Free Trade: "Supply Side" International Economics?

♠ Posted by Emmanuel in , at 10/29/2009 03:19:00 PM
I've just read a timely and on-target book about dealing with America's fiscal woes which I intend to write about in greater length soon, Bruce Bartlett's The New American Economy: The Failure of Reaganomics and a New Way Forward. In the meantime, a more or less throwaway idea Bartlett made has caught my attention. In the book, Bartlett compares tax cuts promoted by "supply side" economists with the tariff cuts promoted by "free trade" economists. In a sense, this comparison is apt since we're talking about instruments for raising revenue being reduced to--in theory at least--encourage economic activity.

Not to reveal too many spoilers but the gist of Bartlett's argument--remember that he was one of the most recognizable proponents of implementing "supply side" policies in the Reagan era--is that changing conditions require changing policy prescriptions. To any reasonable observer, this is self-obvious. However, the recent Bush years have put Reaganomics in a bad light as Dubya continuously invoked the idea that tax cuts paid for themselves without considering the important flip side of the deficit equation: spending. Bartlett has disowned what he views as the bastardized version of "supply side" economics still being peddled by mainstream Republicans that any economic problem can be addressed by, well, ever-greater tax cuts. Outside of the situation of stagflation, such calls have lost their meaning as the challenges facing America today are vastly different than the start of the Eighties.

This, of course, brings me to the "free trade" set. Just as the "supply side" set or whatever passes for it nowadays proposes tax cuts as an all-purpose solution for what ails America, these folks tend to see tariff reduction as doing the same for what ails the world economy. Think of WTO Director-General Pascal Lamy or even Jagdish Bhagwati. This despite already low tariffs by historical standards. Indeed, the downfall of both appears similar: Bartlett strongly criticizes current "supply side" economics in its Bushian iteration as only looking at one part of the fiscal equation in revenues without delving into expenditures. Starve the beast, they say. Similarly, the "free trade" set tends to look at increased trade volumes as an unbridled good without thinking much about how capital account balances--the opposite of current account balances--affect the health of the world economy. When goods do not cross borders, soldiers will they say.

I have argued that global economic imbalances need to be meaningfully addressed--especially among the "free trade" set. Are they utterly unconcerned with the distributional consequences of poor countries lending money to rich countries at ripoff rates? Certainly, some of Bhagwati's boilerplate arguments in favour of trade need reexamining. I am thinking of the overused "China's opening up to the world economy has brought millions of people out of poverty" line of argument. As Yasheng Huang's insightful Capitalism With Chinese Characteristics explains, poverty reduction in China was much greater in the 80s when the emphasis was on generating entrepreneurial activity in rural areas; actual income gains then were widely-shared and had very little to do with international trade. Contrast this to the 90s when projects by urbanized coastal regions to attract FDI and trade did so but at the expense of rapidly growing income inequality in a supposedly "socialist" state while those in the rural areas were largely left behind. Particularly galling is the fact that illiteracy in China has risen in recent years--some achievement. And, of course, there is the not quite negligible matter of the Chinese state using the people's money to fund American hyperprofligacy.

Just as mindlessly championing tax cuts at every instance makes limited sense in a for all intents and purposes bankrupt country like the US, perhaps free traders should rethink their support for tariff cuts without understanding its consequences on the capital account side. Has reverse Robin Hood globalization--taking from the poor (Chinese peasants) to give to the rich (spendthrift Yanks) really done either a world of good? I am afraid that many of our Chinese friends are unable to speak for themselves--especially in an evil fora like the blogosphere. Meanwhile, America is pretty much the farthest thing you can get from a land of opportunity. A short, sharp shock in the form of a concentrated US-China war could even do the trick.

Like "supply side" economics circa 2009, perhaps "free trade" in our day and age needs a fundamental reappraisal in a world where tariff rates are already quite low, with better consideration of the much-neglected capital account side of the equation.