Kimberly Clausing on Open and the Progressive Case for Free Trade
Dec 30 2019

 Open-199x300.jpg Economist and author Kimberly Clausing of Reed College talks about her book Open with EconTalk host Russ Roberts. Clausing, a self-described progressive, argues that the United States should continue to embrace free trade but she argues for other interventions to soften the impact of trade on workers and communities.

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Explore audio highlights, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.

READER COMMENTS

Michael Amundson
Dec 30 2019 at 8:15pm

Thank you for the episode with Kimberly Clausing.  I listen to and enjoy the podcast every week and find them to be thought provoking.  I don’t mean to sound too critical here but a few things came to mind listening.

I was skeptical of the initial time period mentioned for the income inequality comparison: post WW2 to 1970 as the baseline for comparing income inequality to income inequality of later time periods.  It seems to me that the 25 years post WW2 were unique in history with the US industrial infrastructure undamaged and running at peak output relative to the rest of the industrial world. The very strong manufacturing capability of the US must have had an impact on income distribution.  The end of WW2 also brought the GI bill that produced a lot of  STEM graduates (my father was one) to strengthen the US economy.  My guess is infrastructure damage and manpower loss from WW2 to European countries and Japan must have lasted into the mid 60’s, which must have had measurable impact on US income distributions.

Using metrics of top 50% and bottom 50% in this discussion seems to imply that a bottom 5% person is locked in to being a bottom 5% and the concept of income mobility is not a factor.  In 1971 I made $420 (all year) putting me in a very low % income;  I did not remain in this income bracket the next 48 years. Why is it that proponents of “fixing income inequality” via income redistribution, use polarizing metrics like “top 1% “(for example), there is always a top 1% by definition.  Wealth is another popular polarizing metric. How much of recent meteoric wealth growth is tied up in stock valuation or real estate?  Dumping stock or selling off real estate to fund the redistribution would crater the value of the wealth, so you can’t count on the wealth being liquid enough to grab from the evil 1% people.

If income redistribution is the solution to protect workers harmed by globalization, who decides which workers will receive the redistribution?  Will the government, politicians, perhaps bureaucrats decide who was harmed and by how much? This sounds like an entitlement creation instead of a solution, not that I have any suggestions on the topic.

You make good points on free trade and immigration.  The cost of tariffs per job saved should be something every voting citizen should keep in mind.  Another thing to mention is that government is more arbitrary creating winers and losers than the free market.  There will be winners and losers in a dynamic economy but an economy based on free trade is not a zero sum game.

Thanks,

Mike A

 

Shayne Cook
Jan 2 2020 at 6:07am

Michael Amundson:

Excellent comment here. You echoed much of precisely what I was thinking as I listened to this podcast.

On the topic of enhancing redistribution schemes discussed in this podcast, I have an alternative suggestion. And mine has the merits of already being (at least partially) implemented tax policy.

Back in 2010, as part of the “fiscal stimulus” package to address the aftermath of the financial crisis, a change was made to exclude both Qualified Dividends (QD) and Long-term Capital Gains (LTCG) from taxable income for earners in the first two tax brackets (10% and 15% – Incomes up to about $36,000 per year for Single). That QD/LTCG income exclusion for the first two tax brackets was retained in both the 2013 and 2017 tax legislation changes. Good stuff.

My question (and suggestion, for that matter) is: Why not extend that same QD/LTCG income exclusion to at least the first 4 tax brackets – Single incomes under approx. $160,000, at 2019 bracket levels?

That would cover both the lower and lower-middle income groups.

It strikes me that incentivizing low and lower-middle income earners to invest and become Capital owners, with this sort of tax change, would address quite a few oft-cited “problems” – “Wealth/Capital ownership” concentration only at the “top”,  Labor versus Capital distribution “disparities”, and the like.

And it further seems to me that incentivizing the lower and lower-middle income folks to be and stay Capital owners with the tax code is a vastly superior approach than further penalizing existing Capital owners with the tax code, ostensibly  to pay for more Government redistribution.

Floccina
Jan 2 2020 at 12:29pm

And the period from WWII was a period of mostly accelerating inflation (or accelerating NGDP growth) but you cannot accelerate inflation forever.

John P.
Dec 31 2019 at 4:24pm

First, I can’t resist mentioning that Russ’s comment about jobs being destroyed and created put me in mind of Mr. Micawber’s pro tip: “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Second, after listening to this interview, the question of how best to help the “losers” from free trade would seem to be perfect for Russ’s answer, “I don’t know.”

Earl Rodd
Dec 31 2019 at 8:32pm

I have a few comments which might raise questions for a future econtalk episode:

1. I find it odd that the talk of trade, especially with China, focuses only on “jobs”. As a citizen and consumer, I have the following concerns with free trade with China:
a. Global pollution.
b. Exporting their political system to us – as we see when US tech companies develop systems to further their oppressive government system such as restricted search engines.
c. As a consumer, I think to me personally (and my season of life and situation are not universal!) perhaps the largest effect of the huge move of manufacturing to China is the loss of quality and even worse, the inability to obtain many products. This latter is subtle: A cheap non-functional “look alike” makes the market for the real product so small, it disappears. This happens when many buyers are casual (e.g. toys) and buy the item rarely if even more than once.

2. I find it odd that when we talk about free trade, the discussion of non-free trade is always in terms of industry specific tariffs. If our goal is to not support China’s horrible environmental record (pollution the ocean and air for everyone, using toxic materials in products) and oppressive political system, why would we put tariffs on only some products? I find it frustrating to listen to a discussion about moving manufacturing off-shore in general, but then hear only about tariffs on one industry and the disruption that causes. Why not think about tariffs on any Chinese product or a product with Chinese content?

3. I’ve listened to econtalk episodes on the minimum wage, Mike Munger’s thoughts on a UGI, and now in the EIC. Why the EIC? A higher minimum wage seems less likely to cause resource mis-allocations. A high EIC (or other welfare) is a subsidy to every low wage industry whose workers cannot live on the wage paid. I think that on the surface, it seems more direct to raise the cost of those workers to the industry rather than make everyone, even people who don’t use that low cost industry, effectively pay part of their wages.

3. This was a very challenging episode with clear thinking until we got to the “carbon” tax. How can one say that anyone’s carbon tax “works” well if the effect is to raise costs by subsidizing more expensive forms of energy or environmentally damaging forms like wind? How about an energy tax – a nice very broadly based tax which encourages efficiency but does not subsidize one kind of energy over another? I find it almost comical to hear intelligent people think we can control the climate, but who never talk about the ideal climate we are trying to create.

Michael Lucas
Jan 7 2020 at 11:22am

Fortunately with the climate we don’t need to design anything. The problem is far simpler that the resource being consumed by carbon emitting activities is simply the carbon carrying capacity of Earth’s atmosphere. We do not precisely know what the limit is, but a simple single degree of freedom model can demonstrate that it is limited. Additionally, long term temperature data reveals that we have already exceeded the ‘noise floor’ with emissions to-date.

Different forms of economic activity consume this carbon carrying capacity of the earth by different amounts. Although there are many philosophical ideas we can never truly know, fortunately it is relatively trivial to quantify the carbon emitted in performing an economic process in a consistent and fair manner.

The revenue neutral carbon tax creates winners and losers and is administered by the government which is not ideal. In the absence of this particular nuance of physics I would be against it, but given that global temperature is tied to carbon in the atmosphere this seems to be the least disruptive way of avoiding a ‘tragedy of the commons’.

Unfortunately I do not see a future where this idea is actually implemented, so I can only hope that non carbon emitting activities become cheaper than carbon emitting ones before the extremely negative consequences of consuming this resource occur. However, if it were up to me I would not willingly choose the worsen our odds when there are fair and market based changes we can make today to improve them.

