What's in a Majority

Paul Krugman says it may now be the case that international trade reduces the incomes of most Americans, even as it increases average incomes. It's interesting to observe, rhetorically, how much work "most" can do. The difference between some policy hurting five percent of the population and it hurting 20 percent is, objectively, much larger than the difference between a policy that's bad for 49 percent and one that's bad for 51 percent. But the former policies are both policies that "help most people" where in the latter switch we've gone from one that's "good for most Americans" to one that's "bad for most Americans."

Be that as it may, Krugman says the appropriate response is a strengthened social safety net. Tyler Cowen thinks outside the box:

Is not the appropriate policy recommendation to create a budget surplus, create a U.S.A. Sovereign Wealth Fund, and invest the resulting capital in the corporate winners from this entire process? In other words, we would be giving the trade-losers a more direct share in capital. Since output is rising and wages are falling, the return to capital must be rising; let's make money off of that.

That sounds like a reasonable enough idea to me. Back in the 1990s when it looked like we were looking at budget surpluses, there was some sentiment that the nominal Social Security surplus should be pulled out of exclusive investment in federal bonds and, in effect, turned into a Sovereign Wealth Fund. Mainstream people seemed to feel this was a very bad idea, but it seemed reasonable to me at the time and in many respects only seems more reasonable today. You would probably want to put a cap on how much of any particular firm the government was allowed to own, or else split the money up into several different Funds governed in different ways but the technocratic issues here seem like problems that should be solved rather than objections that should be deemed decisive.

This sort of thing aside, there's also simply the prospect of greater public investment in public infrastructure -- big, capital intensive projects that everyone can use.

Comments

Tyler Cowen thinks outside the box:

Yes, the American conversation limits us from talking about the further accumulation of capital. What a revolutionary idea, that in place of helping people, the government should support the further accumulation of capital.

Where is that box that represented acceptable thinking? Oh my god, it's been shattered by the world's only true radicals, corporatist neoliberals! My world has been shook to its foundations.

Posted by DivGuy | December 29, 2007 1:00 PM

I think there would be massive corruption and inefficiency in how the SWF is invested and managed.

If the government wants to make money on the higher return to capital, it should just tax the capitalists. Closing the hedge fund loophole would be a start.

Posted by grytpype | December 29, 2007 1:18 PM

On the surface it seems like a good idea, but there are enormous opportunites for corruption when the government invests in private corporations. THe whole government has a conflict of interest of the type that we consider unethical in judges and legislators.

Posted by cw | December 29, 2007 1:47 PM

I love Cowen's choice of "appropriate", the most perfectly wrong word available. Sorry, but another uniquely American triple bank shot idea with a gazillion possibilities for corruption is the last thing we need. Can we please get the basics of honest and transparent government halfway right before we try anything clever?

Posted by Gary Sugar | December 29, 2007 1:59 PM

I can't come down as philosophically against a SWF, as the Norweigian example suggests it can be done in a reasonable manner which does benefit all citizens.

I think Cowen is (as usual) just trying to be too smug however, because his post is all about how Krugman should support a SWF but probably won't...

Posted by Meh | December 29, 2007 2:23 PM

Maintaining a SWF pre-supposes that there is a national consensus that the government should be used for useful, positive purposes.

Because there is a political faction in the United States whose stated purpose is to dismantle all well-functioning parts of government and destroy their ability to efficiently deliver services to citizens, a SWF would be a dangerous resource should the government ever fall into the hands of that faction.

Posted by Tyro | December 29, 2007 2:33 PM

I don't understand why (according to Krug) protectionism is not a legitimate policy even if it benefits most people.

So much pro-'trade' dogmatism here, when all this is about is just race to the bottom.

