More on Trump’s Trade War

I’ve touched on one of these papers before, but NBER Digest has a nice rundown of recent work on Trump’s trade war. One study finds

that the costs of the new tariff structure were largely passed through as increases in U.S. prices, affecting domestic consumers and producers who buy imported goods rather than foreign exporters. The researchers estimate that the tariffs reduced real incomes by about $1.4 billion per month. Due to reduced foreign competition, domestic producer prices also increased. The prices of manufactured goods rose by one percentage point relative to a no-trade-war scenario. The reduction in real incomes represents the welfare cost of higher consumer prices, less the government revenue collected by the tariffs and the additional income of domestic producers who were able to sell their products at higher prices.

This could end up being “especially costly for multinational companies that have made substantial sunk-cost investments in supply chains in other countries, for example by relying on facilities in China or other impacted countries. The study estimates that around $165 billion worth of trade has been rerouted to avoid them.”

Another study

estimate[s] that the new tariff regime reduced U.S. imports by 32 percent, and that retaliatory tariffs from other countries resulted in an 11 percent decline of U.S. exports. They use these responses to estimate import demand and export supply elasticities, and then apply these estimates to calibrate a general equilibrium model of the U.S. economy with detailed input-output linkages. They estimate that higher prices facing U.S. consumers and firms who purchased imported goods generated a welfare loss of $68.8 billion, which was substantially offset by the income gains to U.S. producers who were able to charge higher prices ($61 billion). The researchers estimate the resulting real income decline at about $7.8 billion per year, a value broadly comparable to the net income decline estimated in the previous study. 

What’s more, “The average real wage of workers in tradeable sectors declined by 0.7 percentage points, with a standard deviation of 0.4 percentage points across counties, with workers in the Midwest suffering more than those in other regions.” The protectionist policies also appear to be (of course) political. It turns out that “the U.S. tariffs protected industries that tended to employ workers in the most politically competitive counties. Foreign governments imposed retaliatory tariffs in sectors based in more Republican-leaning counties. The researchers estimate that counties with at least an 85 percent Republican vote share bore losses over 50 percent greater than counties in which the Republican vote share was less than 15 percent.”

Surprise, surprise.

Stuff I Say at School – Part XIII: Political Ignorance and Policy Preferences

This is part of the Stuff I Say at School series.

The Assignment

A critical literature review of political ignorance among the public. This section briefly (though not exhaustively) shows how political knowledge affects political preferences and, therefore, potential policy outcomes.

The Stuff I Said

Somin writes, “Ignorance of the structure of government suggests that voters often not only cannot choose between specific competing policy programs but also cannot easily assign credit and blame for policy outcomes to the right officeholders.” As discussed earlier, Lupia is skeptical of the common measurements of political knowledge, arguing that the ability to recall particulars on a survey is not necessary to achieve “high-value social outcomes.” However, this is an empirical question. The summary of Caplan’s work in a previous section has already shown that economic information and education changes one’s views about economic issues. Summarizing the work of Martin Gilens and Scott Althaus, Brennan demonstrates that political knowledge influences policy preferences. As noted above, high-income is strongly correlated with high degrees of political knowledge. Compared to wealthier Democrats, low-income Democrats “more strongly approved of invading Iraq in 2003. They more strongly favored the Patriot Act, invasions of civil liberty torture, protectionism, and restricting abortion rights and access to birth control. They are less tolerant of homosexuals and more opposed to gay rights.” When demographic factors like race, income, and gender are controlled for, high-information voters “favor overall less government intervention and control of the economy…They are more in favor of free trade and less in favor of protectionism. They are more pro-choice. They favor using tax increases to offset the deficit and debt. They favor less punitive and harsh measures on crime, and are less hawkish on military policy, although they favor other forms of intervention. They are more accepting of affirmative action. They are less supportive of prayer in public schools. They are more supportive of market solutions to health care problems. They are less moralistic in law; they don’t want government to impose morality on the population.”

Relying on a 2017 survey, Oxford economist Max Roser finds “a connection between our perception of the past and our hope for the future.” The numbers suggest “that the degree of optimism about the future differs hugely by the level of people’s knowledge about global development. Those that were most pessimistic about the future tended to have the least basic knowledge on how the world has changed.”

At first blush, this may seem unrelated to policy. However, recent evidence suggests that declinism—a negative view of the state and evolution of society—and nostalgia for a supposedly better past are predictive of populist support.

Even though the data suggest more knowledgeable citizens are more likely to vote, there is also evidence that “more knowledgeable citizens are far more likely to falsely report voting than less knowledgeable ones…People who are knowledgeable and interested in politics but still choose not to vote are more likely to feel guilty for doing so, and therefore less willing to admit their nonvoting to the pollsters. As a result, the voting population is probably significantly closer in knowledge level to the general public than might be supposed.”

While all policy decisions ultimately rely on value judgments (which go beyond the blunt empirics), the evidence in this section suggests that degrees of political knowledge do influence policy preferences. If one is concerned about policy outcomes, one should also be concerned about voter knowledge.

Stuff I Say at School – Part XII: The ‘Why’ of Political Ignorance

This is part of the Stuff I Say at School series.

The Assignment

A critical literature review of political ignorance among the public. This section summarizes the scholarly explanations for the lack of political knowledge among the average citizen.