 

Simon Cranshaw
Jan 2 2020 at 12:39am

You can argue that we’re Americans, you can argue they don’t count. I think they count for something.

I’m glad this was pointed out.. I really think if we’re discussing economics and not politics everyone should count.
This is a very normal economic discussion but I’d like to point out that it does assume an ugly nationalistic prejudice. I believe that the progressive agenda is oriented to caring for the least fortunate people. If this is actually applied evenly across the world, then I think the only thing we should be talking about is reducing restrictions on people to move and work in the world. If you want to talk about income redistribution in America, well, that’s fine but let’s not pretend that we’re trying to help poor people. In the worst case, this line of argument becomes a distraction from the real biggest problems of poverty in the world.
I know that economics addresses politics and politics panders to nationalistic prejudice so this is the framework of the discussion. But let’s not lose sight of what we are talking about and let’s try to be aware of nationalistic prejudice which seems every bit as evil as the racial or sexual prejudices that are now so disdained.

Michael Jungreis
Jan 5 2020 at 5:34pm

Another great and thoughtful episode, but I am compelled at long last to comment on the bizarre focus of our host and most of his guests, along with a great many of the blogerati, on the Bay Area and Silicon Valley, Boston, and New York as the best destinations for those seeking work.  Those are not the most dynamic urban areas in the country, and quite aside from their closed and high-cost housing, they are not the best places for, say, displaced West Virginians to seek employment.   Jobs in those areas are focused on industries that the low-skilled or manually skilled will not have entrance to.

Far better as a destination would be, for example, Houston, the world center of the enormous energy industry, an open-access, booming city with lots of jobs for those without advanced degrees, and a great standard of living available to those lower on the educational ladder (and additionally, culturally much more congenial for that West Virginian than would be New York or San Francisco).  Similarly, the West Virginian might want to try  Atlanta, another booming, open, sun-belt city, or Indianapolis, or Miami, or Dallas, or San Antonio.

It is myopic for those for whom the only significant industry is the tech industry, for whom the only real locations are in California, Maryland, New York, or Massachusetts, to miss where the real employment dynamism is in our country.  Certainly easing  the choking regulatory burdens in those  high-income, high tax, blue states would be a benefit, but  the truth is that it would be only marginally important in dealing with the many who should move for better employment opportunities.

Marilyne Tolle
Jan 8 2020 at 3:20pm

Hi Russ,

You say:

“I’ve come to argue that efficiency is not the reason I’m a free trader. The real reason I’m a free trader is for other reasons. I think that over time, each generation gets a chance to mold its skills to the dynamism of an economy that has trade, that otherwise people get into stagnant situations, that encourages innovation, that encourages human flourishing. And that with a point in time someone may struggle, their children are going to do better. So, that’s the way I solve that problem.”

Isn’t that still utilitarian calculus – of a dynamic/time-series type rather than a static/cross-section one?

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AUDIO HIGHLIGHTS
TimePodcast Episode Highlights
0:33

Intro. [Recording date: November 15, 2019.]

Russ Roberts: Today is November 15, 2019, and my guest is economist and author Kimberly Clausing. She is the Thormund A. Miller and Walter Mintz Professor of Economics at Reed College. She's the author of Open: The Progressive Case for Free Trade, Immigration, and Global Capital, which is the subject of today's episode. Kim, welcome to EconTalk.

Kimberly Clausing: Thank you for having me. It's a pleasure to be here.

Russ Roberts: What's fun about your book is that I agree with it almost entirely on trade issues, but disagree about policy that you advocate in the book. So I think we're going to have a great conversation. One of the things we disagree on is how the average American has been doing over the last 30 or 40 years during a time of rising globalization. Why don't you summarize your perspective on that?

Kimberly Clausing: Sure. Yeah. I guess I would preface it by saying that I think American living standards are quite high, particularly in comparison to a lot of countries. But one of the key features of recent economic history is that what's been going on with the macro-economy as a whole isn't always mirrored in what's happening to typical workers.

So, if you compare two recent periods--if you look at the period after World War II that ended about 1970, and if you compare that to the period from 1980 to present--you'll notice in that earlier period, there were big gains in GDP [Gross Domestic Product] and output, but also rising living standards that kept pace with what was happening with the macro-economy as a whole.

So, the bottom 90% of the population actually had income growth that matched, if not exceeded, kind of what was happening with GDP. Growth at the very top of the distribution was actually slower, in most cases, than at the bottom.

And what we've seen in this more recent era, is still substantial gains in GDP, and GDP per capita, and increased, sort of, access to all kinds of goods. But, the living standards for those in the bottom, you know, four-fifths or so of the population haven't kept pace with what they've come to expect from the earlier era.

So, for the bottom half of the population, living standards are relatively stagnant. For those in the sort of 50th- to 90th-percentile, you see increases, but increases that fall short of expectations.

So, I think a lot of workers have looked at the, sort of, gains in the whole economy and felt somewhat disappointed with their own personal economic situation, and that disappointment has some bearing in reality if you look at the data since the increase in GDP hasn't always benefited everybody. And in particular, the increasing income inequality has made the gains much higher for some groups than for others.

3:14

Russ Roberts: So, I'm very skeptical of that evidence. And, as I conceded earlier, I'm in the minority on this. I think most economists agree with your assessment. At the same time, most economists would agree that our measures of inflation are not very accurate, which of course, is crucial to determining whether the bottom 50% say is making much progress.

And I guess I also feel it doesn't even pass the sniff test, to suggest that the standard of living of the bottom 50% today is roughly the same as it was 30, 40 years ago.

So, the other issue I think that is often, almost always ignored is demographic change. And so many of these measures are household measures. And of course, there's a lot more single person households.

And so the left-hand tail--and it's particularly true of people with low education. So, the people in the left-hand tail are more likely to be single, whereas before they used to be married. So, I feel that a lot of the pessimism about the state of the economy is a statistical artifact. I just want to put that on the table. It's not the focus of our conversation. We have a lot of other things to talk about.

But I want to mention that, because I do think there's an important question as to whether we have a crisis, in terms of how the economy treats people other than the rich, versus just, 'Well, it could be a lot better; there are plenty of things I think should be improved.' But it's really a very different picture, I believe, when you correct for the challenges of measuring inflation and demographics.

Kimberly Clausing: Yeah. So I guess what I would add to that is that I think it's really a question of degree, and we probably agree on this. The household demographic changes are important, changes in how we measure inflation are important, and there's a lot of new products and there's some controversy about how to best sort of account for their gains.

So, those are real issues. I think even if you control for both of those things, you still get an increase in income inequality. It's just a less dramatic one. So, that's one thing to point to.

And another thing that I look at when I sort of think about the wellbeing of the middle class is some other symptoms that we might take a look at, such as the rise in consumer indebtedness, as we see much more household debt than we saw in earlier periods. Surveys about people in their economic security, how do they feel? Like, do they have enough money to sort of cover, you know, a three-month period without wages? You know, that. So, those types of measures of income insecurity are on the rise in this era relative to the earlier era.

And finally, this sort of rise in political polarization, which I think isn't solely an outcome of media, but also an outcome of discontent, right? There does seem to be some theme of economic discontent that has both the far Left and the far Right kind of searching for different solutions to that discontent. But the discontent seems to really palpably be there, I could argue.

Russ Roberts: Yeah. Well, I certainly agree with that. I do think some of it has been encouraged by the media. And I don't mean that in a strategic way. I mean that in the fact that the way the media reports on this has created some of that feeling.

