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More Catholic Than the Pope

By Matthew Yglesias on July 6, 2010 at 5:29 pm

"More Catholic Than the Pope"

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Tim Duy offers a long, admittedly heretical trade skeptical post that I’m not going to attempt to summarize, though I recommend that you read it.

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Instead, let me offer another suggestion. If you tell an orthodox economist that you want to impose barriers to foreign imports in order to preserve or create jobs, the orthodox economist will tell you that such barriers will only shrink the overall size of the economic pie. If you tell the orthodox economist that you’re worried about the distributive implications of this line of thought, he’ll tell you that it makes more sense to adopt the pro-growth free trade policies and then do more redistributive taxation. A lot of people disappointed with the past 10 years’ worth of economic results have been led to question the orthodoxy, but it seems to me that we should pay closer attention to the orthodoxy and actually do what the orthodoxy implies.

Which is to say that the United States is participating in a much more open global economy in 2010 than existed in 1990. In part that’s because we’ve liberalized our own trade policies. And in part it’s because China, India, Brazil, and the former Soviet bloc have all liberalized their own policies. What the orthodoxy says about this change is that it should (a) increase our potential output and (b) make us more open to redistributive taxation. Now look at what’s happened over the past twenty years. Do we do more redistributive taxation? No, we don’t. Has the Fed started targeting a more aggressive growth rate? No, it hasn’t. We’re not seriously taking advantage of the putative upside of freer trade nor are we doing the thing that’s supposed to mitigate the downside. So of course it’s not working out the way it’s supposed to.

I think reasonable people can disagree about second-best alternatives to the best possible policy. But the best policy for the United States remains exactly what the orthodoxy says—freer trade, more aggressive economic growth targets, and higher taxes to finance more and better public services. In the 1990s, we got a “lite” version of this kind of policymaking and it worked pretty well. Similarly, I think countries like Chile and Brazil that have combined liberalization with increased social welfare have managed to achieve impressive growth and improvements in human welfare.

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