His words, not mine (well, I am paraphrasing). But I do appreciate his willingness to reconsider. We should all be so forthcoming.
The question at issue may seem technical, but it is of considerable policy importance. It is a standard result in public economics that the efficiency cost of a small tax or tariff is small, but rises rapidly (with the square of the tax or tariff). A direct implication is that when tariff barriers are low--as they are currently (average tariffs in the U.S. are around 2 percent)--reducing them further does not create a whole lot of aggregate gains. But the losses suffered by those producers or workers who are adversely affected do not get correspondingly smaller. A 10% reduction in wages or prices hurts as much, regardless of what the initial level of tariffs is. Therefore, the ratio of distributional "costs" to net gains tends to rise as the remaining trade barriers get smaller. This is where I think we are in trade.
It is of course a much different ball game with labor mobility, since the existing barriers are so high to begin with.
I wonder if the 2% figure gives a fair characterization. Doesn't that figure represent some large tariffs in a small number of sectors and free trade in others. Also, I'm guessing it leaves out subsidies in general. I can't remember exactly how to draw a big subsidy on that picture, but I remember it not being good. Are you for limiting the large tariffs and subsidies in agriculture? I'd agree probably that the overall economic gains to the U.S. would be small, mostly because Ag is an increasingly small sector of our economy, but shouldn't the efficiency gains compared to the distribution costs be large? It also seems to me to be a really regressive policy. Most poor people don't work in agriculture, but they all buy food.
Also, I can't find simple data on U.S. tariffs across sectors, so maybe my characterization is misinformed. I'm a first year Ph.D. student, so I've forgotten most economics but learned lots of math ;-).
Posted by: Charlie | May 25, 2007 at 02:06 AM
I've been thinking that I probably mischaracterized the situation. I had relatively few examples in mind, like sugar tariffs and ethanol subsidies that raise the price of food. Since most of our Ag policy is done through subsidies, rather than tariffs it's probably a net gain for the poor lowering the price of food. Assuming that low income people's consumption is skewed enough toward food consumption and the effect of the losses in efficiency are smaller to them, they could be net gainers.
Is that what you think? Are the efficiency costs worth it?
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My thoughts re:non-homothetic demand would come from having some non-tradables in the economy. You get richer, you consume a more diverse array of goods, which you have to produce. You could get the same sort of effect even if everything were tradable, but with transport costs.
I did have a quick skim of the paper. I don't have time at the minute to read every word, but they did mention this kind of thing. However, they said that it couldn't explain the non-montone relationship. Fair enough, but most simple models have difficulty with non-monotone relationships. You could easily add a few bells and whistles to my basic story to get the U-shape.
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