The Stuff I Said

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Though political ignorance is rampant among American citizens, scholars are quick to distinguish between ignorance and stupidity. Despite rising educational attainment and IQ scores, political knowledge among the general public has remained largely stagnant since the 1930s. In fact, Somin determines (in agreement with previous economic theories of democracy) that most political ignorance is rational. Political knowledge is costly in time and effort with little payoff in terms of political influence. At best, an American voter has a 1-in-10 million chance of changing the outcome of a presidential election. This optimistic number occurs only within a few swing states and only if the voter votes for one of the candidates in the two major parties. On average, however, the chance is 1-in-60 million. Numbers improve when it comes to U.S. Congressional elections (1-in-89,000) and state legislator elections (1-in-15,000), but the probability of changing the outcome still remains insanely low. Brennan argues that, from a strictly mathematical standpoint, the disutility of merely driving to the polls (i.e., the probability and cost of getting into an auto accident) is higher than the utility of the vote cast upon arrival. Given these hard data, political ignorance appears to be a rational trade-off. As Somin puts it, “Even a 100 percent altruistic person—someone who always chooses to prioritize the welfare of others over his own whenever the two conflict—would not rationally devote much of his time to acquiring political information for the sake of casting an informed vote. No matter how great the benefits to others of a “correct” electoral outcome, the altruist’s ballot has almost no chance of bringing it about; in a large electorate the change that his vote will be decisive is vanishingly small.”

Caplan’s explanation for voter ignorance extends beyond rational ignorance to what he calls rational irrationality: “Since delusional political beliefs are free, the voter consumes until he reaches his “satiation point,” believing whatever makes him feel best. When a person puts on his voting hat, he does not have to give up practical efficacy in exchange for self-image, because he has no practical efficacy to give up in the first place.” Not only does the acquisition of political knowledge provide a low return on investment, but irrationality can provide self-satisfaction at virtually no cost. This makes the choice to be seemingly irrational when it comes to politics understandable and arguably—if paradoxically—rational.

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Caplan elsewhere provides another likely explanation for voter ignorance: poor information retention. Drawing on literature in educational psychology, Caplan finds the “transfer of learning” in our educational systems to be less than impressive. Most students are unable to retain or apply their newfound methodological reasoning outside of the classroom and can usually only do so within the classroom after being instructed to apply a particular principle to their problem-solving. “Telling subjects to use a principle is not transfer,” says psychologist Douglas Detterman. “It is following instructions.” This insight complements the rational ignorance theory by demonstrating the difficult and costly nature of true education. This lack of transfer in learning shows up in various surveys of American adults who typically received public K-12 education:

The American Revolution Center tested 1,001 adult Americans’ knowledge of the American Revolution. Eighty-three percent earned failing grades. The Intercollegiate Studies Institute tested over 2,500 adult Americans’ knowledge of American government and American history. Seventy-one percent earned failing grades. Newsweek magazine gave 1,000 Americans the U.S. Citizenship Test. Thirty-eight percent scored too low to become citizens of their own country. On the 2000 American National Election Study, the typical person got 48% of the factual questions right; you would expect 28% by guessing…How many American adults know the Bill of Rights is part of the Constitution? The American Revolution Center reports a dismal 57%, but the truth is far worse. Since there were only four response options, you would expect roughly 25% of the ignorant to guess the right answer by chance…Not knowing the three branches of government isn’t like not knowing Hamlet; it’s like not knowing the letter “h.” If you don’t know that the Civil War came after the Declaration of Independence, you don’t understand American history. If you don’t know which parties control the House and the Senate, you don’t understand American politics.

Ian Anson of the University of Maryland introduces a more disturbing angle on the persistence of voter ignorance. In a 2018 study, Anson points to what is known as the Dunning-Kruger effect: “[a] widely cited phenomenon in social psychology [that] holds that individuals with low levels of competence will judge themselves to be more competent than they really are, while those with high levels of competence will underestimate their excellence.” This overestimation of one’s abilities and/or knowledge “affect[s] the ability of low achievers to overcome their incompetence because they are unaware that they lag behind others until their objective performance is measured and reported to them.” After surveying two groups (a total of 2,606 American adults) on political knowledge, Anson had participants evaluate their performance after priming them with partisan cues. The results showed that the worst performers (i.e., the most politically ignorant) were more likely to overestimate their performance. What’s worse, this overconfidence was exacerbated by partisanship. “This result is normatively worrying from the perspective of citizens’ ability to self-correct,” writes Anson, “as it may be that rationally ignorant Americans are especially confident that they are better informed than many of their (partisan) peers. The rationally ignorant fail to overcome their ignorance not just because they face steep costs and lack incentives to improve, but because they are unaware that they are relatively ignorant. They become increasingly hardened to the possibility that they are uninformed when partisan identities are activated, a commonplace feature of most contemporary political discussion.” Anson’s findings are bolstered by a recent study, which found that (1) “people choose to hear from those who are politically like-minded on topics that have nothing to do with politics…in preference to those with greater expertise on the topic but have different political views,” (2) “all else being equal, people are more influenced by politically like-minded others on nonpolitical issues,” and (3) “people are biased to believe that others who share their political opinions are better at tasks that have nothing to do with politics, even when they have all information they need to make an accurate assessment about who is the expert in the room.” This partisan selection process lowers the quality of the obtained information, further inflaming voter tendency toward ignorance and misinformation. Most scholars adhere to a theory of rational ignorance among voters: due to the poor incentives provided by a democratic system, most citizens determine that the costs of political knowledge (including the difficulty of making it stick) outweigh its benefits. Furthermore, the poorly informed suffer from “the double burden of incompetence” due to ignorance of their own ignorance, making change unlikely.

Stuff I Say at School – Part XI: The Extent of Political Ignorance

This is part of the Stuff I Say at School series.

The Assignment

A critical literature review of political ignorance among the public. This section specifically explores the academic literature on the extent of political ignorance, demonstrating that Americans know very little when it comes to politics and policy.

