Thursday, May 15, 2008

Summers Sometime Solutions

Two recent columns by Lawrence Summers in the FT argue for a readjustment of global priorities concerning trade. Summers begins by noting the shifts in public sentiment.

In the first column Summers notes that

making the case that trade agreements improve economic welfare might no longer be sufficient to maintain political support for economic internationalism in the US and other countries. Instead, I suggested that opposition to trade agreements, and economic internationalism more generally, reflected a growing recognition by workers that what is good for the global economy and its business champions was not necessarily good for them, and that there were reasonable grounds for this belief.

Summers column marks a marked retreat from the position of most economists. Perhaps he no longer belongs in the ostriches camp from Chapter 3 of Trading Away Our Future.

In the second column Summers highlights the importance of domestic capital investment to prosperity:

The most important reason for doubting that an increasingly successful, integrated global economy will benefit US workers (and those in other industrial countries) is the weakening of the link between the success of a nation’s workers and the success of both its trading partners and its companies.... Part of the reason why US workers (or those in Europe and Japan) enjoy high wages is that they are more highly skilled than most workers in the developing world. Yet they also earn higher wages because they can be more productive – their effort is complemented by capital, broadly defined to include equipment, managerial expertise, corporate culture, infrastructure and the capacity for innovation.... in an open economy ... Workers no longer have the same stake in productive investment by companies as it becomes easier for corporations to combine their capital with lower priced labour overseas.

Summers solutions are arguably steps in the right direction, though they don't go very far. They focus on taxes and regulation:

First, the US should take the lead in promoting global co-operation in the international tax arena. There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens with promises that they can avoid paying taxes altogether on large parts of their fortunes. It might be inevitable that globalisation leads to some increases in inequality; it is not necessary that it also compromise the possibility of progressive taxation.

Summers does not note that the US is one of the larger such tax havens for non-resident foreigners. Because we abolished the withholding tax in the 1980s, almost all income earned by such individuals from US investments is tax free. Because the US treasury does not even report this income to foreign governments, avoiding taxes in their home countries is very easy. One of the negative consequences of this has been the trade deficits, which contribute to the disconnect between economic internationalism and the interests of US workers. The US can take unilateral action to reduce the impact of such shelters on the US economy, and it ought to do so.

Second, an increased focus of international economic diplomacy should be to prevent harmful regulatory competition. ... There has not been enough serious consideration of the alternative – global co-operation to raise standards. While labour standards arguments have at times been invoked as a cover for protectionism, and this must be avoided, it is entirely appropriate that US policymakers seek to ensure that greater global integration does not become an excuse for eroding labour rights.

This might help, and may be worth working towards. However, it is a long-horizon solution at best.

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