Bryan Caplan  

Does Scheve and Slaughter's "New Deal" Pass the Sniff Test?

With Rebuttal from Dan Klein?... Garett the Gracious...

Scheve and Slaughter have gotten a lot of attention for their Foreign Affairs piece on "A New Deal for Globalization." They argue that we can squelch popular support for protectionism by making the tax code more progressive:

The best way to avert the rise in protectionism is by instituting a New Deal for globalization -- one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system. The notion of more aggressively redistributing income may sound radical, but ensuring that most American workers are benefiting is the best way of saving globalization from a protectionist backlash.
My knee-jerk reaction: This is an extreme long-shot. Are people really going to open their minds about trade if you change the tax code?

Still, I was intrigued enough to take their idea to the data.

First, we need data on trade views. As far as I know, Worldviews is the longest-running survey about protectionist attitudes. Scroll down to Question 765:

It has been argued that if all countries would eliminate their tariffs and restrictions on imported goods, the costs of goods would go down for everyone. Others have said that such tariffs and restrictions are necessary to protect certain manufacturing jobs in certain industries from the competition of less expensive imports. Generally, would you say you sympathize more with those who want to eliminate tariffs or those who think such tariffs are necessary?
The low-point for free trade was 1977, when only 18% sympathized more with eliminating tariffs. The high-point was 2002 (the last year available), when 38% sympathized.

Second, we need data on the progressivity of the tax code. Since this is a blog, not a refereed paper, let's keep it simple by using the highest marginal tax as our measure. For the U.S., this is available right here.

Ready? Now let's construct a simple index of support for free trade: PROTRADE=[(% who sympathize with eliminating tariffs)-(% who think tariffs are necessary)]/100. Then let's regress PROTRADE on a constant and the top marginal tax rate.

Result: Support for trade is significantly HIGHER when the tax code is LESS progressive. This is hardly surprising considering that rates and protectionism have both fallen over time.

What if we add in a time trend? Then support for trade is UNRELATED to the progressivity of the tax code.

Bottom line: Scheve and Slaughter, like most economists, over-intellectualize the American people. Among economists, a few trade skeptics might change their minds if you raised the top rate back up to 50%. The rest of the country would keep complaining about the Chinese plot to destroy our country by selling us stuff.

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conchis writes:

Um, but wouldn't you expect tax rates to be determined in part by voter attitudes? And isn't there a pretty good case that the attitudes that tend to promote lower taxes rates are also likely to be associated with pro-trade attitudes? And if so, doesn't your analysis suffer from a pretty major simultaneity problem?

Brad Hutchings writes:

Another empirical method can be applied. Substitute the latest screwy thing the California legislature wants to do and see if it makes any more sense. For example:

The best way to avert the rise in unsterilized pets is by instituting a New Deal for neutering and spaying -- one that links unplanned dog breeding to a substantial redistribution of income.

To me, this makes more sense as the original.

8 writes:

Support for trade could be increased by a new program specialized for retraining workers. The IRS would determine if a company's job losses could be classified as being majority due to outsourcing, and if so, employees would be eligible for tax break of $X that could be carried forward for 2 years.

Of course, then other workers will ask why are losses to outsourcing more important than any other?

Matt writes:

Brian is right here, progressive taxation and international trade are not related in the minds of voters. Economists make this common mistake of thinking that government is a monolith subject to periodic consensus building.

Voters vote mostly as consumers of government services, and seldom as sellers of government services, which goes to the bottom of Brian's overall complaint about voter irrationality.

Joshua Holmes writes:

The example of small economies with relatively flat taxes and open trade relations should be a good guide, e.g., Estonia, Iceland, Ireland, etc.

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