The Stuff I Said

What makes this particular skit humorous is how much it reflects reality. According to political scientists Christopher Achens and Larry Bartels, there is a “folk theory” of democracy that is widespread in American culture. This theory paints average citizens as engaged, well-informed participants in the political process, deliberating policies and selecting leaders who represent their well-reasoned preferences. “Unfortunately,” write Achens and Bartels, “while the folk theory of democracy has flourished as an ideal, its credibility has been severely undercut by a growing body of scientific evidence…That evidence demonstrates that the great majority of citizens pay little attention to politics.”

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Michael Delli Carpini and Scott Keeter have defined political knowledge as “the range of factual information about politics that is stored in long-term memory.” Most of the surveys on which claims about political knowledge are based consist of recall questions, which “are designed to measure whether or not a person has selected declarative memory.” Drawing on Carpini and Keeter’s work, Achens and Bartels display the ignorance of the typical American on these kinds of questions. For example, in 1952, “only 44% of Americans could name at least one branch of government. In 1972, only 22% knew something about Watergate. In 1985, only 59% knew whether their own state’s governor was a Democrat or a Republican. In 1986, only 49% knew which one nation in the world had used nuclear weapons.” Recent survey evidence continues to support these findings. A 2018 poll found that 67% of Americans cannot name all three branches of government. Another poll found that a sizeable minority (39%) of Americans think or are not sure if low GDP is better for the country than high GDP. The Woodrow Wilson Foundation recently found that only 1-in-3 Americans can pass the U.S. Citizenship Test, with less than half the population of all but one state (Vermont) being able to pass it. A 2014 Barna survey found that 84% of Americans are unaware that extreme poverty worldwide has decreased by more than half in the past three decades. Sixty-seven percent said they thought global poverty was actually increasing during that time. Similarly, a 2016 study found that only 8% of Americans believe extreme global poverty has decreased in the last 20 years. (A 2017 study placed the percentage slightly higher at fifteen.) The late statistician Hans Rosling often tested his audience’s knowledge of the state of the world. Overall, he found that only 5% of Americans could answer a multiple-choice question about global poverty correctly: worse than chimpanzees picking at random. This ignorance not only extends to basic facts about government, politics, and the economy, but to party makeup as well. A 2018 study found that “Republicans, Democrats, and independents, all overestimate the share of party-stereotypical groups in both the major parties.” For example, respondents thought 39.3% of Democrats belonged to a labor union (actual: 10.5%), 38.2% of Republicans earned over $250,000 a year (actual: 2.2%), and 31.7% of Democrats were gay, lesbian, or bisexual (actual: 6.3%).

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Georgetown political philosopher Jason Brennan divides the spread of political knowledge into four quartiles: “the top 25 percent of voters are well informed, the next 25 percent are badly informed, the next 25 percent are know-nothings, and bottom 25 percent are systematically misinformed.” According to data from the 1992 American National Election Studies, “93.4 percent of people in the top quartile, but only 13.1 percent of people in the bottom quartile, know that Republicans tend to be more conservative than Democrats. Among people in the lowest knowledge quartile, only 12.2 percent and 9.7 percent knew which party controlled the House of Representatives and Senate, respectively. The bottom 25 percent of citizens does worse than a coin flip when it comes to political knowledge—they are systematically in error.” When it comes to the demographics of these quartiles, political knowledge within the U.S.

is strongly positively correlated with having a college degree, but negatively correlated with having a high school diploma or less. It is positively correlated with being in the top half of income earners, but negatively correlated with being in the bottom half. It is strongly positively correlated with being in the top quarter of income earners, and strongly negatively correlated with being in the bottom quarter. It is positively correlated with living in the western United States, and negatively correlated with living in the South. Political knowledge is positively correlated with being or leaning Republican, but negatively correlated with being a Democrat or leaning independent. It is positively correlated with being between the ages of thirty-five and fifty-four, but negatively correlated with other ages. It is negatively correlated with being black, and strongly negatively correlated with being female.

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Legal scholar Ilya Somin’s work scours both the academic literature as well as a sweeping array of public surveys, including (but not limited to) the Annenberg Public Policy Center, Kaiser Health Tracking Poll, Pew Research Center, Bloomberg, Public Policy Research Institute, Reason-Rupe, and American National Election Studies. Voter ignorance is not merely in regards to “specific policy issues but about the basic structure of government and how it operates.” He concludes, “Extensive evidence suggests that most Americans have little political knowledge. That ignorance covers knowledge of specific issues, knowledge of political leaders and parties, and knowledge of political institutions. The evidence extends to many of the crucial issues at stake in recent elections from 2000 to 2014. Moreover, much of the widespread ignorance relate to fairly basic issues about the politicians, parties, issues, and the structure of politics.”

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Relying on the 1996 Survey of Americans and Economists on the Economy (SAEE), GMU economist Bryan Caplan compares (1) the average belief of the general public on economic issues, (2) the average belief of Ph.D. economists, and (3) the estimated belief of a category Caplan labels the Enlightened Public. This latter category is the result of Caplan testing for both “self-serving” and “ideological” bias among economists by controlling for family income, job security, race, gender, age, and income growth. The Enlightened Public essentially are the answers to the questions “What would the average person believe if he had a Ph.D. in economics?” or “What would Ph.D. economists believe if their finances and political ideology matched those of the average person?” Caplan discovers that the answers of economists/Enlightened Public differ greatly from the general public on most economic issues. For example, the general public is far more concerned about the supposed negative economic effects of taxes, foreign aid, immigration, business tax breaks, the number of people on welfare, affirmative action, business profits, executive compensation, technology in the workplace, job outsourcing, and corporate downsizing. Caplan’s controls and comparisons indicate that (1) economic information and education changes one’s views about economic issues and (2) the general public is lacking in these qualifications. This gap between economists and the general public is further confirmed by a 2013 study by Paola Sapienza and Luigi Zingales. Drawing on the Economic Expert Panel (EEP) and Financial Trust Index (FTI)—both from the University of Chicago—the researchers find that, “[o]n average, the percentage of agreement with a statement differs 35 percentage points between the two groups.”