But I don't want to deny, and I think what we can focus on that we agree on, is that both geographically, certain regions have struggled terribly with economic change in the last few decades. And also certain groups of people, particularly people who did not go to college, or who didn't finish college, or people who didn't finish high school, or only went to high school. I think those are the folks we ought to be worried about who are struggling to get ahead or just to thrive and have dignity. So, I do think that's important.

Kimberly Clausing: Yes, I agree with you there.

And the geographic concentration point is an important one, because it does appear that some regions of the country are much more susceptible to sort of economic shocks, and some regions of the country are much more thriving. And, so.

Russ Roberts: Yeah. A separate issue that comes up a lot on the program is the regions. I'll just pick obvious ones like West Virginia that are struggling. And there are cities that are thriving and doing very well, and it's hard for people I think today to move to those cities, for a lot of reasons. Land policy is one, community is another. Ties that people have to where they grew up. So, all those things, I think, are part of the story. But it's also clear to me that a number of people are having a really tough time. And regardless of how big that group is, it's sizable enough that we ought to be concerned about it.

Kimberly Clausing: That sounds right.

7:53

Russ Roberts: Good. So, one of the things that I struggle with, and I learned from your book in an interesting way is--let me read a quote from the book. You say the following:

While plenty of economists study the economic inequality, job loss, and disruption that are caused by the forces of globalization and technical change, they often shy away from the difficult questions of how to address these problems in a politically feasible way. It is a quite common affliction of the economist to smugly pronounce what an optimal policy would look like, acknowledge that such a policy may prove politically contentious or impossible, and then pass off the resulting problem as one of "politics," a field too dirty for clean hands.

Why don't you expand on that, because I think--expand on that.

Kimberly Clausing: Yeah, so I noticed this a lot in economics, and I'm definitely subject to the same, you know, tendencies, because we are told from the time that we first start learning economics that it's a really powerful tool to just sort of describe the world as it is and to sort of think about how one might move towards more efficient solutions rather than less efficient solutions.

But I'm often struck by how often it is when I demonstrate something in class, like the optimality of free trade for a small country, or, like, why a carbon tax would make sense for internalizing the externality, that I'm then left to sort of reckon with the fact that the policies that seems so obvious to the economist are often not the ones that are chosen by policymakers.

And so, I think sometimes it's useful to sort of step back a moment and ask why that might be. And it's true: some of this is outside the purview of things that economists can do well. But sometimes you really have to sort of ask some of the secondary questions. Like, let's say, there are both winners and losers from trade; but we don't think, that ultimately that it will be Pareto-improving--that the winners will compensate the losers through some sort of redistributed mechanism.

You know, then: Should we still be in favor of free trade? If so, what does that imply about other policies that might complement that rather than just sort of saying, 'Okay, well, free trade is good. Let's move on to the next question.' You know, so this book is a sort of a departure from my more academic work, where I just kind of focus on determining this or that elasticity and looking at things in a more scientific way, in that it does recommend, you know, particular policy responses, not just sort of looking at the story of what economists say about something.

10:46

Russ Roberts: Yeah, so I think that's really important. And I want to talk about that for a few minutes, because even though you don't dwell on it in the book, I just think it's really interesting to try to think about it. I'm a very hardcore unilateral free trader. I would like to see the United States have no free trade agreements, just open borders for products and more or less open borders for people. That's, of course, a radical view, both those views.

But if you ask me, 'Well, won't that cause some winners and losers?' I say, 'Absolutely.' And I used to make the argument that you critique in the book, which we were taught, you were taught, I was taught, and I used to teach my students, which is: the gains outweigh the losses from these policies. They're net positive.

And, I started to come to believe that that utilitarian calculus which underlies efficiency--that the technical term that economists use for basically the pie getting bigger--is morally problematic. Despite my belief in the power of trade to transform our lives in a positive way, and despite the fact that I believe that the net gains are positive, the fact that there are large groups of people who struggle at any point in time with the consequences of trade I find troubling.

And so I have come to argue--and maybe this is just a weird form of psychological adaptation--I've come to argue that efficiency is not the reason I'm a free trader. The real reason I'm a free trader is for other reasons. I think that over time, each generation gets a chance to mold its skills to the dynamism of an economy that has trade, that otherwise people get into stagnant situations, that encourages innovation, that encourages human flourishing. And that with a point in time someone may struggle, their children are going to do better. So, that's the way I solve that problem.

I want to come back to the political problem, but before I do, what's your reaction to that?

Kimberly Clausing: Yeah, I think that's a good reaction. I take a slightly different but fundamentally similar view, which is I am a free trader, as well. I do worry about the losers, as well. I think my arguments about why we should nonetheless have free trade even if we can't do some of the redistribution that we'd like is the thought that if we didn't have free trade, ultimately things would be even worse.

So, the thought is, let's say we tried to protect workers from these potential losses and we identify some workers, perhaps the ones making coal or steel, that we think are particularly damaged. And we're like, 'Okay, we're going to put on tariffs to help them.' The argument I make in the book is that that actually kind of adds insult to injury to what's happening to the typical worker who has similar skills as those coal and steel workers. It's true, you might save a few steel jobs with steel tariffs, but you're probably going to lose some auto jobs, some jobs in the cutlery industry, and elsewhere, right? You introduce new types of shocks. I mean, you make things more expensive for all the workers regardless of what it is that they're producing, because when they go to the store, anything that has steel embedded in it is more expensive.

And also there are these studies that suggest that, per steel job saved, the tariffs cost the U.S. economy about $650,000. So, I guess my argument is that, even if we can't do the redistribution, and it's nice, of course, as you point out that over generations, we'll have a more efficient economy. But I also think it's important to sort of look at the counterfactual policies and say, like, well, do we actually think that there's a way to protect workers from this churn of the world economy? Or do we just ultimately kind of set back the United States relative to other countries if we try to protect them from these winds of change?

14:38

Russ Roberts: So, this is where I think the politics comes in. And I really like that quote that you had, because it forced me to confront my own imperfections there. So, I don't like just saying it's politics, but I think I probably do say that. So, I'll give you my example. I think we each are similar here, but maybe not.

So we both agree that some workers are made worse off by trade, at least in the short run, and that short run might be fairly long. Or, another way to say it is we'd like to soften the blow without giving up the benefits that accrue to lots of other people. And that accrue to them as well, by the way, in other parts of the economy in the form of lower prices, and so on.

So, you would give a bunch of examples of things that we should be doing to help mitigate that. So, you say, 'We should spend more on infrastructure; we should spend more on education.' And I say similar things, except my policies that I think would help workers are different from yours, right? So, I might say, 'I think we need more competition in the school system. We need less government; that, government expenditures don't always lead to more education, just more schooling. You don't get any smarter on the worker side.'

And, I have to accept the fact that my preferred policies to help aren't going to happen. Probably. I mean, they could. But am I just hand waving? Are you just hand waving? You say we should spend more on infrastructure. We spend a ton on infrastructure. Maybe we should spend a lot more. But the political process, which has $4.4 trillion at the Federal level at its disposal, doesn't seem so keen on it.

So, when you and I advocate for it, are we doing anything other than just sort of making ourselves feel good about the fact that this trade policy we like, is--we can sleep at night?

Kimberly Clausing: Yeah, I think you have a nice point there. But I would point out that there are some areas of bipartisan consensus where, nonetheless, it appears that Congress hasn't been able to act, but where we might imagine eventual success if we push on it.

So, one example would be expanding the Earned Income Tax Credit. So, people on both the right and the left at least over time, you can find major figures who have supported that policy. It's a nice policy. It creates negative tax rates for those at the bottom--those that we might think are particularly likely to be hurt by the forces of trade and technological change and other things. It encourages work rate by increasing the real wages, again, of those lower in the income distribution. And it's a much less costly solution than some of the alternatives that have been suggested, like the Universal Basic Income [UBI], which is far less targeted to low-income workers and just kind of hands everybody money and is quite expensive.