Posted by abb1 | December 29, 2007 2:37 PM

Abb1 hits the nail on the head about what is just so misguided, if not absolutely looney, about Krugman's column. He is arguing for protectionism, even while denying it. According to Krugman, globalism has benefitted skilled (or educated) labor but hurt unskilled labor. His solution? Protect unskilled labor at all costs, even if it hurts skilled labor. This may sound good on the surface but would have devastating consequences. We can negotiate trade agreements with the developing world that would stipulate minimum wages for workers, so US workers can compete with them. What would be the result? The price of all sorts of items (bikes, TVs, cars, the computers we use to blog, etc.) would rise dramatically, and ultimately we would be buying less of these things, and the jobs we wanted to protect would evaporate since there would be no demand. The good news would be that now the standard of living in the US would be the same (i.e., as low) as that in the developing world. The creative answer to the question about what we have to do so that the majority of the US benefits from trade with the developing world is to turn unskilled labor into skilled labor. One good way to do that is the social safety net, as Krugman notes. The others: education and innovation.

Posted by tobie | December 29, 2007 3:25 PM

The simplest way to address the concerns of DivGuy and little Tyro would be to establish sovereign wealth funds for each of our major entitlement programs. Then the monies from these funds would be dedicated to those programs.

This would probably have an added benefit of reducing inflation expectations, reducing interest rates and strengthening the dollar, since the trajectory of our entitlement programs seems to be more of a concern to the bond market and international investors than our current debt, which, as a percentage of GDP, is at level competitive with other first world countries.

Posted by Fred | December 29, 2007 3:26 PM

Fred, there's an even simpleer solution for our major entitlement programs, and it's called higher taxes.

meanwhile, the bond market shows zero interest in the "trajectory of our entitlement programs:" whatever makes you think otherwise? (and, of course, we'll note that by the "trajectory of our entitlement programs" you really mean medicare, and you really, therefore, mean the "trajectory of health care costs in general," not entitlement programs at all).

meanwhile, i am completely on board with those who think that there is zero evidence in the totality of american history that a sovereign wealth fund would be anything but another toy for lobbyists to play with and serve the competing interests of present and future "winners," putting aside the absurdity of the notion that there is anyone smart enough to know the "winners" when they see them....

Posted by howard | December 29, 2007 3:39 PM

1) Alaska did something very similar to this with the windfall profits tax on the oil companies. (look! taxes! on extractive industry corporations! It was possible, once upon a time.) There are all kinds of stupid around how the resulting return on the investment is spent (head-count direct refunds to individuals of amounts over a certain annual return, regardless of state budget needs), but the basic idea seemed to work.

2) Please note that at the start of the Bush Administration Schibertarian Randroid Alan Greenspan advocated for the reduction on the income taxes of the very wealthy in order to avoid a (unified) budget surplus because he *says* he wanted to avoid this exact "problem". This was, of course, after Reagan-era Greenspan had advocated an increase in SSRI taxes on working people in order to compensate for the baby boom. That shell game is probably the most successful and underhanded government transfers of wealth from poor to rich you've never heard of.

Posted by paperwight | December 29, 2007 3:47 PM

Even further outside the box, philanthropist Jim Woodhill has argued that the corporate income tax is dysfunctional due to the vast expenditures (actual and opportunity) undertaken by corporations to evade paying it, and thus should be replaced by the federal government simply owning 25% of all American corporations.

Posted by Steve Sailer | December 29, 2007 3:53 PM

Tobie appears to be echoing Krugman's sentiments. In the mid 1920s two US Senators (Smoot and Hawley) raised tariffs on all goods imported by the US. The hope was that it would stimulate the US economy and return jobs to the US. It has now become clear that the result of these tariffs (which reduced world trade by 300%) was to perpetuate the Great Depression of the 1930s. Stopping world trade by erecting barriers in a misguided attempt to help ourselves at home has (and will) fail. This sort of isolationism, which forces us to reinvent the wheel mutliple times amounts to our cutting our noses off to spite our (collective) faces! On the other hand, there are very real consequences for unskilled workers when jobs leave these shores, and an attempt to soften these effects for US workers is a serious issue that needs to addressed. However, simple-minded attempts, that essentially amount to sealing off the world from the world, and living in a vacuum at home, carry with them the seeds for the worst forms of human thinking-a passionate and fervent certainty (that simple solutions will do the job), which works to prevent common sense from prevailing. These are complicated matters, and unfortunately attempts at "simple solutions" are bound to fail. Give the economists a little credit-they have spent years trying to understand these matters-I think they deserve to be heard at any rate.