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Despite the strong consensus on the typical American’s political ignorance, Arthur Lupia of the University of Michigan is skeptical of the explanatory power of these survey data. He argues that in many cases, it is “not demonstrate[d] that recalling the items on [the] survey is a necessary condition for achieving high-value social outcomes” and, therefore, not a good standard for measuring relevant political knowledge. He also questions the legitimacy of the American National Election Studies, showing that obviously correct answers were sometimes marked as incorrect due to an overly-rigid grading system. Finally, he notes that “decades of surveys and experiments provide evidence that “don’t know” responses are mixtures of several factors. Ignorance is one such factor. Low motivation, personality, and gender also affect responses.” However, Achens and Bartels point out that “insufficient motivation is endemic to mass politics, not an artifact of opinion surveys[.]” Furthermore, they hold Lupia’s feet to the fire for the vagueness of statements like “high-quality decisions” or “high-value social outcomes.” Uninformed voters are supposedly capable of these things, yet Lupia provides no concrete examples. Brennan also argues that public polls actually overstate how much Americans really know about politics and policy. The first reason is because these polls “usually take the form of a multiple-choice test. When many citizens do not know the answer to a question, they guess. Some of them get lucky, and the surveys mark them as knowledgeable.” These polls “count a citizen as knowledgeable if they know that we spend more on social security than defense, but they typically don’t check if they know how much more we spend.” Finally, these questions are about “easily verifiable facts…While most voting Americans cannot answer such questions, these questions do not require specialized social scientific knowledge.” Unfortunately, greater question complexity is associated with greater ignorance. According to Carpini and Keeter, “as the amount of detail requested increases and as less visible institutions or processes are asked about, the percentage of the public able to correctly answer questions declines.”

In sum, the scholarly consensus appears to recognize that the average American citizen knows very little about the major players, institutions, and processes of their government. What’s more, there is a significant gap between expert views on policy-related issues and that of the average American.

Stuff I Say at School – Part X: Direct Effects of Trade on Poverty

This is part of the Stuff I Say at School series.

The Assignment

A critical literature review of trade openness on poverty. This post consists of section on direct effects of trade on poverty as well as the conclusion.

The Stuff I Said

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The majority of studies on openness and poverty concentrate on trade’s effects on economic growth and, consequently, growth’s effects on poverty. As Panagariya (2019, pg. 136) notes, this means that “the literature directly linking trade openness and poverty is sparse.” Nonetheless, a few more recent studies have attempted to look at the direct linkage between trade liberalization and poverty.

Measuring trade openness by the trade-to-GDP ratio and average tariffs, Aisbett, Harrison, and Zwane (2008) confirm previous studies in a cross-country analysis showing a strong link between trade and increased aggregate income growth. However, when the direct link between trade and poverty is measured, the tie is weakened considerably. Nonetheless, the direct association between trade and poverty remains positive, if not always statistically significant. The authors recommend complementary domestic policies related to good governance and institutions in order to make trade optimal for the poor. However, a more recent study finds a stronger direct tie between trade and poverty. Updating Aisbett et al.’s (2008) data with more recent years and the World Bank’s new poverty headcount ratio, Devashish Mitra (2016, pg. 65) shows that in the period of 1981-2013, “a single percentage point increase in trade leads to a poverty decline of 0.149 percentage points.”

Petia Topalova (2007, pg. 293) explores the effect of trade liberalization—measured by the weighted tariff average—on various districts within India from the late 1980s throughout the 1990s and comes to more pessimistic conclusion: “trade liberalization led to an increase in poverty rate and poverty gap in the rural districts where industries more exposed to liberalization were concentrated.” However, a response article by Hasan, Mitra, and Ural (2007) actually reverses her results after more robust measurements are taken into consideration (i.e., the inclusion of non-tariff barriers, the avoidance of nontradable employment weights, better sampling data from state-level measures). They “find that states whose workers are on average more exposed to foreign competition tend to have lower rural, urban and overall poverty rates (and poverty gaps), and this beneficial effect of greater trade openness is more pronounced in states that have more flexible labor market institutions” (2007, pg. 75). A follow-up study by Cain, Hasan, and Mitra (2012) updates Hasan et al. (2007) with the latest available data and comes to the same conclusions, determining that 38% of the poverty reduction between 1987 and 2004 was due to international trade.

Maelan Le Goff and Raju Jan Singh (2014) examine a panel of African countries between 1981 and 2010 and find that trade openness increases poverty after controlling for GDP per capita, education, and institutional quality, indicating the need for complementary reforms. Andreas Bergh and Therese Nilsson (2014) analyze 114 countries from 1983 to 2007, breaking the poverty data down into four five-year periods. In order to test economic globalization’s causality, they control for (1) the number of years McDonalds has been in the country and (2) the preceding average level of economic globalization of the neighboring countries. They discover that while trade flows lead to reductions in poverty, the significance disappears once they control for income and growth. However, even after those controls, liberalized trade restrictions have a large poverty-reducing effect (along with information flows).

Despite some mixed results, this handful of studies seems to support the conclusions of the previous section that international trade ultimately leads to reduced poverty. Even still, complementary domestic policies are necessary for countries to reap the full benefits of trade.

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In her recent book, Kimberly Clausing (2019, pg. 65-66) writes, “Openness to the world economy has played an important role in one of the most encouraging developments in human history: the dramatic increase in worldwide living standards in recent years…International trade is not solely responsible for these impressive achievements, but it has played a key role.” This literature review fully supports Clausing’s view. Trade has done an enormous amount of good for the poor worldwide and will continue to do so as long as policymakers and the public steer clear of populist-fueled protectionism.

