David R. Henderson  

Econgirl on Compensation for Trade Losses

The new political divide... Tolstoy, Hypocrisy, and Purita...

Should some of my gains from In-N-Out Burger be Taxed Away to Compensate Taco Bell?


Jodi Beggs, aka Econgirl, at the "Economists Do It With Models" blog, raises the issue, which more economists seem to be talking about lately, of compensating "losers" from international trade. The basic idea is that since free trade on imports creates gains for domestic consumers that exceed losses for domestic producers, the consumers could have some of these gains taxed away so that the producers' losses are lower or zero.

She briefly points out some of the problems with figuring out whether it really is trade that hurts producers in specific cases and some of the problems with designing a compensation system. She seems to come down on the side of exploring this further with the idea of actually designing a policy to tax these gains and subsidize losers.

But there's a much more basic problem than the ones she points out.

It is this: Any argument you make about why gainers from trade across national borders should be forced to compensate losers applies equally to gainers and losers from trade across state borders. For that matter, any argument you use on compensation for trade across national borders applies equally to gainers and losers from trade within a state and even within a city. Recently an In-N-Out Burger establishment opened up in Seaside, California, near where I live. I have wanted one of those for years and we finally have one. I have gone there almost once a week (if I'm in town) since it opened. I've also noticed that I've gone to Taco Bell zero times since In-N-Out opened, whereas I used to go about once every 3 weeks. So producer Taco Bell lost some of my business to producer In-N-Out. Should I be taxed on some of those gains in my consumer surplus to compensate Taco Bell? I somehow think that Jodi Beggs would say no. But why?

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COMMENTS (17 to date)
Thomas writes:

I agree with your final paragraph. The use of "winners" and "losers" in relation to economic activity is misplaced. It's a lot like the misuse of "market failure" to describe market outcomes of which the writer disapproves. I have more to say about "winners" and "losers" here: https://politicsandprosperity.com/2016/07/03/winners-and-losers/

Roger McKinney writes:

Obamacare does just that with healthcare insurance . Those making more than 5% will have their profits taken from them and given to those making less than 5%.

RAD writes:

Hmmm, I agree that Econgirl would probably not think you should be taxed for your In-N-Out preference. But I think she prefers free trade overall but her blog post argues that she is wiling to compromise with a compensate-the-assumed-loser system rather than allow Mankiw's Isolationists/Nationalists/Ethnocentrists to enact their "to hell with trade" policy.

So I think her answer is NO because there is no one exhibiting in-group preferences in the In-N-Out Burger vs. Taco Bell scenario and demanding an end to trade across city borders.

I think she brings up a good point about the built-in assumption that the out-group winners are cheating. So here is a question for you, David, if In-N-Out Burgers was truly cheating under local rules but not external rules (say they outsourced a supplier that used slave labour in a jurisdiction that allows slavery), would you continue to be a loyal In-N-Out customer?

If this is Buffalo, N.Y. bars vs. Niagara Falls, Ontario bars, should Canadian Niagara Falls bars compensate American/Buffalo bars for their lower drinking age (19 vs. 21)? Should Buffalo bars compensate Niagara Falls bars for their lower alcohol taxes? Rather than outlaw cross-border drinking, does it make sense for Niagara Falls bars to refuse to serve 19 and 20 year old Americans? Does it make sense for Buffalo bars to collect Canadian alcohol tax for their Canadian customers?

Jodi Beggs writes:

You asked a rhetorical question that was directed at me, and I'm terrible at rhetorical devices, so I'll answer. :)

Taking the "should" question literally (and as an economist), I would probably say no, since in general I do feel that having people develop capabilities to adapt to a changing world is superior to demanding compensation for the normal course of change. But I think the phrasing of this question and the reasoning here illustrates the point I was ultimately trying to make- it doesn't matter how "right" you are economically if your policy can't get enough buy in to actually happen and results in an outcome that is inferior even to an intellectually heretical compromise solution.

While academia is certainly a place for intellectual purity, we do a disservice when we are so rigid as to not even entertain discussions about how our findings can be put into practice in an imperfect world. To your point specifically, I have the luxury of not having to address the trade across state borders issue because people seem to view that as the status quo and as a result don't complain nearly as much as they do with international trade. But yeah, if popular sentiment was threatening to make it impossible to move production from, say, New York City to Topeka, I probably would extend my argument to what you characterize as an absurd extreme.