So, if you look at that policy, and we could sort of ask, 'Well, why haven't Congress-people on both sides of the aisle just agreed to do that?' you know, we can actually find instances where they have. Like, there are moments where that has been successfully expanded. And I can imagine a world even right now where people could agree on that. So, I do think if we focus on some of those policies, that that's probably a useful area to focus on.

I think expanding Research and Development funding is another area where we could sort of imagine people coming together on both sides of the aisle to suggest. You know, and then there are some things that are, of course, harder and more contentious, right?

What I try to focus on in the book is things that I could sort of imagine happening rather than things that I would think are ideal, right? So, it's sort of a full imagination process, right? And it's just my perspective on what I think is politically feasible, but it's pretty far from the wish list that you would see in campaigns, for instance, which are often: you get people proposing things that they know there's just no chance of having happen. But they think that they sound nice to people, whether it's asking another country to pay for an infrastructure investment, or whether it's saying that you're going to provide something for free to everybody without really specifying how. You know, I mean, those types of policies I think are even more fanciful than anything an economist would suggest.

Russ Roberts: Very well said.

The flip side of this is--we'll get to trade details in a minute, but this is such an interesting topic. The flip side of this is that some people have suggested to me that you should always argue for the ideal policy--don't argue for what's politically feasible--because then at least you'll get something close to the ideal. And you might even get the ideal if all goes really swimmingly.

You can look at Capitalism and Freedom, by Milton Friedman, and every idea in that book, at the time--almost every idea--was incredibly radical. The idea that we would actually have a volunteer army, a paid army rather than the draft--is absurd when he wrote it; and we got it. So, you could argue that if we hadn't done that, it wouldn't have happened.

So, I think there's a---it is a question of political strategy, and it is something that I think we have to concede we don't--you and I as economists--well, you and I--nobody fully understands it. That's a silly thing to add. But that it's uncertain. And you're right, great ideas can be adopted even when they're initially seen as unattractive.

Kimberly Clausing: Yes, I agree with that, too. I do think that there are different things that we try to do with our professional lives, and one is to sort of move the conversation by having big insights or big ideas that may take time to adopt. I've been working for decades on issues of taxing multinational companies, and, you know, for a long time, there's absolutely no policy work that seem to be happening in any country on this issue. And now, we've got the OECD [Organisation for Economic Co-operation and Development] and the G20 [Group of 20] countries sort of agreeing on a lot of measures that would, you know, maybe not be my ideal but are certainly addressed at some of these policy questions that I've spent decades working on.

So, I do think progress does happen over time, and sometimes it's a lot slower than we'd like it to be. So, you know, you don't have to do just one or the other, you can sort of push for grand things in the long run while also suggesting pragmatic things in the short run.

Russ Roberts: Yeah. Again, that's very well said.

21:18

Russ Roberts: Let's turn to the details of trade--the economics of trade, which we put in the background of many episodes of EconTalk, but we haven't talked about it much explicitly at the fundamental level in a long time, and that's in the news. So, I think it's very useful. Let's start with trade deficits. Should we be worried about those?

Kimberly Clausing: Yeah, that's a great question. And I wish--it's actually the one lesson of economics that you can teach an Intro student really very clearly in a matter of minutes, but somehow it seems to never permeate the consciousness of the media or [crosstalk 00:21:56] either--

Russ Roberts: It's not in the zeitgeist.

Kimberly Clausing: You know, like, so, but basically what is true--it's just a truth, it's not even a theory--is the trade deficits happen in all those countries that spend more than they earn, and trade surpluses happen in all the countries that earn more than they spend, right?

So, these macroeconomic influences that determine countries' savings rates, their investment rates and what the government is doing with a budget deficit, those fundamentals are driving how much the country borrows or lends, right? So, in a country like Germany where they have very responsible budgeting and where people save a lot, and they save enough that it exceeds the investment, countries like Germany tend to run trade surpluses.

And countries like the United States, where the government frequently runs large deficits, where individuals and companies often as a group save less than they invest--those countries run trade deficits. And, no matter how much you tinker with the terms of trade agreements, or threaten trading partners with tariffs, or implement tariffs even, that's not going to change those fundamental factors that determine how much a population and its government want to save and borrow.

And that borrowing and saving is really what's driving each and every trade deficit and surplus that we see in the world.

And it's something that you can sort of show an Intro student with three or four equations really quickly.

But, somehow, when the media announce the latest trade deficit, they do it in this sort of breathless fashion that indicates that some sort of like outcome of a global struggle about competitiveness.

And you can have very competitive companies and a very competitive workforce and very strong fundamentals in your economy and still run a really large trade deficit if people want to spend more than they're earning as a whole. And that counts both government actors who are borrowing, but also the personal and the corporate sector.

Russ Roberts: So, to summarize, a trade deficit is almost a perfect mirror of a capital surplus--that is, the gap between what is invested and saved in a country. In the United States, we're a very attractive place to invest--for a bunch of reasons. We have a low savings rate--for a bunch of reasons. So, we run a surplus --

Kimberly Clausing: You mean a deficit. Yes.

Russ Roberts: we invest less on the capital side--

Kimberly Clausing: Yeah. Sorry. Yep, yep.

Russ Roberts: We run--we invest less abroad than foreigners invest here.

That's glorious for us. In a certain level that means that our productivity and our capital are growing despite our low savings rate.

At the same time, we run a trade deficit, meaning we consume more goods and services than we produce. Which seems like magic. And it is magic and it's exactly what's going on.

The only problem with that is , potentially, there might come a day when countries don't want to invest here, and, or don't want to buy our bonds and finance our government budget deficit--different thing than the trade deficit, easily confused because they have the word 'deficit.' But if that day came and it came suddenly, there might be some adjustments that would be traumatic and hard to deal with.

But there's nothing--you can run a trade deficit for a century. I think England did. So, it's not a crisis. My theory, by the way, is that besides the fact that the media likes to wave it around because it sells newspapers, the word 'deficit'--it sounds negative. If we ran instead, the story said, 'Once again, America's run a capital surplus, and found ways to attract capital into the United States greater than how much capital leaves the United States. Good going, America,' it could be a different story maybe.

Kimberly Clausing: Yeah, absolutely. I think the adjustments that you describe in the event that people don't want to buy U.S. assets, we do have the benefit of a floating exchange rate that should help with that. So, what that means is that if people lose their appetite for U.S. Treasury Bonds abroad, or if they don't want to invest in U.S. stocks, right? And that there'll be a lower demand for U.S. dollars with which to buy those U.S. assets, and that will depreciate the dollar, right?

That dollar depreciation basically puts every asset in the United States on sale from a foreign perspective and helps us finance whatever deficit we want to run, right?

So, there's no reason in our case for that adjustment to be particularly shocking or burdensome, especially at the levels that we see now where we've got like a 3% of GDP [Gross Domestic Product] trade deficit. That's not really large enough to generate big shocks in a floating exchange rate system.

Russ Roberts: And if you're not careful, you might say, 'Well, let's just borrow even more money.' The risk is, is that at some point, that shock will come. Even though it could be mitigated by an exchange rate change, it's still going to be a challenge to cope with that debt[?] transformation, I would suggest.

Kimberly Clausing: Yeah. And, what tends to happen often in the U.S. case is we'll have a recession for some other reason. So, if you look at the 2007-09 downturn and Great Recession, that dramatically reduced the size of our trade deficit. It wasn't that suddenly people lost their appetite for U.S. assets. I mean, in fact, there was actually--the dollar strengthened during that period, because U.S. assets were considered safe in a time of economic hardship.