Stuff I Say at School – Part IX: Indirect Effects of Trade on Poverty

This is part of the Stuff I Say at School series.

The Assignment

A critical literature review of trade openness on poverty. This post consists of part of the introduction and the section on trade and economic growth.

The Stuff I Said

As the The Economist (2013) reports, “The world’s achievement in the field of poverty reduction is, by almost any measure, impressive.” The United Nations’ “aim of halving global poverty between 1990 and 2015 was achieved five years early…The [Millennium Development Goals] may have helped marginally, by creating a yardstick for measuring progress, and by focusing minds on the evil of poverty. Most of the credit, however, must go to capitalism and free trade, for they enable economies to grow—and it was growth, principally, that has eased destitution.” This last statement is at times controversial in the popular press. In order to engage the controversy, this review will survey the academic literature on the effects of trade liberalization on poverty. This will be explored through two main channels. First, through trade’s indirect effects on poverty via economic growth. Most research on trade liberalization and poverty is focused on the relationship between trade and growth. Other possible avenues associated with trade, growth, and poverty—such as innovation or institutional change —will largely be ignored. Only work that focuses specifically on the connection between trade and growth will be reviewed in this section. The final section will mine the scant research on direct effects of trade liberalization on poverty.

Economist and trade expert Jagdish Bhagwati (2004, pg. 64) argues that “freer trade is associated with higher growth and…higher growth is associated with reduced poverty. Hence, growth reduces poverty.” However, empirically establishing this connection between growth and poverty reduction is necessary, seeing that it is theoretically possible for the benefits of economic growth to not be distributed to the poorest segments of society. Using a sample of 92 countries over a 40-year period, David Dollar and Aart Kraay (2002, pg. 219) find that economic growth on average increases “the income of the poor to the same extent that it increases the income of the other households in society.” Kraay (2006) finds that the main explanation for cross-country differences in poverty shifts over time is the growth in average incomes: 70% in the short-run and 97% in the long-run, respectively. In a follow-up study, Dollar, Kleineberg, and Kraay (2016, pg. 81) look at a dataset of 121 countries over four decades and come to the same conclusion: “Incomes of the bottom 20 percent and bottom 40 percent of income distribution generally rise equiproportionally with mean incomes as economic growth proceeds.” In a book-length treatment on the economic reforms in their home country of India, Bhagwati and Arvind Panagariya (2013) find that the growth since the 1990s has reduced poverty nationwide in both rural and urban regions alike and among socially disadvantaged groups. These studies confirm that the connection between economic growth and poverty reduction is solid.

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According to Bhagwati (2004), trade openness produces growth through various channels, including specialization, economies of scale, increased competition (and, consequently, decreased domestic monopolies), promotion of macroeconomic stability, and increased foreign direct investment. Much of the empirical evidence supports this view that trade openness results in growth. David Dollar’s (1992) early analysis of 95 developing countries between 1976 and 1985 concludes that trade openness (what the author calls an “outward-orientation”) and per capita GDP growth are highly correlated. Those countries in the most open quartile experienced a per capita growth rate of 2.9 percent, while those in the most closed quartile languished at -1.3 percent. Similarly, Harvard’s Jeffrey Sachs and Andrew Warner (1995, pg. 45) show in a cross-country analysis that, between 1970 and 1989, “being open to international trade has been sufficient to achieve growth in excess of 2 percent for developing countries.” However, Sachs and Warner (1995, pg. 45, fn. 61) acknowledge that their “indicators of openness are associated with other market-based reform policies, which makes it difficult to identify the precise contributions of trade as compared to other policies.” Using the portion of total trade that relies on geographical factors as an independent variable, a study by Jeffrey Frankel and David Romer (1999) finds that a one percentage point increase in the ratio of trade to GDP raises income per person between 0.5 and 2 percent. Measuring trade openness by means of tariff revenues, nontariff barriers, and other liberalization indicators, Romain Wacziarg (2001) discovers a positive effect of trade openness on economic growth in 57 countries between 1970 and 1989. Halit Yanikkaya (2003, pg. 57) provides continual support for the idea that trade stimulates growth, finding a “strong and positive relationship between trade intensity ratios and growth.” However, contrary to previous studies, Yanikkaya also finds that trade barriers can promote growth under particular conditions. William Cline (2004) questions Yanikayya’s latter findings, noting their contradiction with previous scholarship and the likelihood of his measurements either understating or misgauging the effects of protection. On the flip side, Francisco Rodriguez and Dani Rodrik (2001) argue that many of the measurements used by Sachs & Warner (1995) as well as Frankel & Romer (1999) are flawed in their openness measurements, fail to establish causality, and ignore other complementary policies necessary to promote and sustain growth. Perhaps surprisingly, T.N. Srinivasan and Bhagwati (2001) also find methodological problems with various cross-country regressions. However, in their view, this undermines many of Rodriguez and Rodrik’s criticisms due to their heavy reliance on these kinds of studies. After examining the evidence from several country-specific studies, Srinivasan and Bhagwati determine that Rodriguez and Rodrik’s criticisms fall flat and that trade and growth go hand-in-hand. Nonetheless, in a later paper, Bhagwati and Srinivasan (2002, pg. 182) acknowledge the cross-country regressions’ “interesting” findings that “practically no country that has been close to autarkic has managed to sustain a high growth performance over a sustained period.” A follow-up study by Frankel & Andrew Rose (2002) addresses many of Rodriguez and Rodrik’s concerns, controlling for small city-states, geographical distance, and institutional quality. They determine, “In every case, regardless of whether the other controls are included or not, the openness variable retains most of its magnitude and all of its statistical significance in the presence of each of the three Rodriguez-Rodrik modifications” (2002, pg. 451; italics original). On the other hand, Rodrik, Subramanian, and Trebbi (2004, pg. 135) find that when the impact of geography, global integration (international trade), and institutional quality are compared, “the quality of institutions trumps everything else.” Yet, they also find that institutions and integration positively influence each other: “A unit increase in institutional quality increases the trade share by 0.45 units, while a unit increase in trade increases institutional quality by 0.22 units” (2004, pg. 143). Conversely, Francisco Alcala and Antonio Ciccone (2004, pg. 638) control for both geography and institutional quality and measure “real openness (imports plus exports in exchange rate U.S. dollars relative to GDP in purchasing power parity US$).” Their results show that trade has a significant and robust positive (and causal) effect on productivity. Marta Noguer & Marc Siscart (2005) also control for geography and institutional quality, finding that a 1% increase in the trade share of GDP leads to a similar increase in income per capita. Dollar & Kraay (2004) look at decade-by-decade changes in trade volume across 100 countries and find that within-country changes in trade volume have a strong positive relation with changes in growth. This results in increased income for the poor. Nonetheless, Dollar and Kraay recommend complementing open trade with strong safety nets; nets that are in turn better funded by trade-induced growth.

