Savitri Era of those who adore, Om Sri Aurobindo and The Mother.

Saturday, December 29, 2007

Strengthening the social safety net would not be my policy recommendation

For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net.

That is Paul Krugman, here is more.

I have yet to see the evidence that trade has a significant negative impact on middle class wages, but for sake of argument assume it is true. However benevolent it may sound, strengthening the social safety net would not be my policy recommendation number one. After all, if Samuelson-Stolper factor price equalization is the main mechanism at work, wages would have a long way to fall downwards and if anyone in the middle class is to keep working, the safety net must eventually be cut, not increased. You might think we can fund all these trade-losers by taxing capital but of course the incidence of taxes on capital sometimes falls on labor, not to mention that at some point the Laffer Curve kicks in.
Is not the appropriate policy recommendation to create a budget surplus, create a U.S.A. Sovereign Wealth Fund, and invest the resulting capital in the corporate winners from this entire process? In other words, we would be giving the trade-losers a more direct share in capital. Since output is rising and wages are falling, the return to capital must be rising; let's make money off of that.
You might not trust the government with such investments but it is awkward for Krugman to push that argument too hard. Alternatively, you might think that share prices already have capitalized these gains, but that is hard to square with the view that Krugman is reporting a new result about trade. Share prices are driven by liquidity to some extent, and if you know something about the returns to labor and capital that the rest of the world does not, there ought to be a way to make money. Why spend more on consumption (a stronger safety net today) if the rate of return on investment is rising so high and we are going to need even more of a safety net in the future?

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