job opportunities, according to research by Daniel Shoag, a professor of public policy at Harvard, and Peter Ganong, also of Harvard.

With the recent shootings in Baton Rouge, Minnesota, and Dallas, arguments over police brutality and black crime have started once again. Though it might sound odd, in many cases zoning laws provide background for the tensions between law enforcement and black communities.[ref]For example, one can see the impact on the black community in St. Louis from the maps here. Journalist Radley Balko provides context in an incredible article for The Washington Post here.[/ref] As the article explains,

Zoning restrictions have been around for decades but really took off during the 1960s, when the combination of inner-city race riots and “white flight” from cities led to heavily zoned suburbs.

They have gotten more restrictive over time, contributing to a jump in home prices that has been a bonanza for anyone who bought early in places like Boulder, San Francisco and New York City. But for latecomers, the cost of renting an apartment or buying a home has become prohibitive.

In short, it’s just another form of tribalism making its way into local laws:

[W]hen zoning laws get out of hand, economists say, the damage to the American economy and society can be profound. Studies have shown that laws aimed at things like “maintaining neighborhood character” or limiting how many unrelated people can live together in the same house contribute to racial segregation and deeper class disparities. They also exacerbate inequality by restricting the housing supply in places where demand is greatest.

The lost opportunities for development may theoretically reduce the output of the United States economy by as much as $1.5 trillion a year, according to estimates in a recent paper by the economists Chang-Tai Hsieh and Enrico Moretti. Regardless of the actual gains in dollars that could be achieved if zoning laws were significantly cut back, the research on land-use restrictions highlights some of the consequences of giving local communities too much control over who is allowed to live there.

“You don’t want rules made entirely for people that have something, at the expense of people who don’t,” said Jason Furman, chairman of the White House Council of Economic Advisers.

The Uncertainty of Brexit

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Over at The Washington Post, GMU law professor Ilya Somin has a great piece on Brexit that touches on similar points I made in my first post on the subject. After taking a look of political theorist Jacob Levy’s fantastic arguments against Brexit, Somin makes several important observations:

  • “First, he implicitly assumes that the UK will not become significantly more pro-free market than it was before Brexit. If you think that a Conservative government led by Boris Johnson or Theresa May will adopt much more market-oriented policies than it did in David Cameron, then its possible that the leaving the EU will facilitate such reforms. So far, however, I see little evidence of any such free market revolution in the offing.”
  • “Conversely, it is also possible that, even if the EU has not made British economic policy much more interventionist so far, it might have done so in the future had Britain voted for Remain.”
  • “Finally, it is possible that free trade and migration will be preserved intact if Britain joins the European Economic Area – the so-called “Norway option” favored by some Brexit proponents. EEA membership requires free trade and migration for EU citizens, and would also subject the UK to many (though not all) EU economic regulations. From a libertarian standpoint, the Norway option retains most of the good features of the European Union, while freeing Britain from at least a few of the bad ones. “

In short,

there is still a lot of uncertainty over the long-term impact of Brexit. But Jacob’s analysis should at least give pause to those who expect that Brexit will lead to a more libertarian Britain, or a more free-market Europe more generally.

 

Social Progress: Wealth Matters, But Isn’t Enough

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The Economist recently reported on the latest index from the Social Progress Imperative, which measures various indicators (ranging from nutrition and basic medical care to access to basic knowledge to personal rights) under three major headings: (1) basic needs, (2) foundations of well-being, and (3) opportunity. The index finds that “generally the richer a nation is the more socially progressive it is.” While there are obvious exceptions and even first-world problems (such as obesity), the correlation is pretty clear:

SPI3

The chart demonstrates that GDP isn’t the end all, be all. Yet, even though the addition from Business Insider above the chart is certainly true, it’s the kind of platitude rich people tend to employ. When one is writing as a member of the richest 20% of the world’s population,[ref]A single adult with no children making $12,331 annually (the poverty threshold in the U.S. for a single person household) is in the richest 13.5% of the world’s population. A single adult with two children under 18 making $19,096 annually (the poverty threshold) is in the richest 16.8 percent. See how you rank at Giving What We Can. In other words, talking about poverty in absolute terms matters.[/ref] the claim begins to appear pretty vacuous. I’m reminded of economist Herbert Gintis’ response to Michael Sandel’s criticisms of the market economy: “By focusing on the marketability of particular things, Sandel misses the larger effect of an economy regulated by markets on the evolution of social morality. Movements for religious and lifestyle tolerance, gender equality, and democracy have flourished and triumphed in societies governed by market exchange, and nowhere else.”[ref]For an absolute demolition of Sandel, see Jason Brennan, Peter Jaworski, Markets Without Limits: Moral Virtues and Commercial Interests (New York: Routledge, 2015). Also check out my post “The Capitalist Conscience.”[/ref]

Wealth may not be enough, but let’s not undersell its importance. And let’s especially not do so in order to undermine policies that can lead to greater economic growth.

Brexit, Trump, Sanders

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If you Google “Trump” and “Brexit” you’ll get an avalanche of articles suggesting that the explanation of the UK’s vote to leave the EU is an expression of populist outrage, resurgent nationalism, and an admixture of xenophobia to boot. That might not be accurate. Walker’s post highlighted an alternative view.

But let’s roll with it for a minute. Let’s say the headlines like Victory For Brexit ‘Leave’ Shows Us Why Trump Is Succeeding In America or Brexit Should Be a Warning About Donald Trump are on to something. If so, then what?

Well, in that case then we need to add someone else to the list: Bernie Sanders. Because–on issues of nationalism, protectionism, and even xenophobia–Trump and Sanders are reading from the same script.

What am I talking about? Well, let’s look at Sanders’ take on NAFTA.

NAFTA, supported by the Secretary, cost us 800,000 jobs nationwide, tens of thousands of jobs in the Midwest. Permanent normal trade relations with China cost us millions of jobs. Look, I was on a picket line in early 1990’s against NAFTA because you didn’t need a PhD in economics to understand that American workers should not be forced to compete against people in Mexico making 25 cents an hour. … And the reason that I was one of the first, not one of the last to be in opposition to the TPP is that American workers … should not be forced to compete against people in Vietnam today making a minimum wage of $0.65 an hour. Look, what we have got to do is tell corporate America that they cannot continue to shut down. We’ve lost 60,000 factories since 2001. They’re going to start having to, if I’m president, invest in this country — not in China, not in Mexico.

Sound familiar? It should. Sanders might stay away from some of the more visceral rhetoric that Trump revels in–he doesn’t slander Mexicans as rapists or promise to build a wall–but his targets (Chinese and Mexican workers) are also two of Trump’s favorite targets and his hawkish stance on trade wars matches The Donald’s.

Of course, that isn’t the only similarity. His grasp of reality is equally as tenuous as Trump’s on this issue, as this article from the Foundation for Economic Education elucidates with charts like this one:

nafta-manufacturing

As Daniel Bier puts it:

Not content to merely keep Mexicans from working in the United States (where, thanks to US capital and infrastructure, they could earn three or four times more than they make in Mexico), Bernie Sanders now objects to the right of Mexicans to work in Mexico, if they dare to sell goods and services to Americans — or, God forbid, try tocompete with American firms.

On the specific topic of economic policy, how is this different from Trump? How is it different from the populist outrage that purportedly led the UK out of the EU?

Then again, we could just ask Bernie Sanders how he feels about Trump’s policies. From Slate:

Daily News: Another one of your potential opponents has a very similar sounding answer to, or solution to, the trade situation—and that’s Donald Trump. He also says that, although he speaks with much more blunt language and says, and with few specifics, “Bad deals. Terrible deals. I’ll make them good deals.”

So in that sense I hear whispers of that same sentiment. How is your take on that issue different than his?

Sanders: Well, if he thinks they’re bad trade deals, I agree with him. They are bad trade deals. But we have some specificity and it isn’t just us going around denouncing bad trade. In other words, I do believe in trade. But it has to be based on principles that are fair. So if you are in Vietnam, where the minimum wage is 65¢ an hour, or you’re in Malaysia, where many of the workers are indentured servants because their passports are taken away when they come into this country and are working in slave-like conditions, no, I’m not going to have American workers “competing” against you under those conditions. So you have to have standards. And what fair trade means to say that it is fair. It is roughly equivalent to the wages and environmental standards in the United States. [emphasis changed from the Slate article]

Jordan Weissmann writes:

It is one thing to argue that we should not do business with nations that actively manage or manipulate their currencies… It’s also entirely reasonable to support workers’ rights to unionize abroad or push for stricter environmental protections… But a blanket rule against trade with low-wage nations is different.