Research over the last decade continues to support these earlier findings. Wacziarg & Welch (2008, pg. 212) find that between 1950 and 1998, “countries that liberalized their trade regimes experienced average annual growth rates that were about 1.5 percentage points higher than before liberalization.” Vlad Manole & Mariana Spatareanu (2010) use data from 131 developed and developing countries and find that reductions in trade protections lead to higher levels of income per capita. Expanding the data from Sachs & Warner (1995) and Wacziarg & Welch (2008), David Weil (2013) finds that the average growth rate of income among more open countries was significantly higher (3.1% per year) than that of closed countries (1.5% per year). Antoni Estevadeordal & Alan Taylor (2013) explore the outcomes of liberalized trade policies in countries during two time periods: 1975-1989 and 1990-2004. Those countries that liberalized during these periods had about one percentage point higher growth rates compared to non-liberalized countries.

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Maureen Were (2015) performs a cross-country analysis of 85 countries from 1991 to 2011. In agreement with most of the literature, she finds that trade has a positive and significant effect on economic growth. However, among the Least Developed Countries (LDCs)—most of which are in Africa—the statistical significance disappears. Nonetheless, she notes that trade’s effects on both domestic and foreign direct investment (FDI) are positive and significant. However, Markus Brueckner & Daniel Lederman’s (2015, pg. 1318) study focuses specifically on sub-Saharan Africa and finds that “a 1 percentage point increase in the ratio of exports plus imports over GDP is associated with a short-run increase in GDP per capita growth of approximately 0.5% in a given year,” while the long-run effect reaches about 2 percent. Pam Zahonogo (2016) argues for a Laffer Trade Curve among sub-Saharan Africa. He finds that for most measures, the thresholds are virtually non-existent. However, when imports make up for more than 33.16% of GDP, the positive effects of trade on growth begin to decline. He suggests complementary policies that promote new investments, improve institutional quality, and develop human capital. Yet, it is feasible that higher barriers on imports may harm the poor. In their analysis, Pablo Fajgelbaum & Amit Khandelwal (2016, pg. 1116) find “a propoor bias of trade in every country. On average, the real income loss from closing off trade is 63% at the 10th percentile of the income distribution and 28% for the 90th percentile.” This is due to low-income consumers spending more on traded sectors compared to high-income consumers, who spend more on non-traded services. Furthermore, Furceri, Hannan, Ostri, & Rose (2019) examine a dataset of 151 countries from 1963 to 2014. According to their results, tariff increases negatively impact output, productivity, employment, and consumption. The authors conclude, “All this seems eminently sensible and bolsters the arguments that mainstream economists make against tariffs; our results can be regarded as strong empirical evidence for the benefits of liberal trade” (2019, pg. 28). Perhaps most impressively, Arvind Panagariya (2019, pg. 98) has compiled “data on per capita incomes, good and services exports, goods and services imports, and goods and services exports as a proportion of GDP in constant 2005 U.S. dollars for more than two hundred countries over a period of fifty-four years between 1960 and 2013” (broken into three smaller periods: 1961-1975, 1976-1994, and 1995-2013). With incredible detail, he demonstrates a causal relation between trade and per capita income: those countries that experienced intensive growth in these various periods always maintained a high and/or expanding trade-to-GDP ratio.

Overall, the empirical literature seems to indicate that trade openness has a positive effect on economic growth. Growth in turn reduces poverty. Multiple literature reviews and book-length treatments have drawn similar conclusions. For example, Joshua Lewer and Hendrik Van den Berg’s (2003) review of the literature finds that, on average, studies point to a 1/5 (or more) percentage point increase in real GDP for every percentage point increase in trade. Winters, McCulloch, and McKay (2004) are slightly more cautious, but ultimately admit that the preponderance of evidence suggests that trade openness increases economic growth and income levels within countries. Alan Winters and Antonio Martuscelli (2014, pg. 498) review the more recent literature and conclude that “the evidence is very strong that greater openness is generally associated with higher levels of income and, equivalently, that trade liberalization is associated with temporary increases in growth. The relationship appears to be causal but is not absolutely invariable.” Douglas Irwin’s (2015, pg. 197) survey of the evidence finds that “greater trade openness—marked by rising trade and low or declining trade barriers—has been a feature of virtually all rapid-growth developing country experiences in the past fifty years.” Examining countries such as China, India, South Korea, Chile, and Vietnam, Irwin concludes that liberalized trade has been associated with greater growth and, consequently, declining poverty. Panagariya (2019) performs a similar analysis, dedicating extensive attention to economic “miracles” such as Hong, Kong, Singapore, Taiwan, South Korea, India, and China. He then turns his attention to other successes throughout Asia and Africa (and even moderate ones in Latin America). He writes, “I have shown that in each case, trade liberalization and expanding trade are integral parts of the success story” (2019, pg. 322).

