Sebastian Mallaby uncorked a doozy today on the intersection of trade and tax policy. He seems to grudgingly concede that free trade is inevitable, so governments shouldn’t get in the way. Right conclusion, poor reasoning. For example:
Paradoxically, the changes that have made globalization less popular have rendered resistance to it less fruitful. Back in the 1980s, trade put pressure on big, vertically integrated industries: cars, electronics. In the new world of outsourcing and global supply chains, vertically integrated enterprises have been sliced into discreet processes; trade now puts pressure on tasks rather than on industries. Back-office administration and phone-based customer support may shift to India, and this shift may affect industries from banking to medical services. The manufacturing and assembly of components may be outsourced to Mexico or Asia, and this change may affect everything from toys to telephones.
The reasonable question is how much longer such a shift took as government interfered in the process. If your output is protected from competition, you’re also protected from pressure to cut expenses as far as they can be cut. The only problem is that the need to innovate doesn’t change, only the damage from not doing so. Compare the lobster tossed into boiling water and the lobster brought to a gradual boil. Which one fights back while he still can?
So trade now threatens workers in more industries. Even if it still causes less dislocation than technological change, we shouldn’t be surprised that anti-globalization sentiment has sharpened. But the advent of competition in tasks also renders protectionist remedies less sensible than ever.
Preposterous. Companies now better focus on their true business. This is beneficial. The reality that some will perform better does not constitute a flaw in the trade process.
At least Mr. Mallaby comes to the right conclusion. The same can’t be said of his tax analysis:
Consider the work of Peter Lindert of the University of California at Davis. In a magisterial work published three years ago, Lindert analyzed tax-financed transfers across rich economies and found no correlation with the rate of growth or with gross domestic product per person. This, Lindert continued, should not be surprising. What matters for growth is less the quantity of tax and spending programs than their quality.
We know who gets to decide what constitutes quality. That same central planner also decides the quantity, which reduces the incentive to tie the two together. It’s most frustrating that the trade policies mentioned above are the perfect example of such incentive disconnect.
Lindert is no party-line liberal. He argues that high taxes in Europe don’t damage growth because they hit consumption and labor rather than savings and capital: This is an uncomfortable point for those who want the tax system to be progressive. But Lindert also argues that high taxes are compatible with growth if the revenue is spent well. Investments in education and public infrastructure boost a country’s growth rate. Programs that break the link between employment and health insurance enhance the flexibility of workers. Subsidized child care keeps women in the workforce, encouraging employers to invest in training them.
How is a belief that high taxes don’t damage growth not party-line liberal? But that’s less the point here than the notion that high taxes are “compatible” with growth if the revenue is well spent. Again, we know who gets to determine how to spend tax receipts. It’s fine to say that investment in education and public infrastructure boost a country’s growth rate. I’m not going to argue against that. I just find it absurd that the possibility that the private sector might provide even better quality than the public sector is never considered. Any honest look at our public education system would demonstrate that we could improve, to be kind, and money is not the lacking aspect.
Basically, Mr. Mallaby says he’ll give us economic freedom if we’ll agree to give up economic freedom. No thanks.