From a brand new study in the Journal of International Economics:
Using household survey data for 54 low and middle income countries harmonized with trade and tariff data, this paper offers a quantitative assessment of the income gains and inequality costs of trade liberalization and the potential trade-off between them.
A stylized yet comprehensive model that allows for a rich range of first-order effects on household consumption and income is used to quantify welfare gains or losses for households in different parts of the expenditure distribution. These welfare impacts are subsequently explored by deploying the Atkinson social welfare function that allows us to decompose inequality adjusted gains into aggregate gains and equality (distributional) gains.
Liberalization is estimated to lead to income gains in 45 countries in our study, and to income losses in 9 countries. The developing world as a whole would enjoy gains of about 1.9% of real household expenditures, on average. These income gains are negatively correlated with equality gains, such that liberalization typically entails a trade-off between average incomes and income inequality. In fact, such trade-offs arise in 45 out of 54 countries, and are primarily the result of trade exacerbating income inequality. By contrast, consumption gains tend to be more evenly spread across households.
While trade-offs are prevalent, our findings also suggest that liberalization would be welfare enhancing in the vast majority of countries in our study: in a large part of the developing world, the current structure of tariff protection is inducing sizable welfare losses. Explaining what drives these patterns is beyond the scope of this paper but an interesting avenue for future research (pg. 16).
I’m sure this offers a bit of a conundrum for those who have conflated concerns over inequality with caring for the poor.
Earlier this year, I did a literature review for class on the effects of trade on poverty. One section in particular focused on the link between trade and growth. A new Peterson Institute working paper by Douglas Irwin performed a similar service and I’m disappointed that I hadn’t come across it in time for my own paper.
So what are his conclusions?
The findings from recent research have been remarkably consistent. For developing countries that are behind the technological frontier and have significant import restrictions, there appears to be a measurable economic payoff from more liberal trade policies. As table 1 reports, a variety of studies using different measures of policy have found that economic growth is roughly 1.0–1.5 percentage points higher than a benchmark after trade reform. Several studies suggest that this gain cumulated to about 10–20 percent higher income after a decade. The effect is heterogeneous across countries, because countries differ in the extent of their reforms and the context in which reform took place (pg. 21).
We use two sources of data—the Current Population Survey (CPS) and the Survey of Income and Program Participation (SIPP)—to explore the differences in occupational licensing between natives and immigrants. Each dataset provides unique advantages, allowing us to paint a clearer picture of how occupational licensing differs between natives and immigrants than would be possible by using either dataset alone.
Though the CPS and SIPP differ in some key ways, where comparable our results are quite similar between the two datasets. We find that immigrants are significantly less likely to have an occupational license than natives; this gap is larger for men than for women and is especially large for the highest education level. The wage premium from having a license may not differ between natives and immigrants when controlling for English language ability, suggesting that though immigrants are less likely to have a license, they seem to benefit at least as much as natives from having one. Licensed workers tend to work more hours per week than otherwise similar unlicensed workers, so the wage premium understates the earnings premium.
Using the CPS, we find that the native/immigrant licensing gap declines with years since migration, consistent with immigrants assimilating toward natives. We also find large differences in licensing rates by region of origin; in particular, women from the Caribbean, Southeast Asia, and Africa have a higher probability of having a license than otherwise similar natives.
Using the SIPP, we find that a lack of English language proficiency lowers the probability that an immigrant has a license, even when controlling for other individual characteristics such as education level. Utilizing the richer set of occupational licensing questions available in the SIPP, we find no evidence to suggest that license characteristics differ between natives and immigrants, and thus we find no evidence that natives and immigrants are acquiring different types of licenses.
Our results suggest that occupational licensing disproportionately affects immigrants, especially male immigrants, those lacking English proficiency, and the most educated group. Indeed, insofar as occupational licensing helps to protect incumbent (largely native) workers in an occupation from competition, it is unsurprising that immigrants are particularly impacted (pg. 18-19).
They also find, “Skill-based immigration would favor immigrants with high levels of education. Our results indicate that it is precisely this group that exhibits the largest licensing attainment gap with natives. Increasing the flow of immigrants from this education level may lead to substantial occupational mismatch for this group of immigrants if they face difficulty in acquiring licenses needed to work in their pre-migration occupations” (pg. 20).
Regressive regulations like this are low-hanging fruit that can easily be changed.
King’s College political theorist Adam Tebble was recently interviewed about his latest paper on epistemic liberalism and open borders. Explaining epistemic liberalism, he says,
Epistemic liberalism is a tradition of thought that places questions about knowledge, complexity and social learning at the heart of debates in political philosophy, initially with regard to debates about economic organisation and distributive justice. Key thinkers in this tradition are Karl Popper, Michael Polanyi and of course Austrian School economists such as Friedrich Hayek, although there is also something to be said for including David Hume and John Stuart Mill on the list, given what they have to say about justice in extended or ‘large’ societies and about our liberty to engage in ‘experiments of living’ respectively.