While complementary domestic policies (e.g., improvements in institutional quality) are necessary to reap the full benefits of international trade, there appears to be no evidence that suggests trade has anything other than positive effects on growth. The majority of studies support the claim that trade reduces poverty through increased economic growth. Panagariya (2019, pg. 125) concludes, “Given this set of facts, any advice to the developing countries to opt for protectionist policies can only be viewed as purely ideological.”

What Were the Results of the Washing Machine Tariffs?

As reported by The Washington Post,

When economists at the University of Chicago and the Federal Reserve studied the 2018 duty on washing machines, they found the expected rise in retail prices from foreign manufacturers such as Samsung and LG. Surprisingly, though, these brands also increased dryer prices. Then domestic manufacturers followed suit, simply because they could.

All told, the research shows, U.S. consumers are spending an additional $1.5 billion a year on washers and dryers as a result of the tariffs. That’s an extra $86 for each washing machine and $92 for each dryer, the authors estimate. And less than 10 percent of that goes to the U.S. treasury — about $82.2 million — the study showed…Foreign manufacturers are passing some costs on to consumers, while domestic ones are simply pocketing extra profits, according to the study.

…Manufacturers also capitalized on buyer habits when they bumped up the price of dryers, which were not subject to the tariffs. “Many consumers buy these goods in a bundle,” Tintelnot said. “Part of the price increase for washers was hidden by increasing the price of dryers.”

In sum, “U.S. consumers shouldered 125 to 225 percent of the costs of the washing-machine tariffs. And the duty was mostly a dud on the job-creation front,” costing consumers about $815,000 for every one of the 1,800 jobs created.

That’s exciting. Looks like tariffs are exactly what they are cracked up to be.

Stuff I Say at School – Part VIII: The Impact of Openness

This is part of the Stuff I Say at School series.

The Assignment

1. Do you feel that a country can thrive in an insular or isolated capacity? Is exchanges needed for a country to be successful? Do you see any examples of countries who have been reluctant to adopt new ideologies or integration?

2. What did we learn from the Columbian exchange that would be applicable to modern day society?

The Stuff I Said

1. While I think a country can thrive to some extent in isolation depending on a number of factors, it will not thrive as much as it could have had it been integrated into a larger exchange network. An extreme historical case is Tasmania: when the island was cut off from the mainland by rising sea levels, the population not only failed to progress, but actually regressed. Anthropologist Joseph Henrich surveyed the archaeological evidence and found that the isolation caused Tasmanians to lose a number of skills and technologies they had once possessed, including bone tools, cold-weather clothing, nets, fishing spears, barbed spears, etc. Even their canoeing skills and technologies worsened. Beyond comparative advantage, trade leads to innovation (what author Matt Ridley calls “ideas having sex”). And it is innovation–technological innovation in particular–that truly transforms standards of living. 

Protectionism and isolationism have had a bit of a global resurgence lately, but these positions fly in the face of the expert consensus as far as economic welfare is concerned (check out the survey data on tariffs at the bottom of the post). This populist backlash to globalization led to a string of recent academic books empirically and philosophically defending economic openness:

2. I’ll rely on Nobel laureate Angus Deaton for the next question:

The historian Ian Morris has described how increased trade around the second century CE merged previously separate disease pools that, since the beginning of agriculture, had evolved in the West, South Asia, and East Asia, “as if they were on different planets.” Catastrophic plagues broke out in China and in the eastern outposts of the Roman Empire. The Columbian exchange after 1492 is an even better-known example. Many historical epidemics started from new trade routes or new conquests.

…Yet globalization also opens its routes to the enemies of disease. We have already seen how the germ theory of disease–a set of ideas and practices developed in the North–spread rapidly to the rest of the world after 1945. Knowledge about drugs to control high blood pressure spread rapidly across the world after 1970, producing…synchronized declines in mortality…That cigarette smoking caused cancer did not have to be rediscovered country by country. While the origins of HIV/AIDS are in dispute, there is no dispute about its rapid spread from one continent to another. The scientific response–the discovery of the virus, the deduction of its means of transmission, and the development of chemotherapy that is transforming the disease from a fatal to a chronic condition–was extraordinarily rapid by historical standards, although hardly rapid enough for the millions who died as they waited. Today’s understanding of the disease, although still incomplete, has underpinned the response–not just in the rich world–and in the worst affected African countries rates of new infection have fallen in the past few years, and life expectancy is beginning to rise again (The Great Escape, pg. 150-151).

From Gregory Mankiw’s Principles of Economics, 7th ed. (pg. 32).

From the IGM Economic Experts Panel, University of Chicago

Stuff I Say at School – Part VII: The Importance of Institutions

This is part of the Stuff I Say at School series.

Summary & Commentary on Week’s Readings

Acemoglu et al argue that inefficient institutions persist for a number of major reasons. First, the lack of third-party enforcement of commitments prevents elites from relinquishing their monopoly on political power. Furthermore, the beneficiaries of the economic status quo are usually unwilling to risk their economic welfare through competition. This leads them to promote protectionism and further engage in rent-seeking activities. Institutions that encourage these kinds of activities fail to grow. We see this kind of conflict manifest in various areas of the economy, from labor and financial markets to regulations in pricing. The more institutions concentrate political power in the hands of the few, the more incentives are warped and distort paths to economic growth.

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In their book Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Daron Acemoglu and James Robinson distinguish between inclusive and extractive institutions, with the former creating the conditions for prosperity. “Inclusive economic institutions,” they write,

…are those that allow and encourage participants by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new business and allow people to choose their careers…Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity (pg. 74-75).