But what happened is people bought fewer imports because the U.S. economy was contracting, right? And savings rates went up too, because of sort of the shock associated with that whole financial crisis in the United States. So, sometimes other factors will enter in that change the sort of path of these imbalances, and that's one thing that we saw in the Great Recession is not so much that the Great Recession was caused by the imbalance, but that it sort of righted some of the imbalances as it was being sorted out.

Russ Roberts: And you have dark humor in your book, which I've used as well, where you say, 'Well, if you're really worried about the deficit, just have a big recession or depression and you'll fix it.'

Kimberly Clausing: Exactly.

Russ Roberts: It highlights the fact that it's really a result and not a cause of things. I think people assume that if we could get rid of it, we'd have more jobs, but that isn't true. At least I don't think so, and you don't either. So, explain why.

Kimberly Clausing: That's right. Yeah. So, I mean, basically, getting rid of it would entail--some other macroeconomic change would be needed to do that. So, for instance, you imagine if the U.S. government got in the mood to run a more balanced budget, for instance, that would definitely reduce the size of the trade deficit. The government would presumably be collecting more in taxes or spending less or both to make that happen. And that's going to change those variables.

But we don't really think that it's going to change the number of jobs. We tend to think that that's an outcome of the overall level of demand in the economy compared to what's produced.

So, if, for instance, the government decided to reduce the size of its budget deficit, probably at the same time, the central bank would say, 'Okay, well, that's going to reduce aggregate demand so we're going to lower interest rates to try to offset that,' and that will hopefully keep the number of jobs if that's done skillfully, relatively constant.

But we think that number of jobs is really dependent on the overall state of the macro economy, not on any particular trade balance. And if you look across countries, you don't see that the countries with bigger trade deficits have different sort of employment outcomes than countries with smaller ones. That's not a major variable that's driving job growth.

Russ Roberts: And similarly, over the last 50, 60 years as we've run a trade deficit I think every year, and sometimes large ones, most of that time period, jobs were growing steadily. As people enter the labor force or women's labor force participation went up, the trade deficit didn't stop them from finding work. They did great.

30:09

Russ Roberts: But what about China? There are two aspects of China, I think, that are worrisome even to you and me, who are generally free trader, generally not worried about deficits. And I just say it as a footnote: I don't know how old you are. I'm old enough to remember when Japan was destroying America, supposedly.

Kimberly Clausing: Oh yes, I'm that old, too.

Russ Roberts: Supposedly, that somehow got--but we still run--I think we still run a big trade deficit with Japan, but somehow we're not worried about them anymore. Then, it was Mexico, and now it's China. I think, though, despite our agreement on this--that trade deficits are not worrisome--a lot of people argue that trade with China between 2000 and the present when China became part of the World Trade Organization [WTO] and expanded its exports to the United States, that was very hard on a piece of the economy.

That, even though the total number of jobs may be unchanged, certain types of jobs change, and that can be very hard on people. And the example that people worry about a lot is manufacturing.

And the second issue people would talk about is that China acts unfairly. They steal intellectual property. They don't let our goods in. I have my response to that, I'm curious what yours are.

Kimberly Clausing: Yeah. So, there are several things to keep in mind with respect to China. They're a very large economy, over a billion people, an enormous amount of economic growth there. So, as they entered the world economy, it was really inevitable that they would be producing more of the world's manufactured goods, that they would be effective at doing that. And so we have to sort of ask from a U.S. policy perspective: Is there a way that we could have made that easier on U.S. workers, that entry of China into the world economy?

I don't think a sensible response would be to try to stop them, for instance, from joining the WTO. I think it was very useful for them to enter a rules-based world trading system. And I think the WTO is the perfect tool for handling disputes that we might have with China about particular practices that we might deem unfair, right?

And the fact that they're very good at making manufactured products is not an unfair thing. It's just the fact of the matter. They have a lot of people. They have a lot of economic growth. We expect them to be good at making a lot of manufactured products.

But, there are practices where you require technology transfer, where IP [Intellectual Property] theft might be involved or things along those lines where we might have legitimate grievances; but we have a nice forum for dealing with those grievances, which is the WTO. And we've successfully resolved a lot of disputes, including disputes with China there.

And so, I think that that's kind of a much more effective way of dealing with some of the trade disputes there than the alternative, which seems to be putting on tariffs in the hopes that they will change their behavior--but then, of course, they retaliate with tariffs of their own, and we generate a new set of shocks that American workers have to deal with. So, I think that's a less effective policy.

This isn't to say that U.S. workers didn't lose something from this extra trade with China. They did. I mean, there's some really nice research that I think you had David Autor actually on your program. He goes through this research which documents that it probably did cost about two million workers, if you kind of include the fullest estimate, job loss due to that Chinese ascendancy in manufacturing.

But I also point out in the book, and I think it's really important for us all to remember, that we live in a very dynamic economy. It's a capitalist economy, it generates job loss all the time. And in fact, the typical quarter in the U.S. sees over six million jobs lost and over six million jobs created, right? So, that's an incredible amount of job churn that happens each and every year.

So, it's true: there's some additional job churn because of China's entry into the economy. But I think we delude ourselves if we think that we can somehow protect workers from that one source of job churn without creating a lot of collateral damage.

Russ Roberts: Yeah, I'm very skeptical of the Autor--it's Autor and his co-authors, there's quite a few people working on those studies. But, to point to China and say that they are responsible for loss of two million jobs without accounting for the increases in jobs that you can't count, because they're harder to identify from lower prices, which freed up resources for people and capital to do other things--just strikes me as--actually, I won't say anything more than that. I just think it's wrong.

Kimberly Clausing: It's a general equilibrium problem, in the sense that it's true, there may be some jobs lost one place, but there are jobs created elsewhere, right? And that's one thing that we think in general with trade, is that you're going to lose some jobs in the import-competing sector, and you're going to expand some jobs in other sectors.

And we also need to account for the fact that if there is a little bit more job loss, that the Fed and others aren't sort of standing there silent while things happen. They look at the overall picture of the economy. So, I think saying that that's an aggregate job loss is probably not true.

Russ Roberts: I just want to expand on your point, by the way, about the quarterly data, which is I think extremely educational. Every quarter--or maybe it's every month, maybe you tell me--millions of jobs are created, and millions of jobs are lost. When it's healthy for the economy, there might be 6.2 million jobs created and six million jobs lost that quarter. When it's not healthy, it's six million jobs lost and only 5.8 million created, and that's a hardship. But there's a lot of dynamism even in our somewhat sclerotic economy. And I think to ignore that actually I think is just wrong.

Kimberly Clausing: Yeah, I agree. And I also think it has enormous policy implications, right? Because if you're saying that this loss of two million jobs over a decade justifies tariffs, for instance--which isn't the argument that Author makes, by the way. And they don't suggest tariffs. But other people using that work have leapt to the conclusion that, 'Oh, well, maybe this means we should protect American workers from foreign competition.' One, you're only going to get at a tiny bit of the churn that's in the economy; and two, I think, you're really distracting people from much more effective solutions to workers' troubles.

So, if we have concentrated areas of job loss, in a way, it doesn't matter what's causing that, whether it's trade or technological change or domestic competition, right? I mean, the question we have to answer is how to most effectively deal with that resulting problem. I think the problem with trade remedies is they often exacerbate the sort of shocks and difficulties that workers face.

Russ Roberts: Just to use a metaphor, which I think is helpful, I think often people think that the job market is a game of musical chairs. So, if there's a lot of chairs, but if two million of them get pulled away, there's all these people looking around and can't find them. And that's not what happens. There's a bunch of chairs being taken away, and there's a bunch of chairs being added.