I pick up where these authors, and particularly Hayek, leave off by claiming that epistemic considerations are not just crucial to debates about distributive justice, but also to more fundamental questions about the status of the background norms and conceptions of the good that inform the economic choices that we, either as self-interested individuals or as other-regarding pursuers of collective projects, may make. Thus, in Epistemic liberalism: a defence I seek to build upon Hayek’s claim about the existence of an economic knowledge problem – where the knowledge relevant to our deciding what to do with resources is for a variety of reasons uncentralisable – to claim that there also exists a more profound cultural knowledge problem.
How does this relate to open borders?
In contrast to much of the literature on migration and justice, and especially in contrast to that which defends a more liberal position, the argument I make in favour of more open borders focuses not upon the interests of immigrants or of the already-resident, but upon those whom migrants leave behind in their countries of origin. In this sense my argument represents something of a breakthrough, for it seeks to claim the interests of those left behind for those arguing in favour of the more liberal approach, rather than leaving them to be appealed to in arguments against it, most notably by writers on brain-drain. My argument, then, can be read as a response to brain-drain critiques of more open borders and to scepticism about freedom of movement in general.
There is some very interesting work in this area, particularly on social remittances and their effects by authors such as Kathleen Newland and Peggy Levitt. Both their work and studies by others in development economics do show how, through visits home, via regular communication, or both, immigrants also remit the values of their adopted nations to those they have left behind. Indeed, there is evidence to suggest that not only the relatives of immigrants, but those who live near to them, are also impacted by this phenomenon.
What’s more, “open borders not only enable migrants to assist those left behind in ways that alternative cross border resource transfer mechanisms cannot, but also assist governments to do the same, via a process of what I call ‘state signalling’.”
A new paper forthcoming in the journal American Economic Review: Insights estimates the effect of trade with China on American consumers and shows us what we stand to lose if we don’t end the trade war.
In “Estimating US Consumer Gains from Chinese Imports,” economists Liang Bai of the University of Edinburgh and Sebastian Stumpner of the University of Montreal and the Bank of France study price data from the Nielsen Homescan panel to find that trade with China reduced the prices Americans paid for consumer tradables by 0.19 percentage points per year. You can download a draft of the paper here.
Bai and Stumpner argue that about a third of the consumers’ gain from trade with China comes from greater product variety while the other two-thirds come from lower prices for the goods people were already buying.
Another way to put it is that inflation was lower–prices didn’t rise as rapidly–because of trade with China…The direction of the result won’t surprise economists, who have argued for centuries that international trade helps a country’s citizens by making it possible for them to get more with every hour of their hard-earned labor.
Trade and globalization have provided undeniable economic benefits for the vast majority of American families, businesses, and workers. Most obvious are the consumer gains. Several recent studies have found that freer trade with China, for example, has generated, through increased competition and lower prices, hundreds of billions of dollars in U.S. consumer benefits — benefits that, according to economists Xavier Jaravel and Erick Sager, are the equivalent of giving every American “$260 of extra spending per year for the rest of their lives.” Consumer gains from imports, in general tilted toward the poor and the middle class, are especially tilted toward them when it comes to goods that are made in China and sold at stores like Walmart. The magnitude of such benefits also debunks the well-worn myth that free trade is mainly about cheap T-shirts. Indeed, trade’s consumer surplus is a big reason that Americans today work far fewer hours to own far better essentials than at any prior time in U.S. history.
Then there are trade’s overall benefits for the economy. A 2017 Peterson Institute paper calculated the payoff to the United States from expanded trade between 1950 and 2016 to be $2.1 trillion, increasing U.S. GDP per capita and per household by around $7,000 and $18,000 — with benefits, again, disproportionately accruing to households in the bottom income decile. The U.S. International Trade Commission, moreover, found in 2016 that U.S. bilateral and regional trade agreements such as NAFTA generated small but significant annual increases in GDP, as well as in employment and real wages among highly skilled and less skilled American workers. As the American Enterprise Institute’s Michael Strain has noted, trade-skeptical populists who downplay this impressive macroeconomic boost ignore that, as our current economic moment attests, a small bit of extra GDP growth can mean big things for lower-wage, lower-skill workers in terms of employment and possible government assistance.
