June 22, 2007
Free Trade and Inequality II Posted by John Steele Gordon at 10:45 AM EST Fredric Smoler refers to an article regarding increasing opposition to globalization, despite globalization’s many and profound benefits to the economy, and a proposed solution to the problem, in the current issue of Foreign Affairs. I agree that it is a most interesting article, but I don’t agree with either the analysis of the situation or the proposed solution. A few points. 1) Globalization. The ongoing integration of the world economy is unstoppable, whether we like it or not. Trying to stop it would be like trying to stop the Industrial Revolution in, say, 1830. American participation in the process might, at enormous economic cost, be delayed, but, with 30 percent of the world’s GDP, not for long. The last serious attempt to wall off the American economy from global influences was the Smoot-Hawley Tariff of 1930. It was one of the major reasons an ordinary recession turned into the economic catastrophe of the Great Depression, as American exports in particular and world trade in general collapsed. 2) Redistributing payroll taxes. First, political quid pro quos don’t work, at least not for long, unless there is a very tight nexus between the two parts. The idea that a change in the domestic tax structure that would benefit many people who perceive their economic interests to have been adversely impacted by globalization would result in a change of heart on their part regarding globalization strikes me as highly unlikely to put it mildly. This seems to me to be an example of the sort of political naiveté that is all too common in ivory towers. Instead, they would take the increased income, say thank you very much, and go right on opposing globalization. Second, the payroll tax that the authors of the article would make progressive—i.e. higher rates for higher incomes—is not, in theory, a tax at all. It is instead a mandatory contribution to one’s Social Security account and to Medicare. The initials in the acronym FICA, after all, stand for Federal Insurance Contributions Act, and individuals get a statement every year showing how much they and their employers have contributed to their individual accounts. The authors would have the FICA of those earning below the median drop to zero while sharply increasing the FICA of those above it, either by eliminating the cap or increasing the rate on higher incomes. How would this be accounted for in the annual statement? Politicians are, of course, masters of euphemism, but this would be a challenge. 3) Wages. The authors refer to the stagnation and even decline in wages and “money income” for most American workers in recent years, especially in the period 2000–2005. I don’t doubt the truth of the statistics they rely on, but I question how accurately those statistics reflect the real-world experience of most employed Americans. First, 2000–2005, with the end of the stock market bubble and 9/11, is perhaps not a good period to use, and five years is too short a period in any event. Second, money income is not the same as compensation, and whenever I see “wages” (or “money income,” which, I presume, would be wages plus investment income) being used as the sole measure of economic wherewithal, I get wary. For while wages have been lagging, noncash perks have not. For instance, The Wall Street Journal reports that of employers with 20 or more workers, 85 percent provide tuition assistance to employees, 45 percent provide adoption assistance, 74 percent paid sick leave, 57 percent flex time and 77 percent paid vacations. Most pay for or help pay for health insurance, many offer in-house medical services, in-house food services, and even in-house day care. None of this shows up in statistics on “wages,” but it shows up nonetheless in workers’ wallets in terms of increased disposable income. If you aren’t paying to take a course at the local junior college or paying the babysitter you would otherwise have to hire, that money can be spent on other needs. The fact that these forms of noncash compensation are not taxed might, of course, account for why they are increasing much faster than wages.
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