David R. Henderson writes:

@Jodi Beggs,
Good answer. Thanks. Glad you took it as more than a rhetorical question.

BC writes:

Trade protectionism pits the concentrated benefits of the protected against the greater-but-dispersed costs to general public consumers. I read Jodi's comments as an argument that this public choice problem can be overcome by having consumers essentially buy off the protected industries' firms and workers.

While that may be work, it's unclear whether it's truly necessary to garner sufficient political support for free trade policies. Over the last few decades, free trade has generally enjoyed broad support; it's really only in the present election cycle that support for free trade has seemed to backtrack. Should we try to combat employment discrimination by taxing consumers to compensate less qualified workers that would have benefited from discrimination? How do we decide when it's appropriate to buy off a particular interest group? Public choice suggests that there will be many interest groups that potentially could need to be bought off. At least, free trade is a general enough issue that many members of the public have overcome "rational ignorance" and understand its importance. That would seem to suggest that trade protectionism be defeated through traditional public debate, reserving taxpayer funds for buying off other types of interest groups on issues that the public is less aware of.

On another note, I give Jodi lots of props for pointing out that free trade is not an intervention, protectionism is ("many people seem to view the trade outcome as 'regulation' rather than the other way around") Free trade does not produce consumer "gains" at the expense of protected-industry "losses". Protectionism allows some industries to gain rents at the expense of consumer losses.

john hare writes:

[Comment removed. Please consult our comment policies and check your email for explanation.--Econlib Ed.]

ThaomasH writes:

It is a bit disingenuous to discuss the issue as a problem of how to compensate firms for trade liberalization losses when people are concerned about the effects on incomes of lower middle class workers.

Art Carden writes:

My unpopular answer, when I'm asked about the losers from a move to free trade (ideal world, not practical politics) borrows from Landsburg. If your owe your standard of living to rents created by trade restrictions--and thus purloined from your customers with the state's help--the moral case that you should be compensated is weak indeed.

pyroseed13 writes:

Don't we already have a federal government program that attempts to compensate the "losers" from the "winners" of a trade? I can't seem to remember the name but I remember reading about in the WSJ. My guess is that like most government programs it probably doesn't work all that well.

Tom writes:

Ultimately, any strategy that attempts to compensate losers will devolve into a mess that accomplishes very little, but let's keep in mind that when the government has protectionist policies in place and then removes them, it causes harm, even if it is ultimately a good idea in the long run.

That harm, unlike with Taco Bell, can impact an the employment opportunities of an entire area's population, making individual recovery much more difficult.

Many of these economic debates focus on policy efficacy when the real issue is just how much economic change can a community handle at one time.

What government can do is focus on support of economic diversification and be a little less inclined to provide special considerations and pursue major deals with large economic entities vs promoting general economic welfare.

R Richard Schweitzer writes:

Is this the same old "level playing field" objective?

Only the surfaces of liquids, like bodies of water are "level" by nature. But, they are afflicted with waves, and the largest bend with the curvature of the earth.

R Richard Schweitzer writes:

Why is it so hard to understand imports (and our related expenditures abroad) as other people working for us - and

Our exports (and their related expenditures here) as us working for them.

We don't do as much (in terms of relative values) work for them as they do for us. We might charge more for our work - but they won't or can't pay more. Shifting around who "pays" here for the work from there is not going to change the flow.

Ben Kennedy writes:

"For that matter, any argument you use on compensation for trade across national borders applies equally to gainers and losers from trade within a state and even within a city. "

China pollutes their environment into oblivion which allows them to make steel for less money. Similarly, there is no comparative advantage for making air conditioners in Mexico. Air conditioners are not agave plants. The only advantage there is that workers are willing to work for a lot less money. That's it.

Within the US, even across states, we don't see these issues. The same labor will tend to generate the same marginal product and demand the same salary.

So, a trade compensation regime that was designed to account for what amounts to regulatory arbitrage would, quite naturally, kick in mostly for international trade and almost not at all for intra-country trade.

Craig writes:

The difference in median income between the top states and the bottoms states in the US is not that far off from the difference in US bottom states and that of Mexico. At least not so different that this discussion between external and internal state trade is not relevant.

Chris writes:

Following my tradition of posting on tangential subjects on this blog, here goes:

Prof. Henderson, are you aware of the not-so-secret menu at In N Out? Just wanted to be sure you are better able to maximize your utility there.

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