from Follow the Money

Working to privatize Social Security = working against free trade … and a bit more on the politics of agricultural trade

December 5, 2006

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Privatizing (or eliminating) social security and eliminating the United States remaining barriers to trade fit together well in theory.   Both consistent with a philosophy of reducing the government's role in the economy.

But they may not work together in practice.  Without government intervention, it is pretty hard for the winners from trade to compensate the losers -- or to address American’s growing sense of economic insecurity.   Consequently, getting rid of a program (Social Security) that helps protect older workers who lose their jobs (for whatever reason, including intensified foreign competition) from retirement insecurity (Social security can be thought of as a form of retirement wage insurance) likely implies reduced political support for open trade.

That is what Daniel Gross thinks.  

There's one final and very important Republican failure when it comes to free trade. Free trade is not simply getting cheap goods from China. It's about creating the social and political conditions favorable to the continued expansion of trade. Free trade has exposed American workers to global competition on an unprecedented scale. In recent years, wages have stagnated (despite rising corporate profits and economic growth), jobs and benefits have become more insecure, and benefits like pensions and health care are being wiped out. Is free trade the cause of all these woes? Not necessarily. Does free trade correlate with all these woes? Absolutely.

Rightly or wrongly, many Americans, even those who reap the gains of free trade daily, identify free trade and globalization with their declining financial security. And the response of President Bush and the congressional Republicans has essentially been, "tough." Companies facing ferocious overseas competition can't or won't provide health-care benefits any more? Open a Health Savings Account. Companies can't or won't provide pensions? Let's privatize Social Security and cut benefits.

This you're-on-your-own attitude has ultimately been more damaging to the cause of free trade than anything John Dingell could do.

I agree.

Sebastian Mallaby hints that libertarians should join with liberals to scale back certain kinds of egregious government intervention in the economy in return for expanding social insurance to help manage the dislocations from globalization:

“The ambition of realistic libertarians is not to shrink government but to contain it: to cut senseless spending such as the farm program and oil subsidies to make room for the inevitable expansion in areas such as health.

As it happens, this also describes a plausible agenda for the Democratic Party -- at least if it can shed the back-to-the-1950s yearnings of its reactionary left. Precisely because Democrats want government to provide social insurance against the volatility of globalization, the party has an interest in cutting unneeded federal spending. …

The era of big government is far from over, and liberals and libertarians gain nothing from fighting over its inevitable growth. But precisely because government is on a trajectory of unsustainable expansion, liberals and libertarians have a common interest in reinventing it.”

Mallaby's argument is kind of interesting, though I have a hard time getting past my family’s rural roots whenever agricultural subsidies get raised by folks who reside in the northeast corridor.   My heart says why focus on these subsidies and ignore far more costly subsidies for suburban housing?  The average suburban resident is doing much better than the average small farmer.  Rural western Kansas and rural western Nebraska are not among the poorest parts of the US, despite wheat subsidies.  

I know the big guys get a big share of all farm subsidies.  But without any subsidies, a lot of smaller grain farms aren’t economically viable: supporting a price high enough to keep the small guy going means giving the big guy a huge windfall.  You can certainly argue that implies these kind of subsidies haven’t worked all that well – they haven’t really stopped the depopulation of vast swaths of rural America, they drive market prices down by keeping too much land in production and the big guys end up with the lion's share of the gains. All true.   But that doesn’t mean that the adjustment associated with ending the subsidies wouldn’t be brutal.  Anyone who borrowed to buy land that is now valued in part based on capitalized future subsidies would go bust. 

Mallaby, I should note, is consistent: he wants to get rid of both agricultural subsidies and the mortgage interest tax deduction.   However, he seems to have left ending tax breaks for mortgages off his list of policies to help consummate a theoretical libertarian/ leftie marriage – presumably in a concession to political realism.

No matter.  I suspect that that the political case against going after agricultural subsidies is still pretty compelling, though perhaps not quite as compelling as the political case for not going after mortgage subsidies in a housing downturn.   

Daniel Gross notes that the Republican’s geographic base now depends heavily on agricultural subsidies.

With the Republican base now having shrunk to the Old Confederacy (sugar, cotton, peanuts) and the Great Plains (corn, wheat, soy), look for more of the same protectionism. Senate Minority Whip Trent Lott doesn't like free trade in agricultural products any more than he likes affirmative action. 