Trade and globalization also support American companies and workers, even in manufacturing. The Commerce Department, for example, has estimated that almost 11 million jobs depended on exports of U.S. goods and services in 2016, and foreign direct investment in the United States — the necessary flip side of our oft-maligned trade deficit — supported millions more. Meanwhile, American companies that adapt and thrive in today’s economy most often do so by making use of imports and global supply chains. The San Francisco Fed, for instance, recently estimated that almost half of U.S. imports are intermediate products purchased by American manufacturers to make globally competitive finished goods; the country’s biggest exporters, therefore, are also its biggest importers. Numerous other studies have found that the vast majority of the value of an American company’s assembled-abroad product (such as an iPhone, assembled in China) accrues to the U.S. company, including its workers and shareholders — not to the place of final assembly (despite what a gross bilateral trade balance, which attributes an import’s full cost to its final export source, might say).
…My 2017 survey of the academic literature on over a century of U.S. protectionism pre-Trump showed that, with very few exceptions, it imposed immense economic costs on American consumers, workers, and companies (more than $600,000 per year for every U.S. job created) while also failing to open foreign markets or resuscitate protected American firms and workers over the longer term. In case after case, the jobs still disappeared, and the companies either went bankrupt or came back to the government for more help. And it’s happening again: Though American steel consumers are paying much higher prices than their global competitors, U.S. steel-industry stocks lag far behind the S&P 500 index. For these and related reasons, economists of the Left, Right, and center continue to oppose tariffs overwhelmingly (93 percent of a recent IGM Economic Experts Panel of dozens of top economists, to be exact), and they support freer trade and globalization.
So remember that wall Trump keeps promising? Seventy percent of it was completed by previous administrations. Which is to say that immigration idiocy didn’t suddenly begin in 2016.
When it comes to deportations, the Trump administration hasn’t reached the heights of the Obama administration. According to Axios, “Immigration and Customs Enforcement has deported more immigrants this fiscal year than any full fiscal year of Donald Trump’s presidency, but it has yet to reach Barack Obama’s early deportation levels, according to new internal Department of Homeland Security figures obtained by Axios.”
According to the Marshall Project, the current detention system has been continually expanding over the last 25 years:
Under President Bill Clinton the daily population in detention tripled from what it had been in 1994 to nearly 20,000 at the end of his second term. A pair of laws passed in 1996 and signed by Clinton resulted in a vast expansion of the system, introducing mandatory detentions for asylum seekers and legal immigrants who had committed crimes, indefinite detention and additional spending on enforcement. In the aftermath of the terrorist attacks of 9/11, President George W. Bush also cracked down on immigration, ending a policy in 2005 that permitted those being caught crossing the border to be released until their court dates. By the time Barack Obama took office, the average daily population had ballooned to more than 30,000.
Though detention numbers dipped briefly under Obama, by the time of the 2016 election the daily average had reached just over 34,000 after an influx of Central American migrants at the southern U.S. border. In each administration, the growth of the detention system was used to broker political compromises in lieu of dealing with an overburdened immigration system.
This is why claims that “children in cages” began under previous administrations are actually true (though the Trump administration has taken it to 11). And at least some criticisms began under the Obama administration. For example, National Review pointed to a 2011 PBS Frontline special that shined a critical light on the administration’s immigration enforcement:
The yearlong investigation did an extensive and deep dive into the U.S. immigration enforcement system and stories of hidden abuse in detention centers. The nearly hourlong report makes for harrowing viewers: Women who have been detained complaining about being harassed by guards for sexual favors, sexually assaulted by guards, and guards threatening to kill the women they are harassing if they talk. A single mom with two daughters who overstayed a visa gets deported back to Mexico just because she changed lanes without signaling. Cops describe patrolling neighborhoods with significant number of illegal immigrants, where people instinctively run from the sight of a police car. A mother of five American-born children being deported over a speeding ticket.
The report describes, “a vast network of 250 detention centers, from county jails to large centers run by private prison companies, where immigrants facing deportation are held until they can be removed from the country. In the past decade, three million immigrants have been detained in the system.” The report shows white-domed tents surrounded by barbed wire, and are described as overcrowded warehouses of people. Those who have been through the detention centers describe beatings, racial slurs, official coverups, and threats to deport anyone who complains. The problem is described as more than a few “bad apples,” but more of “barrels of bad apples.”
…In the Frontline report, the administration insists the current enforcement policies are necessary to protect the American people. The report shows the president traveling to El Paso and boasting, “We have strengthened border security beyond what many believed was possible. We now have more boots on the ground and we are deporting those who are here illegally.” The deputy director of ICE boasts of “record-breaking numbers in terms of criminal alien removals” that include “1,000 murderers, 6,000 sex offenders, 45,000 serious drug violators. As we expand the deployment of Secure Communities, focus on criminal aliens, you’ll see that number continue to go up and up.” Officials from the administration boast that they’re finally taking enforcement seriously, a contrast with their lax predecessors.
