Friday, August 10, 2007

A Return to Speenhamland?

Discussion is opened on using taxation to ‘persuade’ low-paid people to favour the ending of protectionism, or 'globalisation'. Strange, as protective tariffs keep out foreign products because they are cheaper (if they ain’t cheaper, they don’t need tariff protection). Two contributions from the Adam Smith Institute and Don’t trip up (‘a witty saying proves nothing’)here: (

Stephen Farrington writes: ‘Subsidies for embracing free trade’

“The abiding protectionism of the US electorate continues to astound economists, who are seeking ways to reduce this irrational prejudice and introduce the electorate to the benefits of free trade. The Adam Smith Institute Blog reports on a suggested New Deal for Globalisation:

In this month's Foreign Affairs Kenneth Scheve and Matthew Slaughter argue that the only way to overcome the tide of protectionism in the US is for the government to introduce a massive redisitribution program to bring the fruit of open markets to the doorstep of those earning below the median wage.

The authors have clearly been studying their public choice theory by suggesting that voters should be bribed into supporting 'good' policies instead of being convinced. The Adam Smith Institute Blog is understandably skeptical, concluding:

Large-scale redistribution under the banner of a "New Deal for Globalisation" would disincentivize low skilled workers from actually working, while encouraging them to be bought off by the government in return for globally beneficial liberalisation. It would also push some high skilled workers to simply move to lower taxed countries where their contribution would be better appreciated!

This is not the way to create a globally competitive economy. Education could have a much more immediate effect than these the authors admit. And to the extent that protectionists want to bash China et al., perhaps the country’s leaders would do better to actually lead and stand firm on a liberal principle.

Electoral bribery is certainly not good policy. Perhaps instead of bribing the electorate, the state could provide a safety net to ensure the free market does not ravage everyone when the protectionist barriers collapse. Then, the benefits of globalisation will be felt without too much pain. There is also the nice warm glow that come[s] from having a government that ensures no one is impoverished.

Better equality of opportunity could also help workers embrace free trade. If workers can easily move between jobs and into growing sectors, they could find themselves abandoning the protected industries in favour of higher paid jobs in boom sectors. This can only occur if there is quality education available for all and an open economy that allows movement of labour.

For globalisation to be popular, workers need to see there are real benefits to free trade. This does not mean engaging in ideological protectionism to ensure they are insulated against the effects of free trade and thus support it. It means structuring the economy so free trade genuinely benefits those it is supposed to, and demolishing the obstacles that prevent this. If the benefits of free trade cannot be proven to the mass electorate, then maybe economists should reconsider their theories of globalisation. Quite simply, they should prove globalisation works not bribe us to believe it should

First, I must say I found Stephen Farrington’s ‘Don’t trip up’, a refreshingly well written Blog and reading down the page I found other interesting articles.

Adam Smith spent a large part of Wealth Of Nations considering what might be done (and why) about the massive distortion in the domestic economy from supporting colonies in North America, awarding monopolies of trade to British merchants and manufacturers (causing the Navigation Acts which enforced the monopolies), facing European rivals in regular wars to protect the monopolies, and suffering from the drain of scarce capital away from domestic productive activity (including economic growth) into the colonial trade with its higher profits. This last was the main part of his analysis of the defects of international trade under monopolistic conditions in Book IV.

Today we have what it has become fashionable to call ‘globalisation’. The same problem remains. World trade is not characterised by free trade. To discuss international trade in ‘free trade’ terms is a myth. Many ‘free trade’ countries are among the worst ‘protectionists’ and their commitment to free trade is highly conditional.

World trade is almost exclusively ‘protected trade’. The so-called ‘free trade’ areas are ‘protected’ areas, particularly in food and low-cost manufacturing (now extended from simple ‘toys’ and ‘trinkets’ to high-end technology products). All countries are ready to slap on tariffs if their imports begin or threaten to begin to seriously compete with domestic producers. All countries are in favour, in principle, with adopting policies to raise people out of abject poverty, as regular concerts remind us. None is in favour of unilateral free trade. All are reconciled to a less than free-trade international system. This applies to G8 countries and the poorest countries in Africa, Asia and South America, as their domestic tariffs, even against poor and poorer neighbours show.

That’s why Smith resigned himself in trying to ameliorate individual obstacles to free trade rather than demanding that countries (neighbours) gave up their isolationist tariff protection against each other. That is why he concluded with absolute certainty that ‘to expect, indeed, that the freedom of trade should ever be in its entirety restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it’ (Wealth Of Nations, IV.ii.43: p 471).

He pointed in vain to the fact that Britain would gain enormously from free trade with France, and vice versa, but political and popular prejudices (jealous rivalries) prevented this happy occurrence and both continued thereafter to buy dearer from other countries, making merchants richer and consumers poorer.

In that context what should we make of the proposal to alter income tax rates from poor and richer consumers? Apart from would it work as intended, we should ask would these adjustments do what most other subsidies do: remain in force long after it is realised that create more distortions than they remove. The early example of the fallacy would be the system named after the local magistrates at Speenhamland, Berkshire in 1795, who thought up a means to alleviate the duress caused by a rise in grain prices, which spread across the country and subsidized the wages of the poor.

I’m all for cutting taxes but I doubt if this would work as intended. If the problem is perceived as one of adjustment the helpful remedy would be to do as Smith advised: introduce the changes where they affect only one set of businesses the change should be ‘restored only by slow gradations, and with a great deal of reserve and circumspection’ (WN IV.ii.40:p 469).

The idea of a ‘big bang’ strategy of unilaterally abandoning tariff exclusion is appealing, but as it is unlikely ever to happen, greater policy pressure should be directed at single targets, which include big ones, such as the EU’s agricultural subsidies.

But let’s leave domestic income taxation out of it.


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