Africa Tries Free Trade

Or, more accurately, a customs union.

With all the proposals for hundreds of billions of dollars in new government spending and new taxes in the United States in recent days, there hasn’t been much good economic news.

Alexander C. R. Hammond, of the Institute of Economic Affairs (IEA) and of African Liberty, writes about it in “Africa Tries Free Trade,” Reason, April 2021. He writes:

On January 1, the long-awaited African Continental Free Trade Area (AfCFTA) came into effect. Aside from the economic benefits that the arrangement will bring to the continent, Africa’s newfound support for free trade and liberalization marks a clear rejection of the socialist ideology that has tormented African politics for decades.

In recent decades Africa has been the sick puppy of the six heavily populated continents. A glance at the Economic Freedom of the World map of economic freedom shows why. Over half of the 50+ African countries are in the least-economically-free quartile of the world’s 190+ countries. Not a single African country is in the top quartile. Hammond calls Nigeria, South Africa, and Egypt “regional economic powerhouses,” but of the three, only Nigeria is in the second-from-the-top quartile, South African is in the second-from-the-bottom quartile, and Egypt is in the bottom quartile.

One of the five measures of economic freedom is freedom to trade internationally. With AfCFTA, this will increase for many African countries.

This agreement is like NAFTA and its successor, USMCA: it’s a customs union. The idea is to have low or zero tariffs between and among members of the group, but a common tariff rate on imports from outside. Nevertheless it’s a big, if slow, step toward freer trade.

Hammond writes:

Within 5–10 years, the AfCFTA will ensure that 90 percent of tariffs on goods traded between member states will be abolished. Within 13 years, 97 percent of all tariffs will be removed. By 2035, the World Bank has predicted, this enormous liberalization effort will boost Africa’s gross domestic product by $450 billion, increase wages for both skilled and unskilled workers by 10 percent, and lift more than 30 million people out of extreme poverty, defined as living on less than $1.90 per day. According to the same estimates, by 2035, the AfCFTA will see more than 68 million people rise out of moderate poverty, defined as living on $1.90–$5.50 per day. The “countries with the highest initial poverty rates,” the World Bank says, will see the “biggest improvements.”

Given Africa’s flirtation with socialism and protectionism from the 1960s through at least the 1980s, this is a welcome development.

For more on Customs Unions, see Douglas A. Irwin, “International Trade Agreements,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.

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The new (center) left

In recent years, the reporting at The Economist has moved somewhat to the left. Here’s a recent example:

But the assumption of rational self-interest constrains the welfare state significantly. Generous benefits, and the high taxes needed to fund them, will put rationally minded people off work, undermining economic growth and the government’s capacity to help people in need.

In practice, though, Mr Saez explained, the world works differently. . . .

Employment rates for prime-age men are remarkably similar across rich countries, Mr Saez pointed out, despite big differences in tax and welfare systems. Average tax rates in France are roughly 20 percentage points higher than those in America across the income distribution, yet about 80% of middle-aged men work in each country. (Americans do work more hours, but, as Mr Saez noted, this too reflects social choices, such as the shorter working week specified in French law.) There is strong social pressure for healthy men not to be seen as “freeloaders”, which pushes against the incentives created by higher taxes or bigger welfare cheques. Where social pressures to work are more ambiguous—as for the young or old or, in many places, women—generous benefits tend to have larger effects on employment decisions, Mr Saez noted. But this reinforces rather than undercuts the idea that social factors have important effects on economic decisions.

This isn’t exactly wrong, but it seems a bit misleading.  The tone of the article is sort of dismissive of conservative arguments that the welfare state discourages work, but the actual empirical evidence suggests that it discourages work among the young, the old, women, and among men it leads to shorter work hours.  This is one reason why per capita GDP (PPP) is far lower in Europe than in America. It’s not true that “the world works differently”; it works exactly the way that classical economic theory predicts.  The European welfare state makes Europe a much poorer place.  That may be fine (perhaps people prefer the extra leisure time), but it’s foolish to minimize the effect.