Very true.  But that hardly means that the Democrats can easily turn their back on agricultural subsidies.  If the Democrats want to retain the Senate, they need their share of Senate seats from the Great Plains and Upper Midwest (think Nebraska north, Missouri north and Illinois, Indiana, Ohio and Michigan – all of which have grain and bean producing parts).   $15-20 billion a year in farm subsidies is relatively small price to pay to remain competitive in some states that the US constitution assures are over-represented in the Senate.   Compare $15-20b to the Defense budget

And some subsidies that help the South directly also help the Midwest indirectly.  Sugar subsidies are the classic example.   The US supports sugar prices with huge tariffs – which keep Southern sugar cane growers in business in the face of Brazilian competition.  But the high domestic price of sugar from sugar cane also makes it profitable to raise sugar beets in the Dakotas and to turn Iowa and Nebraska’s corn into high fructose corn syrup (a sugar substitute in soft drinks). 

And if anything, it seems that there is pressure to expand the scope of agricultural protectionism to fruits and vegetables.   

It is sort of interesting – the agricultural products that traditionally have been protected and subsidized in the US are grains, legumes and sugar.  These products generally are not produced in a labor intensive way in the US.  Grain farming is hugely capital intensive – think of the cost of buying the land and modern factories on wheels (combines).   

Agricultural protectionism doesn’t have its basis of support in the labor movement. 

Grain production has been subsidized in part because grain (along with ‘beans and processed sugar) have been easy to trade for a long time, in part because farm programs protect US farmers from the economic insecurity associated with large commodity price swings and in part because US agricultural programs – like most agricultural programs – serve as much to protect smaller farmers in the US from competition from bigger farmers in the US as to protect US farmers from foreign competition.  

Fruit and vegetable farming tends to be both labor intensive and hard to trade across borders– so fruit and vegetable farmers have tended to be a pro-immigration constituency (illegal or legal) rather than a protectionist constituency.  Without immigrant labor, it would be hard to grow fruits and vegetables in California – and the per acre return of cheap labor and vegetables is a lot higher than the per acre return on a combine and grain. 

But right now China has an advantage in most labor intensive things.  Apparently labor intensive agriculture too. Modern refrigeration and storage technology has made a lot of perishable products more tradable across continents.  The New York Times:

California growers once dominated the garlic industry in the United States, but imports from China and Hong Kong have increased from less than 1 million pounds in 2000 to 112 million pounds last year. This year, for the first time, more Chinese garlic will be sold in the United States than California produces, Commerce Department figures show.

China’s farmers, who are broadly subsidized, have the advantage in that their nation’s currency, the yuan, is tightly regulated to maximize trade opportunities. And the country has a glut of workers for the labor-intensive jobs of growing and harvesting fruits and vegetables.

…. Other specialty crop groups are also struggling with foreign competition, in particular from China, which has geared its agriculture industry towards labor-intensive, higher-value fruits and vegetables. China has begun to dominate everything from apples to onions. Chinese exports have also eaten into American growers’ share of markets in Japan and Hong Kong for items like broccoli and lettuce.”

And then the kicker …

Fruit and vegetable growers have the political advantage of being in states like California, Florida and Arizona, which are likely to be critical in the 2008 presidential election.

California agribusiness seems to be evolving into a pro-immigration/ anti-trade constituency.  

Of course, China’s recent success exporting labor-intensive agricultural products may not simply be a byproduct of technology that has made it easier to ship and store relatively perishable fruits and vegetables.    China’s efforts to hold the RMB down against the dollar also may be a factor.  Right now we don’t know if Chinese agriculture would be competitive in a range of perishable products without the help provided by an artificially weak RMB.  I suspect it might be – moving fruit and vegetable production to pools of cheap rural labor probably makes more sense than moving pools of cheap rural labor to California’s central valley.  Just a hunch.  

There is a broader point here too.   Stephen Roach recently argued that China’s leadership is at risk of underestimating protectionist pressure here in the US.  I agree. 

China’s impact on the US economy has become so pervasive that groups other than the labor movement are increasingly crying foul.   Agribusiness is the best example, but it isn’t the only one.  Paulson is meeting with a group of Midwestern businessmen, the kind who usually are reflectively opposed to anything labor wants, who apparently are now threatening to side with labor on this issue ….

Update: Max and Barkley have dueling posts on trade up over at Maxspeaks that touch on the issue of how to offset the insecurities that come with trade.

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