Weissmann is right. Sanders’ and Trump’s position makes no sense, morally or economically. Economically, a major benefit (maybe the key benefit) of trade is to allow countries to specialize where they have a comparative advantage. If there’s no comparative advantage and no specialization… what does he think trade is for? And, morally, the idea that you’re going to help people who earn very low wages by taking their jobs away is questionable. It’s about as useful as helping the homeless by making sure they can’t sleep where you can see them.

But I digress. The main point of this post is not to enumerate all the ways in which protectionism is bad. We’d be here all day.[ref]And note: there are exceptions to that general rule.[/ref] The point is to note just how similar Trump and Sanders are on these matters, and to also observe–based on the results of the Brexit vote–that these forces might be globally ascendant.

In many ways, we–all of us humans–are on the threshold of a brighter future. Never has global poverty fallen so rapidly. Never have so many been lifted out of the depths of abject deprivation.[ref]See Walker’s and my article for details.[/ref] Never has the promise of prosperity and peace and freedom been brighter for the entire planet. But–if the Brexit vote and the populist movements of Sanders and Trump are any indication–we might just slam that door shut instead of walking through it, and return to the tribalist, zero-sum mentality that treats trade as a competition to win instead of a policy of mutual benefit.

It’s not clear how far down that road we’ll walk, but we already know where it ends.

Brexit: “What Comes Next?”

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[ref]Props to Brad Kramer for nailing the perfect Hamilton reference in his comments on the outcome. I completely and unshamedly stole it.[/ref]

What comes next?
You’ve been freed
Do you know how hard it is to lead?

You’re on your own
Awesome. Wow.
Do you have a clue what happens now?

 

Economist Emily Skarbek makes an important observation following U.K. voters’ decision to leave the European Union:[ref]Get caught up with The New York Times, Vox, and The Economist.[/ref]

No one knows just how this is going to play out. The longer horizon will depend on the course that is chartered in policy negotiations and positions adopted by the UK.

Many of the people I have discussed this with in academic and policy circles want a freer, more open society. This led some to vote remain and others leave, based on divergent predictions about which course of action would lead to a more open society. I take this as one reason for optimism amidst the fear.

The aftermath of this vote will require a broader coalition of liberals to push for an open trade and immigration policy. Trade policy that is crafted in the next few years will be crucial to the economic impact of Brexit. Britain desperately needs policy entrepreneurs, City of London, and leaders in Parliament to craft a solution that maximises openness to counter the populist, nationalist, and collectivist sentiments that may have got us here. It is hard to see this now, having just voted to leave the EU single market.

It seems that many of the “Leave” supporters were driven by the influx of immigrants over the last decade or so. In other words, xenophobia quite possibly led to the Brexit vote. It could also very well be that most didn’t know what the hell they were voting on. Furthermore, the uncertainty can (and is) lead(ing) to economic chaos worldwide. However, it is interesting that younger voters were more in favor of remaining. While they may have been saddled with a future they didn’t want by those going to their graves, this could also mean that the long-term future of Britain is in fact not nationalistic and xenophobic and far more open and liberal. As some supporters of both liberal trade and migration have noted, the EU has helped establish both in Europe. Some are optimistic about the vote. As the Cato Institute’s Marian L. Tupy remarked, “Moving forward, there is no reason why nations committed to entrepreneurship and free trade should not prosper outside of the EU. Switzerland has done so in the past and Britain can do so in the future. By showing the rest of Europe that it is possible to live in prosperity and peace outside the suffocating confines of the EU, Britain will lead the way for other nations – including Denmark, France, Holland and Sweden – that wish to regain their sovereignty and chart their own course.”[ref]You can read Tupy’s more in-depth analysis of the European Union here.[/ref]

The question is whether or not Britain will be “committed to entrepreneurship and free trade” (I’d add liberal immigration policies). The answer will ultimately determine the long-term outcome of Brexit.