Posted by tom | December 29, 2007 3:58 PM

Tom the Great Depression started in 1929, the Stock Market Crash of 1929 for example was in 1929.

Smoot-Hawley passed in June 1930 it was a response to the Depression, not its cause. Though, I wouldn't argue it didn't contribute to the problem.

Posted by David | December 29, 2007 4:14 PM

There is nothing outside the box really. No one really thought that there were no losers from free trade. The argument was always that the winners from free trade can simply compensate the losers for their losses while themselves still come out ahead. Of course, politically speaking that is much easier said than done. It is much more realistic to think that we can successfully oppose free trade agreements than that we can successfully implement new large scale transfers. Under those circumstances the losers from free trade would be very foolish to not just oppose free trade agreements.

Posted by Christopher Gant | December 29, 2007 4:21 PM

Tariffs and quotas would work just fine. Excellent mechanism, very flexible. Plus the unions - to distribute the gains more equally.

Posted by abb1 | December 29, 2007 4:22 PM

The problem, is that the goal is for all workers to be making as low of a wage as possible. That's the goal. Things that speed this up/slow this down only modify the rate...it doesn't change the goal. These are things such as immigration or import/export policy.

But when push comes to shove, and it looks as though the balance is going to shift towards a competitive market where employers have to compete for workers..especially in the ultra-regimented job markets where experience/education are unnecessary..powers that be will step up and strangle the economy to prevent this shift of power. Without allowing this shift of power to happen, things can only get worse over time.

Until this is recognized, nothing will ever have a chance of getting better. There's no individual policy that will fix the problem, as the problem hasn't been addressed.

The major inflationary pressure, outside of energy prices driven by dropping supplies, is by stockholders who demand unreasonable profit growth in order to raise the already way way way unrealistic stock prices in order to make profit from their investment.

However.

There's a time coming relatively soon where the labor market pressures will reverse quite quickly, with the retirement of the boomer generation. Combined with the liquefication of their market holdings, this will be quite the market shakeup, even to the level of a "crash", as near-retirement folks get cold feet and liquefy as not to be the one holding the bag. The only way it'll be a "depression", is if the WATBs on Wall Street and in corporate boardrooms decide to raze and burn the economy in a fit of spite, as the same economy will mostly exist both before and after this event. The loss of the investment capital does not remove the real capital purchased with said investment.

The key is to have a government in place willing to step in case of such an event to be able to react and prevent said razing, as quite frankly, I don't trust the WATB's to not take the mother of all tantrums.

Posted by Karmakin | December 29, 2007 5:20 PM

Not a new idea. Something similar was pushed by Evan Durbin, Hugh Gaitskell & W Arthur Lewis in UK Labour/Fabian politics from the late '30s.

Posted by KH | December 29, 2007 5:40 PM

Krugman this week said on the Charlie Rose show:

... if the United States turns somewhat protectionist, would that have devastating effects on the U.S. economy? The answer is, no, it would not.

I'm for protectionist policies. The notion that "we would be giving the trade-losers a more direct share in capital" is naïve in the extreme. How are the losers to be identified? How much of a loser is such a person? 20%? 56%? 100%?

And this Sovereign Wealth Fund is only for the free-trade losers, or is it for everyone?

PRACTICAL POLITICS: It is far better to let, as much as possible, people to get from their talent and effort, returns by being integrated into a (protectionist) economy, instead of trying to craft compensatory formulas for end-of-the-year-reconciliation. Of course the ultimate technocratic economic balancing is with Communism, which I agree, sounds great in theory. There's your solution, Matt. Whatever national benefits come from free-trade are accrued to the government - which runs and owns everything. And there are no winners or losers since "each to his needs", etc. So I agree with Matt, let's institute Communism here first, then go free trade. Not the other way around, advocate for free-trade and then hope for a political miracle that institutes economic re-balancing.