And to head off criticism, note that while some European welfare states have incomes well above the European average, so do some American states.  Lots of things affect income, not just welfare and taxes.

Over the past quarter century, the center left has shifted a bit left on public policy issues:

1990s-style neoliberalism                                2021 post-liberalism

1. Singapore style forced saving                  Expanded social insurance programs

2. Private infrastructure projects.              Public infrastructure projects

3. Progressive consumption taxes              Progressive income/wealth taxes

4. Fiscal responsibility                                   Deficits don’t matter

5. Monetary stabilization policy                 Fiscal stabilization policy

6. Low wage subsidies                                   Higher minimum wages

7.  Privatization                                                More aggressive antitrust

In 1996, Clinton ran for re-election on ideas such as “the era of big government is over” and “ending welfare as we know it.”  Fiscal stabilization policy was a complete non-starter.  We were moving toward budget surpluses, with an eye on the demographic time bomb created by lower birth rates and longer life expectancy.

Why the recent move toward a slightly more socialist approach to policy?  (Yes, it’s far from outright socialism, but for the most part the list above is not a move toward the Nordic model, at least the post-1990 Nordic model.)

Some might quote Keynes’s famous remark about how to respond to new information, but I’m not convinced that this can explain the shift.  I’m only an expert on one of the 7 areas above (stabilization policy), but in that one area I’ve seen a lots of bad arguments for the move toward fiscal policy, arguments that reflect a misunderstanding of macro theory and an ignorance of macroeconomic history.  So I have little confidence that the other 6 examples are any better justified.  Especially when I see dubious claims that a less effective policy (minimum wages) can be justified on the basis of being more politically acceptable than a more effective policy (low wage subsidies).  We have an EITC program!  And we have a new government where the Democrats have an easier time with new spending programs (requiring 50 senators) than regulatory changes (requiring 60 senators).

So what explains the shift?  I suspect it’s a mix of various factors.  Monetary policy failures like the Great Depression and the Great Recession are almost always misdiagnosed as a failure of capitalism.  The move toward an information economy has made income less equal.  The zero lower bound makes monetary policy seem less effective than it is.

More speculatively, the center right might feel increasingly comfortable viewing the center left as their “tribe”.  The days of P.J. O’Rourke’s “Republican Party Reptile” is long gone.  It’s no long cool to be associated with an ideology that has become increasingly nationalistic and anti-intellectual.  Meanwhile, the demise of communism has removed some of the taint from the left.  Media outlets such as The Economist and the Financial Times, and think tanks like the Niskanen Center, seem increasingly at home in the center left.

PS.  I used the term “post-liberal” as its relationship to liberalism is analogous to the relationship of post-Keynesian to Keynesianism. Similarly, modernism was followed by postmodernism.  In any case, neoliberalism is already taken, and neo-neoliberalism just sounds stupid.

 

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(Un)Orthodox economics

Politics can be very depressing, but a recent Bloomberg article discussing my home state kind of made me smile.  I hope you enjoy it as well:

And then there are backers like Derek Orth in Lancaster, Wisconsin, who are sticking by the president. Orth, a 34-year-old dairy farmer, appreciates the financial help Trump has channeled to the agriculture industry.

“I can’t think of a single close friend in agriculture that is voting for Biden,” Orth said this month. An active follower of social media posts who doesn’t have cable television, he worries that Biden would institute socialism.

I’m going to put this in my “Keep the Government’s Hands Off My Medicare!” file drawer.

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Should Jane Decide Who Gets the Vaccine?

Who will get the cars and when? Who will get the steak? Who will get the wine? Or, as the Associated Press asked this morning, “who’s first in line for COVID-19 vaccine”? There are two answers: (1) Jane who works for the government will decide. (2) An impersonal, decentralized, efficient exchange process, where everybody is his own Jane, will give the answer.

My first claim is that, if such a process as #2 existed, it would be much superior for satisfying the most urgent demands, promoting prosperity, and preventing social strife if not “the war of all against all.” My second claim is that such a process does exist: it’s called the (free) market.