Having said that--and often more chairs are being added than are being taken away--having said that, it can be hard to find which chair is open. And for some people, the chairs are in a different room, and they literally can't get there.

So, I think the thing we have to confront in our side of the argument is that, well, it's true there's a lot of churn. And it's true there's a lot of jobs created from trade with China. But, for some of the workers who lost their jobs, they can't get those jobs that are created. They don't have the skills. They're far away. They don't know about them. Many did, but many of them were able to find them and get there, but many didn't. And that I think is the moral issue that we have to confront.

Kimberly Clausing: Yeah, I agree with that. And I do think that there are policy steps that people could take that would sort of make some of these transitions easier. I'll just mention two really quickly.

One is expanding access and affordability of community college, right? Community college is very inexpensive compared to your traditional four year degree. It's often geared towards sort of skill acquisition later in people's life so that they can kind of retool to suit the local labor market needs. That can be a really cost effective and helpful way to help workers retool.

Another thing to think about is reform to zoning laws in kind of high growth areas, because some of our most successful economies in the United States, places like Silicon Valley, are extremely expensive places to live. So, if you lose your job in West Virginia and you want to move to the Bay Area, forget it: like, it's going to be way too expensive to live there. And I think that people need to take a hard look at what zoning laws have done to prices in some of these thriving communities, because it's making those locations inaccessible to all but the well-off.

Russ Roberts: That's a common theme on this program; I couldn't agree more. I just want to add a footnote to it. I've been looking at some work by Kevin Erdmann, and he makes the point--which I think is, I'm ashamed to say I didn't think of--which is not only does it make it harder for people to move to these places, New York City being one for that West Virginia worker probably a little closer than Silicon Valley, and maybe a lot more comfortable for the skills that that person has, more realistic that they could find something useful there. But not only is it more expensive, and you're going to face an unpleasantly long commute if you do want to work in a thriving metropolitan area like New York, San Francisco, Boston, Los Angeles. There's a handful of these cities that they have high wages, lots of opportunity, and are also incredibly expensive to live because I think mainly policy--not just because a lot of people want to live in them; and that's an important footnote.

But, not only is it hard for people to move there, but the people who already lived there can't afford to stay there. So, they end up having to leave--this is Erdmann's point--and move to places where it's not thriving, not as good, and make it even harder on the people who already are there. But that's the best that they can do. I think it's just a terrible mistake.

41:23

Russ Roberts: But the question I have for you is the following. Let's imagine you were dictator between 2000 and 2020. I love what you said about China. And it's always important to add, I think it's often forgotten, that hundreds of millions of human beings who live in China have much better lives because of this transformation.

Kimberly Clausing: Yes. Yeah.

Russ Roberts: You can argue that we're Americans, you can argue they don't count. I think they count for something. I wouldn't want to--

Kimberly Clausing: Absolutely. Yeah, 800 million people. That's a lot of people that used to be below the World Bank Poverty Line, which is $2 a day and now are well above it. That's an enormous human success that people need to pay attention to.

Russ Roberts: And as has been pointed out by a listener who--I don't know if he wants to be mentioned by name, but he pointed out to me that it happened once. It ain't happening again. It's not happening again. It's not going to be another 800 million people flooding into the cities from the Chinese countryside, manufacturing stuff. It's over. But, historically, we can learn something from it.

My question is, if you were a dictator, or you could be in charge of policy, what should we have done between 2000 and 2020, 2019, the present to have softened that blow on the people who were in the places, who'd had the skills that didn't fit in, and so on? Would you have done anything differently than we did?

Kimberly Clausing: Yes, I would have done several things differently.

One is that expansion of the Earned Income Tax Credit that I mentioned earlier. Right now, that credit is generous if you have children, but really not generous if you don't. So, if you're childless, it maxes out at about $500, but if you have children, you can get up closer to $6,000. So, I don't see any reason that childless low-income workers don't also need a boost. So, you could make that much more generous across the board.

And also, by de-linking it from children, you actually make it much easier to enforce, administer, and comply with.

And then, to help those with children, you can expand and make refundable the Child Tax Credit, which is something that was actually done as part of the Tax Cuts and Jobs Act. It was a more generous Child Tax Credit. That one was a little less effective because it wasn't fully refundable and it was also accompanied by getting rid of exemptions in the tax system. But you could imagine a more generous package through the tax code of kind of helping those workers who may end up in lower-wage jobs than they would like.

A second thing you could do is consider a program of wage insurance where basically for a limited time, if you, say, had a manufacturing job that paid really well and you were earning $50,000 a year, and then you had to transition to some job that was lower wage, you could basically have a government subsidy for half the difference, say, for a limited time to sort of help people transition and have a little extra resources when they're undergoing these economic shocks.

We do have, actually, a tiny program of wage insurance already that's administered through a Trade Adjustment Program that only applies to workers of certain ages and certain qualifications. But, I can imagine a broader version of that that might be effective. You know, I'm a little indifferent about whether we do that rather than just do a much more generous Earned Income Tax Credit, which I think would have a lot of the same implications and probably be a simpler way to do it.

But I think that there are ways to kind of get some income down the income distribution to help those who are kind of most hurt by those shocks.

And then in addition, those trade shocks that you mention are really geographically concentrated. So, I do think that there are ways that we can kind of help support communities and mobility and things like community college, things like zoning reform. But it's also, at times, public investments can be quite helpful.

So, if we look at Pittsburgh, for instance, which is an example I use in the book, they used to be a big sort of steel town. But now Pittsburgh is actually a much more vital city than it was in decades past, because in response to the shrinking steel sector, they made useful investments in housing, in infrastructure, in higher education; and there were sort of partnerships between the business community and local universities, Carnegie Mellon and the University of Pittsburgh. And now they have a very successful sort of medical tech sector as well as health services sector. And, you know, the set of industries that Pittsburgh is attracting and flourishing there is very different from what it had in the past . But it was partly because they had these strengths that they built on in higher education and in providing infrastructure that Pittsburgh was able to sort of rise from the ashes like that. And so I think that other cities could use that as a sort of a model if they're suffering similar concentrated decline in a particular sector.

46:26

Russ Roberts:

I get to play Progressive now, which I don't get to do very often, Kim, so this is exciting for me--

Kimberly Clausing: Okay.

Russ Roberts: Try to put on my Progressive hat.

So, those steel workers aren't going to struggle to work in that high-tech medical sector. So, that's the--I think, part of the challenge that these policies face. Do you agree?

Kimberly Clausing: Yeah. And I--I don't minimize the pain it caused by job loss when your sector is facing fierce foreign competition; and it's certainly an issue in the steel sector.

But I do think, in a way we don't have a lot of compelling alternatives to just trying to do our best to sort of help those workers with transition assistance, with unemployment benefits when those apply, with community college-type retooling.

Because, if we instead try to insulate them from that shock by making the U.S. steel sector uncompetitive and protecting it from foreign competition, it's true, we can save a handful of workers from pain. But we're going to create pain elsewhere in the system.

The past year General Motors paid over a billion dollars in extra tariffs associated mostly with protecting the metal sector. And if we look at the cost of being General Motors, that's a significant amount of money. They estimated the strike cost them about three times that, but that was a strike for 40 days, and this is just in tariffs.

Russ Roberts: The other point I would make, which is so hidden, but I think so important, is that once you open up the possibility of protecting your sector, your industry, your company from that foreign competition, you change the incentives to where you spend your energy as an executive in that company from making a better product to making sure you have influence in Washington. And I find that to be an underappreciated cost of an activist trade policy.

