What We've Learned:
What's Left: for good or bad, why do countries have the trade policies they have today?
If you agree with the following premises:
We need to answer two questions:
People often recommend optimal policies as if they could be installed by a benevolent dictator
In reality, 1st-best policies are distorted by the knowledge problem, the incentives problem, and politics
In modern liberal democracies, we can describe four major categories of political actors:
Voters express preferences through elections
Special interest groups provide additional information and advocacy for lawmaking
Politicians create laws reflecting voter and interest gorup preferences
Bureaucrats implement laws according to goals set by politicians
Voters express preferences through elections
Voters as economic agents:
Choose: < a candidate >
In order to maximize: < utility >
Subject to: < constraints? >
Citizens vote in politicians to enact various laws that citizens prefer -- and vote politicians out of office if they fail to deliver
A collective action problem: citizens need to monitor the performance of politicians and bureaucrats to ensure government serves voters' interests
Voting is instrumental in enacting voters' preferences into policy
Good governance is a public good: an individual citizen enjoys small fraction of benefit created
Additionally, policies & elections depend on many millions of people
Individual bears a private cost of informing self and participating
Hence, a free-rider problem
A rational individual will vote iff: $$p(B)+W > C$$
\(B\): perceived net benefits of candidate \(X\) over \(Y\)
\(p \approx 0\)
\(B\) is a public good
\(C>0\)
A rational individual will vote iff: $$p(B)+W > C$$
If citizens are purely rational, \(W= 0\)
Citizens then vote if \(p(B) > C\)
Prediction: rational citizen does not vote
Year | Turnout of Elligible Voters |
---|---|
2016 | 55.7% |
2012 | 54.9% |
2008 | 58.2% |
2004 | 55.7% |
2000 | 50.3% |
1996 | 49.0% |
1992 | 55.2% |
Sources: Wikipedia, U.S. Census Bureau, Bipartisan Policy Center
A rational individual will vote iff: $$p(B)+W > C$$
Now suppose, \(D > 0\)
Citizens then vote if \(D > C\)
More importantly, the voter votes regardless of the positions of the candidates!
Vote for non-rational reasons: "more presidential looking," "taller," "a better temperament," etc.
Many do vote, even at significant personal cost!
"Expressive voting": people vote to express identity, solidarity, tribalism, preferences, etc
Voting as a pure consumption good, not an instrumental investment to achieve policy preferences
Model predicts rational ignorance
Not necessarily no voting, but
Winston Churchill
1874-1965
"The best argument against democracy is a five minute conversation with the average voter."
Somin, Ilya, 2014, Democracy and Political Ignorance
Somin, Ilya, 2014, Democracy and Political Ignorance
Just so we’re clear (because election day is near)
This is not a normative statement: that you should/not vote, or that you are a good/bad person
This is a positive explanation of why we see the (...suboptimal) results we see in the world
Special interest groups: any group of individuals that value a common cause
SIGs as economic agents:
Choose: < a candidate to support >
In order to maximize: < utility >
Subject to: < budget >
But power and influence is not evenly distributed across interest groups
Logic of collective action: Smaller and more homogenous groups face lower collective action costs of organizing than larger and more heterogeneous groups
Smaller groups to whom benefit (cost) of a policy is more concentrated can outmobilize larger groups where benefit (cost) is more dispersed
Politicians create laws reflecting voter and interest gorup preferences
The politician's problem:
Choose: < a platform >
In order to maximize: < votes >
Subject to: < being re/elected >
Rationally ignorant voters pay little attention to actual substance or policy-making; more to TV-friendly spectacles
Big speeches, ribbon cutting ceremonies, attack ads on rivals, etc
Platforms more about broad platitudes than substance "family values," "tough on crime," "change," "drain the swamp" etc.
Special interests pay very close attention and are actively involved in policy-making and contribute to political campaigns
Politicians allocate funds towards special interests
"In fiscal year (FY) 2013, Americans consumed 12 million tons of refined sugar, with the average price for raw sugar 6 cents per pound higher than the average world price. That means, based on 24 billion pounds of refined sugar use at a 6-cents-per-pound U.S. premium, Americans paid an unnecessary $1.4 billion extra for sugar. That is equivalent to more than $310,000 per sugar farm in the United States"
Source: Heritage Foundation
"Washington, D.C., doesn't have many farms, or farmers. Yet thousands of residents in and around the nation's capital receive millions of dollars every year in federal farm subsidies...lawyers, lobbyists and at least one psychologist collected nearly $342,000 in taxpayer farm subsidies between 2008 and 2011...[also] Gerald Cassidy, the founder of one of Washington's most powerful lobbying firms, Cassidy & Associates; Charlie Stenholm, a former congressman; and Chuck Grassley, a Republican senator from Iowa; [and former] Secretary of Agriculture Tom Vilsack..."
And yet, each individual pays maybe $1-2 a year in higher prices for sugar
Difficult to mobilize voters to petition to end the sugar subsidy to save $1
Sugar producers stand to lose a billion dollars
Sugar PACs that contribute thousands to key lawmakers
Decrease in consumer surplus:
Increase in producer surplus:
Government tax revenue:
Deadweight losses
Domestic consequences of tariff:
A $240m gain to a small group of domestic sugar producers at a $460m expense to consumers
Concentrated benefit, dispersed cost each consumer pays $0.04/lb more for sugar
Harm to foreigners: hurts exporters and consumers in other countries from lost trade
Think of an economic rent as a "prize," the payment a person receives for a good above its opportunity cost
Creating rents creates competition for the rents, causing people to invest resources in rent-seeking
The cost of the rent is not just the rent itself, but the resources invested in rent-seeking!
