The Deadweight Loss of Christmas

It’s hard to visit a Target or Wal-mart in the week before Christmas, and, wandering the aisles wondering what would look good in your friend’s kitchen, not think about how inefficient Christmas gift-giving is. That’s why every Christmas I tend to bore my friends with my version of Joel Waldfogel’s classic article from the American Economic Review, “The Deadweight Loss of Christmas,” best summarized by the Economist a few years ago. Now if I could just convince my family and friends that I love them just as much when I give them cash.

More important than UN reform?

Martin Wolf highlights an issue that simply does not get enough attention — IMF reform. Though I think he lets the U.S. off a bit easy, his argument is entirely valid — it’s time for the IMF to reduce its aspirations and better represent its constituents. The IMF is not a lender of last resort, so let’s stop forcing it to play that role. After we fix this, we can focus on what the world really needs — an international bankruptcy court.

Comparisons that should be made more often…. poverty alleviation

A great article by Anirudh Krishna in this month’s Foreign Policy. The article is important less for its finding– that healthcare is a required “insurance policy” for communities who are trying to elevate people out of poverty–than for its methodology. Krishna explores poverty alleviation in Uganda, Kenya, and…. North Carolina. We need more such comparisons– there are great learnings to be shared from the developing world for the developed and vice versa. 

Many thanks to Sanjay, for the referral.

Why Free Trade?

A friend recently asked me a question about free trade and Hugo Chavez. She’s a graduate student in Environmental Policy, so naturally, she is at the coal-face of the downside of much of free trade. It struck me that convincing here of the benefits of free trade would require more than Ricardo’s comparative advantage and theories of Pareto Efficiency. Here’s her question, and my response:

“How come International Economics only offers one view point? My class should be called “Free-Trade Economics”. We are taught only one theory, as if it were the absolute truth. It doesn’t address the social problems. If Free Trade is so great, how come nations elect and re-elect the Ortega’s, Lula’s and Chavez’s of the world? Aren’t there alternative models out there? Maybe they don’t work as a blanket cure to stagnation, but they have positive outcomes for LDCs? At least for a time being….? Trying to think outside the box here…I don’t want to swallow Free Trade hook, line and sinker.”

Good question. It’s a hard one to address over email (I’m tempted to draw charts!) but I will do my best. Free Trade has been shown in repeated studies to foster economic growth. Almost universally (and I can think of no examples to the contrary), free trade leads to increased efficiency and lower prices around the world. HOWEVER, the gains of Free Trade are not always distributed “fairly.” In the case of the U.S., NAFTA has created serious economic hardships for many former textile and factory workers in the U.S., while helping reduce prices of everything from carpets to t-shirts for everyone. We haven’t done enough to help retrain these workers and get them back on their feet.

In LDCs, the problem is often more stark. Free Trade typically involves exporting commodities, such as oil, fruits, vegetables, and other commodities and importing finished goods like cars, TVs, etc. Distributing the gains of Free Trade requires carefully crafted government policy, including tax codes and import/export tariffs, to ensure that those harmed by Free Trade also share in its gains. Unfortunately, governments in many developing countries have often failed to rise to this task, often squandering the gains from free trade on misguided projects.

Your question about why people vote for the likes of Ortega and Chavez is less a question of economics than politics. We would call these guys “populists” because they offer policies that appeal directly to their constituents (though may not actually be good for them). These men don’t really offer an alternative to free trade or economic liberalism, they offer a pipe dream, and in small countries especially, it’s often easier to “bribe” voters with handouts than to actually come up with any new policies. Chavez, for example, is more interested in railing against the U.S. than actually developing his country. If I were president of Venezuela my entire focus would be on what to do when oil falls to $40 per barrel again? For Venezuela, whose exports are composed of more than 50% oil, this would be a tremendous economic hardship, and the money that Chavez uses to pay-off his constituents would dry up as would foreign investors willingness to do business in his country. Where will jobs come form at that point? Again, if I were president, I would be spending the dollars generated from oil exports to ensure primary education for everyone, to help develop commercial-scale farms capable of feeding the Venezuelan people, and developing an anti-poverty program akin to Brazils and a pension system akin to Chile’s. I don’t see Chavez doing any of these things.

The irony is that even Chavez grasps the important of free trade—he’s pushing for regional trade agreements with like-minded populists in the region. Several countries in the world have experimented with the alternative to free trade—self-sufficiency—and they’ve ended ignominiously. The Soviet Union was banktrupted by the Cold War, and North Korea, despite attempts to be self-sufficient, is left having to import food and anything else it needs from China. Now, there is a spectrum of solutions that lie between pure free trade and entire self-sufficiency, and this is where we can debate what the right solution is. China and India, for example, generally embrace free trade, but realize that their domestic markets are large enough and growing fast enough that they can “protect” some industries that they want to foster in their home countries. Most countries, in fact, try to do this, some more effectively than others. The U.S. is pretty ardently a free-trader, with the exception of agriculture which we continue to subsidize and over-protect.

So at the end of the day, my answer to your question is as follows. First, capitalism is not the best economic system in the world. It’s just the only we’ve ever tried that actually works. Second, I applaud the fact that people have voted in Chavez and Ortega. They ensure that not a diversity of viewpoints is represented among the world’s leaders, and these guys are so popular that they really can make massive changes in their countries (as compared to, say, Argentina, where the president struggles to stay in power, and therefore can get nothing done). But I’m still waiting for any clear statement of their economic policies. What is Chavez’s economic policy? I don’t think he has one, other than to stay in power.

Of course, others make the argument much more eloquently than I, most notably Jagdish Bhagwati and Martin Wolf.

Tamar Jacoby Gets It Right on Immigration Reform

Immigration reform remains a hot potato, but Tamar Jacoby’s outline of a plan for reform seems spot on. In summary, he argues that
“the essential architecture of comprehensive reform: more immigrant worker visas, tougher and more effective enforcement, and a one-time transitional measure that allows the illegal immigrants already here to earn their way out of the shadows.”

Importantly, he also cites evidence that illegal immigrants are NOT a drain on tax resources from state and federal governments.

“Although this is one of the most disputed and emotional aspects of the immigration debate, in fact the net effect in most states is close to a wash.”