Kimberly Clausing: Yes. The political dysfunction associated with kind of encouraging rent seeking--basically, companies are trying less to compete in the world market and more curry favor with some bureaucrats so that they can get protection from world competition. I think that's a big problem.

Russ Roberts: You make the point in your book, and I make this point also often when I talk about this because I think it focuses the mind: Technological change and globalization are really a very similar phenomenon. They are both ways we can get more from the same amount of resources. That analogy, that parallelism is unappreciated in my view.

Kimberly Clausing: Yes. You sort of have to imagine the same sort of difficulties associated with going back in time, right? If we wanted to undo the China shock, that's a very hard thing to undo. And similarly, we wouldn't all throw away our computers. We lose a lot of things when we kind of go back in time.

There's a reason that we like using computers, even if those computers ended up displacing a lot of labor, it's hard to address that by undoing it. You have to find other ways to address it.

48:56

Russ Roberts: So, I want to sort of summarize this. The way I would summarize your view, which is similar to mine, is the following.

There are a lot of things about technological change, innovation, and globalization that we don't like, as a country. So, when politicians talk about this--and I think a lot of policy advocates as well, including economists--they act as if there's a lever or a knob that we could dial and say, 'Well, you know, I don't want 10 on the globalization, I want 7-and-a-half.' Or, 'I want 5.' Of course, 'I don't want no technological change. I want to make the country better. But sometimes it's hard on people. So, I want less of it. A little less. Not too much, just a little. I want to soften it, want to reduce the speed of it.' And those knobs aren't available.

So, what I like about your approach, the way I would summarize your approach is saying, 'Well, that's not realistic. Those knobs don't exist. We're better off letting the pie grow.' And just trying other policies: Instead of trying to slow down the growth of the pie, which is prone to rent-seeking, cronyism, and so on, because that smooth knob doesn't exist, it has to be sector-specific; we're better off trying to soften the blow to the people who don't share in those benefits from economic growth that come from technological change, innovation, and globalization. Is that a fair summary?

Kimberly Clausing: I think that is a fair summary.

And I think one thing we lose sight of is actually how easy in a way it is to soften the blow. We have really powerful tools through the tax system to make sure that when GDP goes up, everyone's income goes up, right? You can make tax rates negative at the bottom. It's not that hard to do. Right?

So, I think the more we can look at these pie-expanding things as really positive features of the economy, but then try to make sure that they really do benefit everybody by working through the tax system to make sure we have a progressive tax code.

I mean, that's the policy I would really pair it with. And that's something that we know how to use and is feasible, effective, demonstrated successful in the past.

Russ Roberts: Besides that piece of it, what other tax policy would you think would be a good idea? You have a number of ideas in the book.

Kimberly Clausing: Yeah. So, I suggest in the book sort of a grand bargain on tax reform that would do a bunch of things at the same time.

So, the first priority is the one I just discussed, which is making sure that the bottom part of the population is seeing rising incomes.

And that--that's expensive. That costs money to create negative tax rates. So, you have to have some revenue raisers elsewhere in the tax system to pay for that. So, I don't think extra deficit finance is a great idea for that goal. There might be some things that are worth deficit financing that are sort of farsighted.

So I also suggest collecting more from those who've been successful.

And what I think is the good way to do that is to pick a modest tax rate--it doesn't have to be a super high one. Perhaps it's slightly higher on the capital side than what we've had before. But, tax all types of income the same. Cut down on sheltering opportunities across tax bases by basically making a person sort of indifferent about which form they earn their income, whether it's pass-through income, or corporate income, or labor income: Try to unify the tax treatment across types of income so that when you do collect taxes from those at the top, you can pick a reasonable rate and still get a lot of revenue.

I think part of the difficulty associated with our current tax system is we've got this pretty big discrepancy between how we tax some types of income and others. And so when people are like, 'Oh, we really need to crank up the rate on those on the top,' they don't always pay attention to that discrepancy. And so if you increase, say, the labor income tax rate to even 70%, which some people have suggested, but you're not dealing with some of these other income form options, right? Then people are just going to move their income into a different form. And it's going to be really distortionary in a lot of ways.

So, I think you can get away with much lower rates if you actually collect the tax, and if you make them uniform across types of income.

And on the corporate side, I suggest something similar, which is, you know, having a uniform treatment of income regardless of where it's earned, right? So, it's sort of like saying that even if you want to put it in a tax haven, like Bermuda where the tax rate is zero, we're still going to tax it in the United States; and of course, avoiding double taxation with a tax credit.

So, that's another big feature, is sort of collecting a little more from those who've succeeded by sort of reducing those loopholes.

And then a final element that I suggest, which is also a big revenue raiser, is a carbon tax. The great thing about the carbon tax is almost every tax that we use today is discouraging something that we want to encourage. We're discouraging labor, we're discouraging entrepreneurship, we're discouraging saving. But a carbon tax is discouraging something that we think is really bad for the planet: carbon.

And so, it's really a beautiful economic policy as far as I'm concerned, because you raise money to finance the government or to pay for this Earned Income Tax Credit expansion or however you're going to use it. But at the same time, you're incentivizing each and every actor in the economy to use less carbon. Right? So, when you make a decision about where to fly, or whether to build a green building, or how far to live from your work, right?, the carbon price is going to influence all of those decisions.

So, I think that there are other countries like Canada, for instance, who have tried this successfully. And British Columbia has had one actually for a while that's worked quite well. And I think it's a long overdue policy change in the United States that I think we could actually build some political momentum for. I know that people are often like, 'Well, it's impossible to make energy more expensive.' People will revolt.

But, you can imagine a system, for instance, where you collected that carbon tax, and then you just sort of divided by the number of people and sent it back as check. And if you did that, actually the bottom half of the population, probably more, more like 70%, I think, come out ahead with that policy because the carbon footprint of those at the top is higher than those at the bottom.

And so when you just collect all that carbon tax and send it back, you're still changing all the incentives. People still want to reduce their carbon footprint. But they're not made worse off, in most cases, from that policy.

Russ Roberts: And that's because their rebate is not related to their activity. That's the key.

Kimberly Clausing: Exactly.

Russ Roberts: The key part is what economists call, the jargon for that is a lump sum tax. They don't really exist, but it's close, meaning not distortionary.

56:41

Russ Roberts: I want to go back to your other types of taxes. And I want to raise a political point, which often--first I'm going to mention the thing that bothers me. And then I want to say what I think is maybe problematic about some of your suggestions.

One of the things that bothers me is that we have an enormous tax on workers, which is the payroll tax, that is couched and sold as a savings program for your future. But it's not. That's not true. It's money that goes out the door to pay current recipients of Social Security and often other programs in past years. 'But don't worry, when you get older, you'll get your money, too.'

And now people are starting to wonder whether that'll be true. We're going to have to obviously adjust some aspects of the program.

But the point I want to make is that most people feel like the payroll tax, which is also split off--usually if you're employed by a regular employer as opposed to self-employed, split between you and your employer--a lot of people believe that much of that employer part is actually paid by you the worker in the form of lower wages.

So, here's this tax that doesn't feel like a tax. Or at least we've done everything we can to make it not feel like a tax. We've made part of it paid by the employer; and we've made this claim that 'Oh, yeah, you'll get it back later, and then some. Don't worry.'

But that means that the income tax, which is not paid by an enormous number of people, partly because of the negative part you talked about, that those negative tax rates are just a fancy way of saying people get money instead of paying money--it means that enormous sums of people feel like government doesn't cost them anything.

And that has political implications.

The flip side of that is that when enormous sum of your revenue comes from a very small group of people, politicians have an incentive to take care of those folks--keep the goodies coming in.

