David R. Henderson  

Summers on Growth, Trade, Immigration, Marshall Plan, and Tax Cartels

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Larry Summers recently gave a speech at an event hosted by the Center for Global Development. It's quite good. His understanding of the big picture on economic growth is very impressive, as is his numeracy. What's a little surprising is his admission about some pretty awful bureaucratic incentives (although I'm glad he admitted it). And he gets the Marshall Plan wrong.

First, the great news on standards of living in the world:

Fifty percent is the growth that has been achieved in a variety of six-year periods in China over the last generation and in many other countries, as well. And so if you look at material standards of living, we have seen more progress for more people and more catching up than ever before. That is not simply about things that are material and things that are reflected in GDP. The primary message of the Global Health 2035 Report that I coauthored several years ago and that Amanda Glassman and others from CGD were involved in was that if current trends continue, with significant effort from the global community, it is reasonable to hope that in 2035 the global child mortality rate will be lower than the US child mortality rate was when my children were born in 1990. That is a staggering human achievement.

It is already the case that in large parts of China, life expectancy is greater than it is in large parts of the United States. One can tell a similar story in terms of literacy and probably an even stronger story of the rights of women. Extreme poverty is now a phenomenon not of countries that just happen to be poor. It is a phenomenon that reflects pockets of poverty in countries that overall have reasonable incomes, like India or China, and it is a phenomenon of fragile and dysfunctional states that do not have effective governments. It is not a phenomenon of generalized poverty of countries that do not lack resources.


Larry's perspective on trade:
The reality is that the American market has been almost completely open for 40 years. And what has happened is that the developing countries have become much more productive and much more efficient and it has become much more possible to move goods at low cost and to export efficient production technologies to developing countries, and that would have happened with or without trade agreements, and the trade agreements have been good deals because they have opened the other countries' markets much more than they have opened ours, mostly because ours was already open.

The huge increase in the Indian government's liquid wealth:
In 1991, when I was new to all of this, I was working as the chief economist of the World Bank, and the first really important situation in which I had any visibility at all was the Indian financial crisis that took place in the summer of 1991. And at that point, India was near the brink. It was so near the brink that, at least as I recall the story, $1 billion of gold was with great secrecy put on a ship by the Indians to be transported to London, where it could be collateral for an emergency loan that would permit the Indian government to meet its payroll at the end of the month.

And at that moment, the World Bank was in a position over the next year to lend India $3 billion in conjunction with its economic reform program. And the United States had an important role in shaping the World Bank's strategy. Well, that $3 billion was hugely important to the destiny of a sixth of humanity.

Today, the World Bank would have the capacity to lend India in a year $6 billion or $7 billion. But India has $380 billion--$380 billion--in reserves dominantly invested in Treasury bills earning 1 percent. And India itself has a foreign aid budget of $5 billion or $6 billion. And so the relevance of the kind of flows that we are in a position to provide officially to major countries is simply not what it once was.


Spending Other People's Money: Nothing to see here, folks; just move along:
I remember as a young economist who was going to be the chief economist of the World Bank sitting and talking with Stan Fischer, who was my predecessor as the chief economist of the World Bank. And we were talking, and I was new to all this. I had never done anything in the official sector. And I said, "Stan, I don't get it. If a country has five infrastructure projects and the World Bank can fund two of them, and the World Bank is going to cost- benefit analyze and the World Bank is going to do all its stuff, I would assume what the country does is show the World Bank its two best infrastructure projects, because that will be easiest, and if it gets money from the World Bank, then it does one more project, but what the World Bank is actually buying is not the project it is being shown, it is the marginal product that it is enabling. And so why do we make such a fuss of evaluating the particular quality of our projects?"

And Stan listened to me. And he looked at me. He's a very wise man. And he said, "Larry, you know, it is really interesting. When I first got to the bank, I always asked questions like that."

"But now I've been here for two years, and I don't ask questions like that. I just kind of think about the projects, because it is kind of too hard and too painful to ask questions like that."


The Marshall Plan:
I gave a lecture on the Marshall Plan--the great historical success of foreign aid.

Really? One of Larry's best students, Tyler Cowen, would take issue with that.

After laying out the problem of global public goods, such as being ready to deal with a pandemic, Larry says:

How we are going to mobilize support around global public goods, where the resources are going to be adequate around global public goods, I would suggest, is the second very large priority for the years ahead.

That will be hard, especially when the people such as Larry who make the case have demonstrated and admitted that they earlier threw taxpayers' money around. See his admission above.

His insight that most of the free trade agreements being talked about today are not really that much about freer trade:

Most of those tariffs in today's world have gone away. And most of the content of what we now call free trade agreements beyond where we are now is not about the removal of those kinds of barriers. It is about, for example, securing intellectual property protection for global companies in a wider range of countries. Or it is about achieving access for service companies to a wider range of countries. Or it is about harmonizing rules in areas like safety standards or financial reporting standards.

His desire to form a global tax cartel, something I wrote about some years ago and something Larry has wanted for a long time:
There is no reason why preventing a race to the bottom in the taxation of mobile capital should not be an equally important priority for those concerned with international integration as the dissemination of intellectual property protection or the protection of investors' rights or the establishment of the right to branch. And that is an issue that-- because revenues not obtained in one place have to be obtained in another place--speaks very directly to the economic interests of broad publics everywhere.