One of the president’s immigration advisors callously declares, “At the end of the day, when you have a community of 10 million, 11 million people living and working in the United States illegally, some of these things are going to happen. Even if the law is executed with perfection, there will be parents separated from their children. They don’t have to like it, but it is a result of having a broken system of laws.”
Critics complain that the administration’s policy is just “enforcement on steroids.” The report warily details how ICE has extended its reach by enlisting the help of local law enforcement to better identify illegal immigrants who have committed crimes — turning local cops into a de facto enforcement branch of federal immigration law.
All of this really should teach us to not deify political administrations. What’s more, it should break the brain of every rabid anti/pro-immigration, pro/anti-Trump Republican/Democrat.
Over at the Peterson Institute, there is a rundown of Elizabeth Warren’s “A Plan for Economic Patriotism.” You can read the analysis for yourself here, but I wanted to point out three things that jumped out at me:
The comparison to Trump (see the photo above).
The number of “Good idea, but…”
Almost every potentially positive policy devolves into protectionist nonsense.
Let me first start with the exception: her training programs. As America becomes more globalized–both through trade and immigration–more training for American workers displaced by global competition might be necessary.
Now, let’s take a look at her proposed Department of Economic Development:
See what happened there? A potentially good idea turned into a protectionist dumpster fire. How about her R&D policies?
Yet another potentially good idea likely squandered by the protectionist slant. And then there are her straight-up awful ideas:
I’ve pointed out the similarities between the economics of Trump and Sanders before. It appears the populist impulse is even more widespread among American politicians.
China increased its retaliatory tariffs hitting US exports on June 1 in response to President Donald Trump’s latest escalation of his trade war. Yet, this action is only half of the bad news for US exporters. The other half is that China has begun rolling out the red carpet for the rest of the world. Everyone else is enjoying much improved access to China’s 1.4 billion consumers, a fact that has been little noticed or reported in accounts of the US-China economic confrontation.
…Trump’s provocations and China’s two-pronged response mean American companies and workers now are at a considerable cost disadvantage relative to both Chinese firms and firms in third countries. The result is one more eerie parallel to the conditions US exporters faced in the 1930s.
Another important implication of China’s action is that Americans are likely suffering more than President Trump thinks due to his trade war. Inflicting such punishment on Americans may be one factor motivating China. A separate motivation may be that it is trying to minimize the harm to its own economy by importing vital goods at better prices from other parts of the world.
Undoubtedly, the Nordic nations, with their high incomes, low inequality, free politics and strong rule of law, represent success stories. What this has to do with socialism, though, is another question.
Drawing on data from the World Bank, the Organization of Economic Cooperation and Development and other reputable sources, the report shows that five nations — Sweden, Denmark, Finland, Norway and the Netherlands — protect property rights somewhat more aggressively than the United States, on average; exercise less control over private enterprise; permit greater concentration in the banking sector; and distribute a smaller share of their total income to workers.
“Copy the Nordic model if you like, but understand that it entails a lot of capitalism and pro-business policies, a lot of taxation on middle class spending and wages, minimal reliance on corporate taxation and plenty of co-pays and deductibles in its healthcare system,” the report notes.
It goes on to point out that the majority of Nordic countries
have zero estate tax. They fund generous programs with the help of value-added taxes that heavily affect middle-class consumers.
In Sweden, for example, consumption, social security and payroll taxes total 27 percent of gross domestic product, as compared with 10.6 percent in the United States, according to the JPMorgan Chase report. The Nordic countries tried direct wealth taxes such as the one that figures prominently in the plans of Sen. Elizabeth Warren (D-Mass.); all but Norway abandoned them because of widespread implementation problems.
The Nordic countries’ use of co-pays and deductibles in health care may be especially eye-opening to anyone considering Sanders’s Medicare-for-all plan, which the presidential candidate pitches as an effort to bring the United States into line with European standards.
The Post concludes,
These countries are generous; but they are not stupid. They understand there is no such thing as “free” health care, and that requiring patients to have at least some skin in the game, in the form of cost-sharing, helps contain costs…If they have established anything, it’s not socialism, or even the dominance of a benevolent state, but responsible governance. They have achieved a clear division of labor, between government (which arguably has a comparative advantage in health insurance and education) and the private sector (which is better at producing and distributing most other goods and services).
What the Nordic countries don’t do is pretend that society can have a strong and efficient social safety net without a big, mandatory financial contribution from the middle class. Nor do they deal punitively with the private sector, upon whose productivity the entire system ultimately depends.
American socialists’ enthusiasm for the northern European systems may be sincere. We shall see whether it can withstand full and accurate information about how those systems actually work.