That sounds like a really bad political-economy set of incentives.

Kimberly Clausing: Yes. I'd point out that the payroll tax is a tax, right? So, when we think that low-income people aren't paying tax, you have to be much more specific. They're not paying one particular tax.

Russ Roberts: Right--but they feel like they're not paying now because they're going to get it back.

Kimberly Clausing: Well, I don't think that people don't feel the payroll tax. I would disagree with you there. I feel it. I know my daughter felt it when she got her first job. You can see in your paycheck, right, that that money is coming out?

Russ Roberts: Fair enough.

Kimberly Clausing: I think a lot of young people don't even think that they'll get Social Security--

Russ Roberts: Well, that's true too, yeah.

Kimberly Clausing: If you ask my students, like, 'Do you think you're going to have Social Security someday?' They're not sure that they're going to have it.

So, for them, this really looks a lot like a tax. It acts like a tax, right? They're getting paid less. It's funding the government. They think they're funding the government. I would disagree heartily with that idea, because I do think if you ask a low-income person, like, 'Do you look at your pay stub?' They do and they see that.

And there's also sales taxes, and taxes on income at the state level that are funding an awful lot of government services, too, right?

So, here in Oregon, we have an income tax, but not a sales tax. But the income tax isn't very progressive. You're sort of in the top once you get to $10,000 or something. You know, so, I'm not sure the exact cutoff. But almost everybody has skin in the game in the income tax here. Or, if you're in the State of Washington, which has no income tax, you have a sales tax and everybody who buys anything has skin in the game there, too.

So, I disagree with this idea that people don't feel that they're funding government at the lower levels.

I guess, looking at the policymaker incentives, I agree with that part. I think policymakers are particularly sensitive to the needs of those at the top of the income distribution, in part because those people are more politically active and salient for a whole host of reasons. Including social ones: they're in the same social circles and the like. So, I do think that there's a connection there between sort of your income and being listened to in a policy context.

But I think that's true, independent of what the tax code is doing, and I think if we raised rates on those at the bottom, that would still be the case, right? I don't think suddenly policymakers would be like, 'Oh, now I'm really worried about,' you know, the typical person more than this rich donor.

1:00:57

Russ Roberts: I agree with all that. The only footnote I would add--I certainly agree that that first pay stub is an eye opener for most of my children, your children, children everywhere.

But I do think that if we decided, say, to expand our military operations in the Middle East, or you name it, the payroll tax doesn't go up. So, there is something of a disconnect. Now, of course, the income tax doesn't go up either.

Kimberly Clausing: Income tax isn't going up either. Yeah.

Russ Roberts: Yeah.

Kimberly Clausing: The practice now is to just issue bonds whenever we want to do things. I'm not sure the policymakers are thinking carefully about these trade-offs--to the extent that there are trade offs they tend to be a bit more political type.

Russ Roberts: Yeah; I don't think that's ideal, by the way. I think that road is not a good road to go down. I think we're in a--it's one of these roads where, 'It's fine. I'm traveling,' and then all of a sudden, there's a precipice and you're over it. You didn't look. It was too late.

Kimberly Clausing: Yeah. There are some serious budget issues to keep in mind, especially because of the demographic situation that we've already alluded to, but the Baby Boomer generation is expensive, you know, like, and so that's going to cost a lot of money in the years ahead.

Russ Roberts: Yeah, although I would point out that if we means-tested it the way you suggest--we should means-test the Earned Income Tax Credit rather than having Universal Basic Income--we could fix that really quickly. And that's a whole another conversation. But it fascinates me that I'm going to get Social Security when at some point, I'm 65. But at some point I think I'll get something back. I don't need it. I don't believe in the word 'need'. But certainly my economic well-being is not counting on that money. And it's weird that I get it back. It's not 'getting it back'. It's taking it from my kids. It's weird, anyway.

Kimberly Clausing: Right. Yeah, I agree. I think there's a good argument there.

1:02:55

Russ Roberts: So, let's close with a slightly personal issue, which is: your book's got the word 'Progressive' in its title. The policy examples that you advocate for are generally on the Left--are associated with political ideas or politicians on the Left. I'm curious what kind of reaction your book has received so far. As I said, I love most of it.

Kimberly Clausing: Yeah.

Russ Roberts: People on the Left, does it bother them?

Kimberly Clausing: Sorry, go ahead.

Russ Roberts: Do people on the Left, are they upset at your advocacy for free trade? I'm just curious what you're hearing.

Kimberly Clausing: Yeah. So, I think there's two types of discontent about the book from, I would say, the sort of Left quarter and the Right quarter of the population. The folks on the Left, particularly on the far Left, I think sort of stop reading when they get to the point where I mentioned that Sanders is also someone who one might think of as being sort of anti-trade; and he had a lot of ads, for instance, in 2016, that blame NAFTA [North American Free Trade Agreement] for things.

And, that group of people tend to think of the book as being too market-oriented in its thinking and sort of saying that it's okay to sort of let markets do a bunch of things and then sort of ask, 'Where are they failing? And what can we do to help those who have been left behind?' I think some of the people on the far Left would prefer more sort of systemic changes in how we organize the economy. And so they view this as sort of Band-Aid type solutions, rather than something that would more seriously help those at the bottom.

I guess I disagree with them, of course, because I'm skeptical that some of these more transformative policies would actually help those at the bottom. I think some of them--I mean, some of them--I have nothing against the idea of empowering labor more: I do think that the sort of bargaining dynamic between labor and capital has changed in important ways and should be reversed. But, I would be very reluctant to sort of say that capitalism itself is a problem. I think, even in the countries that sort of the far Left holds up as models, the means of production are all owned privately, and things like that.

Russ Roberts: Scandinavia.

Kimberly Clausing: Right. Like, they just take a lot more in taxes, right? I think that that doesn't mean that it's not a capitalist economy. It's a very successful capitalist economy that happens to have different weights in their social welfare function on things like childcare and education and healthcare, and different ways of providing those.

So, I think the book was disappointing to people who wanted on the Left a more sort of transformative, like, less market-oriented solutions.

On the Right, I think people tended to agree with many of the views on globalization, but were skeptical about using the tax system to fix it. They were a little more content with the outcomes that arrived by the market, all by themselves, didn't want to sort of do some of the interventions that I suggest, things like free community college, or moving more income down the distribution through the tax system. And so, I think they thought of that as sort of like a liberal fantasy. Although the stuff about trade being good was still right. That didn't mean that you had to do all those extra things.

So, those are the two main sort of bodies of critiques, and I've seen both of those. I mean, I do think that the book really calls for a sort of radical moderation in a way, sort of saying, like, 'Let's recognize all the things that the economy's really doing well, but let's take seriously those who are left behind and think really carefully about effective, efficient ways to solve those social problems.'

We have some pretty big problems that we're turning our back on now. I think climate change is one that I would put at the very top of the agenda. But I also think by dealing with this economic discontent in a way that's less polarizing, that sort of can bring people together so that we can govern and make tough decisions. I think that's something that we really need to do.

I'm dissatisfied with this idea that people are becoming increasingly tribal in the United States. It seems to be kind of like two camps that don't want to talk to each other. And I think that sort of environment is a lot easier to do--that sort of environment is much more likely outcome of economy that isn't generating really inclusive economic growth. And I think inclusive economic growth makes political polarization less attractive because people are doing better and they're feeling that, and they're more willing to sort of reach across the aisle and do things that are collaborative.

Russ Roberts: My guest today has been Kimberly Clausing. Her book is Open. Kim, thanks for being part of EconTalk.

Kimberly Clausing: Thanks so much for having me. It was fun talking to you.


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