Vijay K. Mathur
The
GOP nominee for president, Donald Trump, opposes trade pacts like NAFTA and TPP
(Trans Pacific Partnership (not yet approved by the Senate) in his campaign.
These pacts reduce trade barriers and tariffs. Senator Bernie Sanders,
contender for the presidency in Democratic primaries, campaigned vehemently
against trade pacts. The presumptive nominee Hillary Clinton has also backed
out of her initial support for TPP, perceiving that the American people are not
very sympathetic with the idea of trade pacts even though most economists
believe these pacts promote free trade and economic growth.
Another
recent example is the Brexit (exit of Britain) vote in a UK referendum on June
23, 3016. The majority of voters voted for UK to pull out of EU (European
Union). This outcome was a surprise, despite warnings by concerned thoughtful
politicians and economists that pulling out of EU will decrease economic growth
and result in other adverse economic consequences for the economy.
These
examples demonstrate that a significant number of voters in US and UK do not
support the idea of efficiency without due attention to equality in public
policy. In 1970’s Arthur Okun, Chairman of the Council of Economic Advisors in
President Johnson’s administration, wrote a celebrated book, Equality and
Efficiency, The Big Tradeoff (1975) in which he discusses the conflict
between efficiency and equality. In his view, efforts to promote efficiency end
up creating inequalities in income and standards of living among its citizens.
Donald Trump and Bernie Sanders both alluded to harmful economic outcomes of
trade pacts and globalization, thus garnering support of a significant
proportion of voters.
TPP
is a trade pact between 11 countries, most of which are low wage countries. We
have already experienced adverse disparate economic impacts of cheap imports
from China and out-migration of businesses to Mexico due to NAFTA. Economic
Policy Institute, December 9, 2013, reported that movement of production
resulted in 700, 000 job losses. Most losses were concentrated in California,
Texas and Michigan and in the manufacturing sector. Imports from China also led
to closing of plants in US manufacturing sectors, for example, steel, textiles,
and furniture in certain states. The same fear is associated with TPP.
However,
aside from globalization and trade pacts there are other reasons, such as
skill-based technical change, decline of trade unions and low minimum wages for
the increase in income inequality in the US. But the fact that free trade
promoted by trade pacts is efficient and economically sound policy does not
negate the other evidence that certain regions and labor force sectors in the
country have faced detrimental economic consequences of globalization.
The
evidence on the outcome of the Brexit vote is mixed. Some are of the view that
UK voters did not want to be governed by the dictates of EU institutions. Some
were apprehensive about the free flow of people between EU countries,
especially now when there is a large in-migration of people into EU countries
from Middle-Eastern countries. One could argue that allowing free flow of labor
is an efficient policy, however from equality perspective, free flow of labor,
especially from low wage countries, has a downward effect on overall wages.
Hence, free flow of labor from those countries poses a conflict between
efficiency and equality, because it skews the distribution of income in favor
of capital.
Illegal
immigration issue in the US also poses the same problem. A significant
proportion of the American voters who support Donald Trump are also concerned
about illegal immigration and its effect on wages and public benefits of
citizens. However, the facts are that undocumented in-migrants from Mexico and
other Central American countries provide low wage labor in certain sectors of
the US economy where natives are not willing to work at those wages.
Nevertheless,
the evidence also shows that for decades there is a redistribution of income
from labor to capital. It may not be due to cheap illegal immigration, however
labor does feel that lower wages of migrants, though efficient for businesses,
is not improving their own standard of living. In addition, redistribution of
income from labor to capital is also due to the increase in the industrial
concentration and lack of competition in US markets. The Economist,
March 26-April 1, 2016, points out that increase in monopoly power, and hence
diminished competition, is not only inefficient but also inequitable. It
results in higher profits and return to capital, high prices and/or lower
wages. Therefore enforcement of Antitrust Laws against industrial concentration
would improve both efficiency and equality.
Joseph
Stiglitz, Nobel Laureate in Economics, in The Price of Inequality (2013),
presents a cogent analysis of the inequality efficiency trade-off and states
that “we could have a more efficient and productive economy with more equality”
by curbing practices such as rent seeking, using political favors, and market
failures.
I
am not against free trade and legal immigration. They do promote efficiencies
and growth in the long run. Nevertheless, public policy requires evidence based
decision making, accounting of costs and benefits and their adverse
distributional consequences and remedial actions for those consequences. Even
Arthur Okun in his 1970 book, The Political Economy of Prosperity,
recognized that economist should pay due attention to equity while “preserving
efficiency.”
Mathur
is former chair and professor of economics, and now professor emeritus, Department
of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden,
Utah.
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