CEA’s Annual Report: Trade is good, but we need to make sure it’s good for everyone

While snowstorms were raging in the D.C. area, the White House released the Economic Report of the President and the Council of Economic Advisers’Annual Report 2010. I haven’t had a chance yet to study  the 462-page document, but did review the chapter dealing with international trade – Chapter 10, beginning on page 274.

The start of that chapter provides a strong defense of open trade, following the theories of both Adam Smith and David Ricardo regarding specialization and comparative advantage:

“Initially, trade was about introducing products (such as spices) from one market to another, providing consumers with choices they previously did not have. Still today, trade can offer consumers different goods and different varieties of products already available to them and bring new technology from other countries. By allowing countries to specialize based on skills or endowments, trade can also allow countries to improve their standards of living. Trade can also help a country increase its overall output by allowing firms or industries to take advantage of economies of scale or by encouraging the growth of more productive firms. Thus, trade has the potential to increase the overall quantity of goods and services that a given economy can produce with its resources-and hence increase the overall standard of living-making global commerce a cooperative, not a competitive venture.”

Yet the discussion soon veers off  to promote the need to make sure that everyone shares in the benefits of trade:

“In the past, however, the gains from our trade policies have not been shared sufficiently, and technological change and globalization have left many behind.”

What to do about those people who don’t benefit quickly and equally from trade?  Here’s where the true message is revealed.  The CEA report notes that the federal government already has numerous programs on “trade adjustment assistance, worker retraining, and temporary relief programs,” to help them, but much more is needed – progressive taxation, expansion of the social safety net, as well as changes in the health care and education systems.  Here’s the argument for more progressive taxes:

“A progressive tax rate combined with trade allows those who realize substantial income gains from globalization to still prosper a great deal relative to the state where there is no trade and incomes are taxed at a flat rate. And it does so while making sure that those who face lower incomes from globalization also obtain benefits-not just through the lower prices and expanded choices associated with trade, but also through lower taxation.”(Boldface added.)

Besides the illogic of the boldfaced statement, guess what is used as an example of someone who prospered a great deal from trade and globalization but may have crowded out others who were disadvantaged by that success?  J.K. Rowling!

“At the same time, it is distinctly possible that some American authors who would have captured a larger share of the “magic-oriented book” market had there been no trade in literature were crowded out by Rowling’s success . . .”

Was that a tongue-in-cheek acknowledgment that the argument makes no sense?  One can only hope.