Posted by Quiddity | December 29, 2007 6:32 PM

"Fred, there's an even simpleer solution for our major entitlement programs, and it's called higher taxes."

Howard,

Raising taxes will probably be necessary to have a surplus to start sovereign wealth funds, but higher taxes alone aren't a viable solution. Entitlement costs are growing at three times the rate of our economic growth. The government can't raise tax revenues at a rate three times the rate of our economic growth indefinitely. On the other hand, with an initial surplus, a sovereign wealth fund could conceivably generate returns of three or more times our rate of growth indefinitely.

"meanwhile, the bond market shows zero interest in the "trajectory of our entitlement programs:" whatever makes you think otherwise?"

Common sense. Let's say you own U.S. Treasury bonds. You want long term interest rates to go down, since this will make your bonds worth more. You also want inflation to stay low, because higher inflation cuts into your real returns. You see that U.S. government entitlements are growing at an unsustainable rate, you realize that this will put pressure on the government to pay those costs and service its debt in the future

Fortunately for you, China and other U.S. trading partners have been investing boat loads of their surpluses in U.S. Treasury bonds to prop up the dollar, in order to keep their exports competitive. Foreign central banks are already talking about diversifying away from dollar assets. What happens then? With less demand for U.S. Treasury securities -- and a greater supply of them as our debt continues to increase -- interest rates will have to go up to encourage enough new bond investors to buy

Posted by Fred | December 29, 2007 6:37 PM

Ack... using a laptop at Starbucks and a touch bad malfunction caused me to prematurely submit that last post. Finishing that last paragraph:

Fortunately for you, China and other U.S. trading partners have been investing boat loads of their surpluses in U.S. Treasury bonds to prop up the dollar, in order to keep their exports competitive. Foreign central banks are already talking about diversifying away from dollar assets. What happens then? With less demand for U.S. Treasury securities -- and a greater supply of them as our debt continues to increase -- interest rates will have to go up to encourage enough new bond investors to buy new bond issues. Higher interest rates will reduce the market value of the Treasury bonds you already own. You could, of course, hold them to maturity and get your principal back (assuming you didn't pay a premium for the bonds), but your real returns may still end up being negative due to inflation.

"meanwhile, i am completely on board with those who think that there is zero evidence in the totality of american history that a sovereign wealth fund would be anything but another toy for lobbyists to play with and serve the competing interests of present"

I assume you realize that some of the largest institutional investors in America today are state government pension funds. Are you similarly concerned about them?

Posted by Fred | December 29, 2007 6:44 PM

Please don't let them invest my SocSec "surplus" in bridges and infrastructure

this country needs massive infrastructure and it should all be as on budget or in the private sector as much as possible so people see how much it really costs

and David, can you really point to the day and hour the Great Depression started - stock market crashes are not necessarily indicators or else we'd have had dozens of depressions - the Great Depression was the result of many things, Smoot Hawely, the Fed botching keeping liquidity in banks; followed by Roosevelt's election and disastrous nationalization of so much of the economy.

Back to SWFs, no we don't need an SWF and don't even necessarily need a trade of budget surplus. What we need is growth and an environment where people would rather invest their money here than elsewhere

If every other country in the world created an SWF and decided to invest significantly in the US that's fine by me

I hear people kvetch about Japanese or Arabs buying an office building or a golf course - so what, the things not going anywhere and the fact that there's foreign ownership means there is an added layer of American jobs that may not exist if an US company was the investor

Who's afraid of SWFs? If history is any guide they'll blow the money and many of us will be better off than the citizens of those same dirtbag countries.