Political authorities intervene in markets in various ways that benefit some groups at the expense of everyone else
See Mitchell (2013) in today's readings for examples
These interventions create economic rents for their beneficiaries by restricting competition
This is a transfer of wealth from consumers/taxpayers to politically-favored groups
The promise of earning a rent breeds competition over the rents (rent-seeking)
Gordon Tullock
1922-2014
"The rectangle to the left of the [Deadweight loss] triangle is the income transfer that a successful monopolist can extort from the customers. Surely we should expect that with a prize of this size dangling before our eyes, potential monopolists would be willing to invest large resources in the activity of monopolizing. ... Entrepreneurs should be willing to invest resources in attempts to form a monopoly until the marginal cost equals the properly discounted return," (p.231).
Tullock, Gordon, (1967), "The Welfare Cost of Tariffs, Monopolies, and Theft," Western Economic Journal 5(3): 224-232.
Normal effects of a tariff \((\downarrow\) CS, \(\uparrow\) PS, DWL, G)
The transfer of CS \(\rightarrow\) PS is a “prize” (economic rent) to domestic producers
Normal effects of a tariff \((\downarrow\) CS, \(\uparrow\) PS, DWL, G)
The transfer of CS \(\rightarrow\) PS is a “prize” (economic rent) to domestic producers
The true social cost of the tariff is much larger than the 2 DWL triangles!
“The bigger contributions you accept, the more expectations some people have that they have a call on their government for something in return” — Senator Joseph Liebermann, 1997
“Conventional wisdom suggests that interest groups are buying something when they contribute to a politician's campaign. mpaign. These interest groups must be giving money to influence either the outcome of the election or the policy decisions made by elected officials. Senator Lieberman's statement highlights the second possibility — that campaign contributions allow interest groups to affect policy outcome,” (p.80)
“This paper attempts to determine the importance of campaign contribu- tions and other factors affecting voting behavior in the House of Representatives on three important trade-policy bills that came before the United States Congress in 1993-1994,” (p.80)
“Policies are determined by the interactions between elected officials, who are suppliers of particular public policies, and organized interest groups, who are demanders of such policies. Interest groups provide the campaign funds that public officials need to stress the merits of their candidacies to imperfectly informed voters. In exchange, politicians provide public policies that raise the economic rents earned by the interest groups. These rent-seeking activities are constrained by increased political opposition from individuals and firms whose welfare is reduced by the policy actions...In the end, government officials implement the policy that maximizes their political support,” (p.80)
“Two main trade models provide divergent predictions about which groups in the U.S. will support trade liberalization.
“In the Heckscher-Ohlin trade model, relatively scarce factors of production lose economically from international trade while relatively abundant factors gain...Since the United States is relatively scarce in less skilled labor, the model suggests that legislators will be more likely to oppose NAFTA, GATT and MFN for China the higher the proportion of less educated individuals and the lower the per-capita income in their districts. Because labor unions represent mainly blue-collar workers, a higher proportion of union members in a district also increases the likelihood the representative will oppose the trade bills.
“The [specific factors] trade model, on the other hand, assumes that the services of some productive factors are completely or partly industry-specific. A natural resource or particular type of physical capital may be suitable for use only in a single industry or a few industries, for example, and workers may acquire sector-specific skills. The implication is that individuals' attitudes toward trade liberalization depend on the industry in which they are employed rather than on their factor status,” (pp.80-81).
Baldwin, Robert E and Christopher S Magee, (2000) “Is Trade Policy for Sale? Congressional Voting on Recent Trade Bills,” Public Choice 105: 79—101
“We divide campaign contributions into those from PACs representing labor unions and from PACs representing business interests. The Heckscher-Ohlin model suggests that labor unions will oppose free trade while business groups will support it...labor and business contributions significantly affected legislators' decisions on both the NAFTA and GATT bills.”
Baldwin, Robert E and Christopher S Magee, (2000) “Is Trade Policy for Sale? Congressional Voting on Recent Trade Bills,” Public Choice 105: 79—101
“We estimate that labor contributions or access to legislators gained through these contributions resulted in 67 extra votes against NAFTA and 57 extra votes against the GATT Uruguay Round bill. Contributions from business groups resulted in 41 extra votes in favor of NAFTA and 35 extra votes for the GATT bill. This last result is particularly interesting because it suggests that NAFTA would have failed if business groups had made no contributions to repres- entatives. We estimate the price for labor groups to sway one vote against NAFTA and GATT to be about $352,000 and $313,000 respectively,” (p.99).
Baldwin, Robert E and Christopher S Magee, (2000) “Is Trade Policy for Sale? Congressional Voting on Recent Trade Bills,” Public Choice 105: 79—101
“What is distinctive in our approach is the role we ascribe to political contributions: we see the gifts made by interest groups not so much as investments in the outcomes of elections, but more as a means to influence government policy. In our view, the manner of campaign and party finance in many democratic nations creates powerful incentives for politicians to peddle their policy influence. Then the structure of trade protection is bound to reflect the outcome of a competition for political favors; this is the central theme in our story,” (p.848)
Grossman, Gene M and Elhanan Helpman, 1994, “Protection for Sale,” American Economic Review 84(4): 833-850.
“In our model, lobbies make implicit offers of political contributions as functions of the vector of trade policies (export and import taxes and subsidies) adopted by the government...We have derived an explicit formula for the structure of protection that emerges in such a setting. Our formula relates an industry's equilibrium protection to the state of its political organization, the ratio of domestic output in the industry to net [international] trade, and the elasticity of import demand or export supply,” (p.848).
Grossman, Gene M and Elhanan Helpman, 1994, “Protection for Sale,” American Economic Review 84(4): 833-850.
1) Agriculture
2) Clothing: textiles & apparel
Krugman, Paul, Maurice Obstfeld, and Mark Melitz, 2011, International Economics: Theory & Policy, 9th ed., p.234
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