His point that the gains from freer immigration swamp the gains from freer trade:
The fourth issue that I would highlight--and I can highlight its importance more credibly than I can speak intelligently about it--is addressing the set of issues having to do with the movement of peoples. It is on the one hand the case--and it is the point that economists emphasize--that if you think about the size of the barrier represented by the difference between the price of a car here and the price of a car there, or the price of a shirt here and the price of a shirt there, and you look at that barrier as a percentage, or you look at the cost of money here and the cost of money there, you look at that as a percentage or you measure the barrier, and then you look at the wage rate for an equivalent worker in one place and in another place, the barrier, the imperfection relative to full mobility and full openness is an order of magnitude greater with respect to the movement of people than it is with respect to the movement of capital or the movement of goods. And that is the globalist pure economic case for much freer movement of people than we have today.

At the same time, there is the tension represented by the fact that while it might be difficult for moral philosophers to fully justify and understand, most of us care more about our children than our nephews, and most of us care more about our nephews than we care about our friends' children, and most of us care more about our friends' children than we care about strangers' children, and most of us care more about other American children than we care about children in other countries.

And so an agenda of collective globalization is an agenda that is intentioned with bringing out the most generous impulses within us. And how we manage that tension is, I think, central going forward. I would like to see a world in which there is more movement of peoples, a world in which there are more opportunities for us to prosper and for developing countries to prosper, through more mobility, temporary or permanent, of peoples. I find the CGD work pointing up the magnitude of those barriers to be highly persuasive.


Good on ya, Larry.

His bottom line about migration:

But I do not think there is a more important development issue than getting questions of migration right

HT2 Timothy Taylor, aka The Conversable Economist.




COMMENTS (7 to date)
mariorossi writes:

Surely there must be a significant correlation between the quality of the projects the developing countries show and the quality of the next project down the line. Under this reasonable assumption, evaluating the best projects is a good proxy for optimal allocation.

Evaluating the project that gets truly funded is not as simple as it sounds. It requires much more information than such countries most likely have. Many countries struggle to make the case for the most obvious projects. Do you really believe they would have the resources to investigate and justify the nth best project? It seems to me that you just assume information is free.

Planning projects is expensive. If the World Bank requires planning for many projects before it provides funding, it's effectively raising the cost of the funding itself. Developing countries have high discount rates. It's not obvious this would result in an optimal allocation either...

Alan Goldhammer writes:

David, thanks for posting these comments. Isn't the question of a 'global tax cartel' better addressed by a progressive consumption tax on a per country basis? Money spent taxed in the country where goods/services purchased gets around the issue of where capital resides. It should be neutral in that regard.

Niko Davor writes:

Normal humans care about their children more than their nephews, their fellow citizens more than foreigners, etc. Summers says that global organizations are needed to counterbalance this. Henderson agrees.

This is strong central government redistribution as opposed to small government devolution of power. The strong central government must stop countries from favoring citizens over foreigners, and from preferring extended family members, etc.

Summers reputation is a market-friendly strong central government guy, that fits. But Henderson, was supposed to be the libertarian, this seems decidedly anti-libertarian, even socialist.

David R Henderson writes:

@Niko Davor,
This is strong central government redistribution as opposed to small government devolution of power. The strong central government must stop countries from favoring citizens over foreigners, and from preferring extended family members, etc.
It’s not what I favor. You assume that “global organizations” mean government organizations. Larry probably does too. I don’t.
So you can rest easy about whether I’m anti-libertarian or socialist. I’m not.

Todd Kreider writes:
"It is already the case that in large parts of China, life expectancy is greater than it is in large parts of the United States."
In 2015, the life expectancy in the U.S. was 79.3 years and 76.1 years in China. The lowest U.S. life expectancy is in Mississippi, Alabama and West Virginia at 75 years, just 3% of the U.S. population, with a few more states at 76 years.

With a population of 1.3 billion people, I'm sure it isn't difficult to find a "large region" were longevity is higher in China but a pretty meaningless and vague comparison.

By the way, China's life expectancy has increased a lot since the 2008 Beijing Olympics when it was around 71 years.

Niko Davor writes:

@David R Henderson, When Summers speaks of a collective effort to counter the natural human preference to favor citizens over foreigners, that's inherently a force of governance. Whether it's labeled "government" or something else is superficial and rhetorical.

Similarly, I care less about the labels or rhetoric of "libertarian" and "socialist". There is a big theme here that it is immoral to prefer members of a ethnic/religious/national tribe to non-members, and efforts to counteract these preferences are noble and moral. I oppose this because everyone prefers some tribal groupings to others, and this morality supports this political contest of rhetorically framing some group preferences as immoral and hiding or justifying or distracting attention away from other group preferences. I'd like to hear you or the other bloggers here address this.

Summers is a macro economist and so sees everything only from that perspective. For a hammer, every problem is a nail. Summers sees the only solution to increasing global development in moving poor people to rich countries.

While that is one solution, the best would be for poor countries to free their economies so that entrepreneurs can create businesses financed by the rich world. That has been the secret of the miraculous development in India and China to this day. With the massive burden of socialism that the US suffers from today, greater immigration of poor people will only bankrupt the states.

As for the public goods that Summers worries about, we suffer from a huge excess of them. We need to reduce them about 50%. In other words, roll back socialist policies as many in northern Europe have. Not caring about microecon, and most macro gurus don't, he doesn't know or doesn't care that more public goods requires fewer private goods, that is, businesses and jobs and growth.

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