Net losers with “free trade”

Container Ship
Container Ship

I’m currently reading The Myth of the Rational Voter: Why Democracies Choose Bad Policies (New Edition) (watch for a review over at Rat’s Reading eventually). While I love reading about economics, too often economists simplify things when arguing.

One area that frequently comes up is free trade. Libertarian and market-religion economists love to push free trade over all. I’m generally a fan of free trade, but one argument in favor of it bothers me: free trade improves everyone’s wealth/income/economic standing. This is not true. A better phrasing is that free trade improves a nation’s net wealth. But within the nation, some individuals will become net winners and some will be net losers. Under free trade over the long run, the gains from the net winners will be more than the losses for the net losers. But there will be net losers, particularly in the short run.

To illustrate, I shall pick a commodity. I’ll call the commodity airplanes. We might have one maker of planes in the country. For this illustration I’ll call that manufacturer Boeing, and I’m going to assume it has one owner. We might have one manufacturer because of protectionism from the government. (And in reality, Boeing receives significant subsidies from the U.S. government in several forms.) The protectionism will result in higher costs for airlines and thus higher prices for consumers, both for personal travel as well as for good shipped via airplanes.

If the U.S. were to eliminate the favored status for Boeing, as a whole we’d be better off. Foreign competition (and perhaps domestic as well) would lower the prices of airplanes. Travel would become cheaper and goods shipped via airplane would as well. We’d save a lot of money in small amounts that add up.

There would be one big loser though: the owner of Boeing. He’d lose lots of money.

Overall, the U.S. would be better off because the savings from all those cheaper goods and travel would (more than likely) be more than what the owner of Boeing lost. As a whole, we’re better off. But not everyone sees the same benefit and in particular the Boeing owner sees a huge loss relative to his former position.

Too often I read economists glossing over this fact that some folks are net losers from free trade. We are not all better off because of free trade. A better phrasing would be that most of us are better off because of free trade. There’s lots of different ways that can be framed. It could be looked at as protected industries stealing from the public and deserving nothing. It could be that the public should compensate the formerly protected in return for removing protection. But there isn’t any magic that turns everyone into winners.

Some economists believe that this distinction shouldn’t be made publicly. If free trade isn’t promoted as being a winner for everyone, the losers will band together and become special interests and could convince voters to be protectionist. In order to keep us on the march towards libertarian free trade with gains for most of us, we have to ignore the losers. One clue that an economist believes the distinction shouldn’t be made is if the economist has a position with the American Enterprise Institute or the Cato Institute. Often folks making such arguments aren’t economists at all, but pundits with some economic knowledge. (Yes, I fully realize I am a non-economist making economic arguments.)

In the early parts of the book, Bryan Caplan uses some phrasing that falls into this trap. I don’t think he’s one of the everyone’s a winner crowd. He’s a professor at George Mason University where folks like Tyler Cowen and Alex Tabarrok also teach (they run Marginal Revolution, an excellent econ blog). My view of GMU is that it is a home for non-dogmatic economic libertarians. Which is kind of where I find myself on the economic political spectrum. Kind of.

Now, back to The Myth of the Rational Voter.

Image Container Ship by Nedster78 used under a Creative Commons Attribution Non-Commercial ShareAlike 2.0 license.

Magic home loans

In a post on the blog Credit Slips, the writer notes a development in Massachusetts. There, the supreme court essentially held that a home loan that was designed to be refinanced instead of repaid is inherently predatory and can’t be foreclosed on.

One of my favorite I don’t really feel guilty about it at all pleasures is watching Judge Judy. One type of case that comes before her a lot is where person A loans money to person B who had no job and no income. Ms. Sheindlin often rules against person A in those cases. “Well how did you expect them to repay you? Magic?” If you expected magic, then you really didn’t have a loan. You made a gift.

The situations described are similar and bring up something I hadn’t considered before. If the bank was expecting magic then they weren’t really making a loan, they were making a gift. And that’s the rule in Massachusetts now. If the person had the income to pay the loan terms, it’s a valid loan. If the person’s income at the time of the loan origination was insufficient to make payments, it’s a gift. The bank expected the value of the house to go up, the house to be refinanced, and they’d get their money out of the increased equity. In other words, Massachusetts says that is “magic.” Which has stopped happening pretty much.

The parallels between the home loans and the personal loans handled by Judge Judy aren’t complete of course. Judge Judy’s loans have no explicit collateral. And the amount in question is a lot greater. The Credit Slips blog post says the banks have to rework the terms under the ruling. So there has to be some incentive even under it for a home owner to re-work as well. Normally that’s foreclosure. If that isn’t available, I don’t know what is.

But it’s still interesting.

Social Security won’t be there? Please.

Okay, so one of my pet peeves is people repeating stuff that just isn’t true. I don’t mean rumors that I’m sleeping with Jason’s ex-girlfriends. Hell, that sort of thing is perfectly okay. Tell all sorts of rumors, true or not, about me that you want. No, I mean things like you can’t get ticketed for driving too fast in Montana. Stuff that just isn’t true.

One of the ones that I heard last week was that Social Security will be bankrupt before we retire.

Under reasonable assumptions, it’s just not true. What do I mean by reasonable assumptions? Like we leave the laws around it alone. We could always make Social Security into a dishwasher funding law, but I’m assuming we won’t.

Right now, under the Social Security Trustees projections, Social Security is fully funded through 2041. Under the Congressional Budget Office projections, it’s fully funded through 2046. What does that mean? It means that all planned benefits can be fully paid. Benefits go up faster than inflation, actually. That’s important for what happens after 2041 (or 2046, under slightly more optimistic projections). At that point, benefits can be paid out at 75% of what’s currently planned for those years. 75% of plan at that point is better than if current benefits were indexed to inflation. In other words, retirees after 2041 will be collecting more money, adjusted for inflation, than current beneficiaries.

That’s with no changes whatsoever.

Let’s also point out how far out that actually is. 2041. I will turn 65 in 2035. I will be 71 when Social Security goes bankrupt. 33 years from now. Social Security was in worse shape in 1986 than it will be in 2041, and with a decent change was fixed. 22 years ago. It’s had a surplus since then and we won’t even be dipping into the surplus for another 20 years or so.

This point is so far in the future that if we make really minor changes to the funding (I know, my assumption was no changes, we’re moving on to another part of the argument), like lifting the cap on wage income that is subject to the tax, it will be fully funded forever. Right now if I made 150,000 a year, only the first 90,000 or so would be subject to F.I.C.A. (the tax used to fund Social Security). Poor people pay a higher percentage of income for F.I.C.A. than rich people do.

However, if the economy does as well as it did in the 1970s and 1980s, no changes will be needed. We don’t even need to assume that the economy will be as good as the Clinton years. The economic assumptions in the Social Security Trustees projections assume we won’t do as well as the 1970s. They are extremely conservative (not in the political party sense) assumptions.

To sum up: don’t panic.