Posted by Jozef | December 29, 2007 6:48 PM

meant "we don't need an SWF and don't even necessarily need a trade OR budget surplus"

Oh, and Fred, keep 'em coming

Posted by Jozef | December 29, 2007 6:51 PM

Warren Buffett's plan to eliminate the trade deficit is pretty straightforward. Instead of allowing politicians and lobbyists set tariff levels, let the market decide.

Every dollar of exports generates an Import Certificate. Exporters can then sell the ICs on an open market. If you want an import something, you have to buy an equivalent amount of ICs. This would both tax imports and subsidize exports without Washington playing favorites.
http://www.pbs.org/wsw/news/fortunearticle_20031026_03.html

Posted by beowulf | December 29, 2007 7:40 PM

A good way around a lot of the corruption and management problems inherent in SWF's is a mandate that they can only invest in extremely broad index funds like the Wilshire 5000 US Total Stock Market, Total Bond Market, and a Total International Ex-US Stock market index. This would also have the advantage of very low management costs (little research required). As an aside, 90% of investors would be a lot better off with the vast majority of their money in these three index funds as well.

Posted by pjgoober | December 29, 2007 9:10 PM

"Please don't let them invest my SocSec "surplus" in bridges and infrastructure"

Jozef,

Infrastructure investments have increasingly become an asset class in their own right. Some infrastructure in the U.S. is owned by infrastructure funds, but this is a much bigger phenomena in other first world countries. A couple of the big players in this field are Australia's Macquarie and Canada's Brookfield Asset Management.

Pjgoober,

Management costs are a negligible factor when you are dealing with SWF-level money. These funds can get top-quality active management for less (as a percentage of assets) than you pay for your index funds at Vanguard. International SWFs would have no interest in being confined to index funds, and I don't think it would make sense to hamstring a U.S. fund (or funds) in this way either.

Posted by Fred | December 30, 2007 12:34 AM

Yes Fred

SOME "Infrastructure investments have increasingly become an asset class in their own right."

those that can generate enough cashflow to support themselves (tollroads, et al)and their equity investors

I realize we need tremendous infrastructure and am even investing some of my own retirement money in companies that do things like manange electrical load or in GE, people like that. But many infrastructure investments have pathetic returns however - they create great externalities - great to have bridges and so forth, but all bridges can't be toll bridges or we'd be stoppin all the flippin time as many bridge as need replacing around here. No, given the pathetic history of infrastructure and the history of misleading cost/benefit estimation, I'd like to see more infrastructure spending but I'd like to see some leadership about how much this really costs - without backdoor funding through "social" schemes. Would the Singapore SWF invest in levees in New Orleans? Why should my retirement money then?

Posted by Jozef | December 30, 2007 9:04 AM

"but all bridges can't be toll bridges or we'd be stoppin all the flippin time as many bridge as need replacing around here."

Nah. With RFID that's already been solved. If tolls become common enough, you just mount an RFID transponder on the car, and it's ID'd at full highway speed, and your account debited. Already in use on many toll roads for regular commuters, making it a part of the standard license plate would be a cinch.

Posted by Brett Bellmore | December 30, 2007 9:12 AM

Good point BB

BUT even with "easy pass" set ups you still have to slow down to 5mph or so, I see signs that say 25mph in EZ pass lanes but you don't have a snowball's chance in hell of driving through any faster than 10mph on the best days

so no, the drawback with most infrastructure it is difficult to collect the benefits from users

(I recall taking a grad course on "Externalities and Club Goods" or some such title)

Am not down on infrastructure, just not big on it as a retirement investment - If I were a union retiree I'd be leery of the union steering my retirement money into union operated investment schemes but that is a different economic issue entirely

Posted by Jozef | December 30, 2007 9:53 AM

fred writes "and I don't think it would make sense to hamstring a U.S. fund (or funds) in this way either."

The reason for index funds is simple, there is next to zero chance of corruption. Also, efficient markets hypothesis says it's the best way to go. It would have to be mandated to be done at all because what researcher would come to the conclusion that "gee, my job isn't needed at all, just go with index funds"?

Posted by pjgoober | December 30, 2007 8:55 PM