On the other hand, extractive economic institutions lack these properties and instead “extract incomes and wealth from one subset of society to benefit a different subset,” empowering the few at the expense of the many (pg. 76).

The importance of getting institutions right is highlighted by Rodrik and Subramanian’s study. Three theoretical culprits have been blamed for the vast income inequality between countries: (1) geography, (2) integration (globalization, international trade), and (3) institutions. Regression analyses indicate that institutions trump all other explanations. This is also shown from the outset of Acemoglu and Robinson’s Why Nations Fail, in their story of Nogales, Arizona (United States of America) and Nogales, Sonora, (Mexico). Acemoglu and Robinson lay out their archetype story of two towns with the same essential culture, geography, and relative free trade (NAFTA), in most ways they are the same place. The only reason they are two towns is an institutional barrier between two separate countries. Yet one is rich and one is poor because of institutions. The direct effects of geography are weak at best, while there were no direct effects from integration. However, there were indirect effects of integration: institutions have significant, positive effects on integration, while integration has a positive impact on institutions. This, in some sense, creates a virtuous, growth-enhancing cycle. Rodrik and Subramanian point out that the institutional factors emphasized the most have largely been market-oriented (e.g., property rights, enforceable contracts). Yet, factors such as regulation, financial stabilization, and social insurance also matter in getting institutions right.

The interaction between political and economic institutions is an important insight. For example, even though most research finds that seemingly liberal political institutions like democracy have no direct impact on economic growth, more recent evidence from Acemoglu and colleagues suggests that they may in fact contribute to growth. What’s more, the evidence strongly suggests that economic openness—particularly international trade—contributes to growth. A 2010 study used data from 131 developed and developing countries and found that reductions in trade protections led to higher levels of income per capita. A World Bank study found that between 1950 and 1998, “countries that liberalized their trade regimes experienced average annual growth rates that were about 1.5 percentage points higher than before liberalization. Postliberalization investment rates rose 1.5-2.0 percentage points, confirming past findings that liberalization fosters growth in part through its effect on physical capital accumulation…Trade-centered reforms thus have significant effects on economic growth within countries” (pg. 212). A 2016 IMF paper found that trade liberalization boosts productivity through increased competition and greater variety and quality of inputs. All this suggests that Sachs and Warner were correct when they found “that open policies together with other correlated policies were sufficient for growth in excess of 2 percent during 1970-89” (pg. 45; fn. 61). Their findings also suggest “that property rights, freedom, and safety from violence are additional determinants of growth” (pg. 50). Acemoglu and Robinson in a 2005 paper found “robust evidence that property rights institutions have a major influence on long-run economic growth, investment, and financial development, while contracting institutions appear to affect the form of financial intermediation but have a more limited impact on growth, investment, and the total amount of credit in the economy” (pg. 988).

In short, inclusive institutions are necessary to fully reap the benefits of an open economy.

Is Student Loan Forgiveness for the Marginalized?

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I saw this floating around Facebook recently with the news of Elizabeth Warren’s student loan plan. For those unfamiliar with what Mayfield is referencing, here’s the entry from the HarperCollins Bible Dictionary:

As another Bible dictionary clarifies, “Though Leviticus 25 does not explicitly discuss debt cancellation, the return of an Israelite to his land plus the release of slaves implies the cancellation of debts that led to slavery or the loss of land.”

So does Warren’s plan benefit “the marginalized”?

According to Adam Looney at the Brookings Institution, Warren’s proposal is “regressive, expensive, and full of uncertainties…[T]he top 20 percent of households receive about 27 percent of all annual savings, and the top 40 percent about 66 percent. The bottom 20 percent of borrowers by income get only 4 percent of the savings. Borrowers with advanced degrees represent 27 percent of borrowers, but would claim 37 percent of the annual benefit.”

E Warren Distribution of benefit

He continues,

Debt relief for student loan borrowers, of course, only benefits those who have gone to college, and those who have gone to college generally fare much better in our economy than those who don’t. So any student-loan debt relief proposal needs first to confront a simple question: Why are those who went to college more deserving of aid than those who didn’t? More than 90 percent of children from the highest-income families have attended college by age 22 versus 35 percent from the lowest-income families. Workers with bachelor’s degrees earn about $500,000 more over the course of their careers than individuals with high school diplomas. That’s why about 50 percent of all student debt is owed by borrowers in the top quartile of the income distribution and only 10 percent owed by the bottom 25 percent. Indeed, the majority of all student debt is owed by borrowers with graduate degrees.

Drawing on 2016 data from the Federal Reserve’s Survey of Consumer Finances, Looney’s final analysis

shows that low-income borrowers save about $569 in annual payments under the proposal, compared to $900 in the top 10 percent and $2,653 in the 80th to 90th percentiles. Examining the distribution of benefits, top-quintile households receive about 27 percent of all annual savings, and the top 40 percent about 66 percent. The bottom 20 percent of borrowers by income get 4 percent of the savings…[W]hile households headed by individuals with advanced degrees represent only 27 percent of student borrowers, they would claim 37 percent of the annual savings. White-collar workers claim roughly half of all savings from the proposal. While the Survey of Consumer Finances does not publish detailed occupational classification data, the occupational group receiving the largest average (and total) amount of loan forgiveness is the category that includes lawyers, doctors, engineers, architects, managers, and executives.  Non-working borrowers are, by and large, already insured against having to make payments through income-based repayment or forbearances; most have already suspended their loan payments. While debt relief may improve their future finances or provide peace of mind, it doesn’t offer these borrowers much more relief than that available today.  

The Urban Institute’s analysis has similar findings (though their tone is more optimistic):

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I’m not sure whether or not Warren’s plan is a good one (I’m skeptical, especially given some of the results abroad). But I’m not big on acting like college graduates in a rich country are the marginalized of society.