The market is a continuous, invisible auction in which every individual or association of individuals can bid, and in which any producer may choose to fill any bid—which will usually be the highest bids. (Some may choose to serve those who bid the lowest price but they are rare. A mischievous economist would say that they are trying to bid for a place in heaven.)

Who gets the cars? Lots of bidders, in fact. Once the bidding process is over at any point of time, all the auction participants willing to pay the price that clears the market get cars. The others don’t. It’s the same for steak or wine or pretty much everything. Some services, like love or friendship, are more difficult to bid for, but they can’t be efficiently allocated by the government’s Jane either.

Why can’t billionaires or governments bid everything away from ordinary people? Suppose a billionaire wants to buy all the guns. Assume there are 200,000,000 private guns in the United States, probably an underestimate. Assume an average price of $200. The minimum value of guns, as evaluated by those who own them and bid for them continuously (if only by not selling), would thus be $40 billion. “Minimum” because of the consumer surplus: one only buys something whose value is higher than its price. No single billionaire has enough money to buy that and, as we shall see presently, even the trillionaire government could not buy all the guns in voluntary exchanges.

As the government bidder-in-chief (or a billionaire) starts bidding, gun prices will start increasing. The first guns can be bought easily, but as individuals who least want their guns have sold them, the bids for the remaining guns will have to increase, and the fewer the private guns left, the higher the necessary bids. As only a few guns are left in the hands of people other than the bidder-in-chief, their prices will be extremely high not to mention the likelihood of holdouts. “$10 million for my old revolver!” Even with confiscatory taxation, the bidder-in-chief will need eminent domain or the Defense Production Act to get all the guns from all the people.

Moreover—and this additional factor is important—as the price goes up, new producers will jump in the industry to produce more. So if the bidder-in-chief does not have the power to abolish free enterprise (or kill all smugglers), he will never be able to bid away all the guns, all the steak, or all the wine in order to give them to his preferred supporters and clientèles. Similarly, neither billionaires nor the trillionaire state can buy all the steel or all the aluminum to build cars, mansions, or walls.

Now suppose Covid-19 vaccine is (hopefully) invented. Instead of Jane deciding who gets the vaccine, everyone in a free society would make his own decision on whether to buy or not, now or later. Every individual would decide to which extent he contributes to biding up the price by deciding whether or not to stop bidding before a price clears the market for all winning bids at that price. Note that our former but humbled bidder-in-chief, the government, would still be able to bid up the vaccine price in order to purchase some—to give, say, to seniors in nursing homes, to government bureaucrats, or to White House occupants, but he would have no more power than that. There is a good argument that vaccines should be subsidized and available free for children. Charities or associations could also bid up the price in order to obtain vaccines for the people they cater to.  And nothing would forbid any less-than-average Jane to sell her TV set to get a dose, if she thinks the latter is more important than the former.

In any allocation system, of course, not more than what is available at any point in time can be consumed. But remember that as the price goes up, other producers, domestic and foreign, would be incited to jump in the market by inventing and producing a new vaccine. Furthermore, as more people are vaccinated, herd immunity would develop so that, in the end, even those who did not, directly or indirectly, pay to be vaccinated would be protected.

These ideas are not very original, at least for economists. You may find them in, say, Milton Friedman’s 1962 book Capitalism and Freedom—or, for that matter, in many if not most microeconomics textbooks. They have underlaid the whole classical liberal tradition. Yet, they seem to have disappeared from anywhere else in our socialist societies.

In a perfect socialist society, where there would presumably be a continuous redistribution of income from the above-average to the below-average individual, there would be no reason, from that point on, not to let each one be his own Jane and up prices. (Continuous redistribution: You wake up in the morning, look at your screen, and see that $100 have been debited from your bank account with the mention DIET, or “Daily Income Equalization Transaction.”) However, there would be few vaccine producers as one could live as comfortably doing anything that one thinks is the easiest and most pleasant.

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