Sunday, December 11, 2005

more on inequality, invisible taxes, world trade

The discussion thread on John Quiggin's post on inequality has some arguments over whether people lack the basic necessities of life: warm coats in winter and enough food to eat. It's interesting that folks who are contributing to the debate don't have data, only subjective impressions. One says lots of winter coats are distributed in NYC so they must be needed there, but I recall helping a neighbor distribute winter gloves at a soup kitchen one winter and being surprised (though I shouldn't have been) that there was a serious problem in that street entrpreneurs were grabbing up the free gloves so they could sell them. At that place and time the "market" was demonstrating that the community didn't want gloves as much as it wanted other consumables (cigarettes, say, which the entrepreneurs were trading for the gloves). I don't mean that coats and food are not needed, but that you can't simply assume what's needed.

So here are some interesting facts from an article in the Business Section of today's Washington Post.

First, the tariff structure that is supposedly designed to protect American producers and American jobs is skewed so that people at the low end of the income scale are effectively paying an inordinate tax on their purchases while people at the high end are not.

Examples given include disproportionate tariffs on underwear, luggage, handbags, and sweaters. One of the most dramatic of these is footwear. The tariffs on low-end sneakers range between 48 and 67 percent, but tariffs on higher-end sneakers are only 20 percent, and for leather dress shoes, the tariff is 8.5 percent. This set of footwear tariffs is particularly noxious since low-income families have to purchase lots of sneaks as their kids grow. It might be thought that the tariffs enable low-income families to purchase American-made products relatively cheaply, but we all know that this is not the case. To put it bluntly, what you buy in Wal-Mart is made overseas, particularly in China.

The high tariffs are effectively a highly regressive, and largely invisible, tax, but they are not really part of a vast right-wing conspiracy to screw the poor. It's more a case that tariffs are created in time of need (real or percieved) and just don't go away. For example, as the article says, "the [sneaker] tariffs have their origins in the 1920s, when U.S. tire companies -- which then made rubber footwear -- wanted to fend off an onslaught of cheap shoes from Czechoslovakia. In later decades, U.S. athletic-shoe makers lobbied successfully to maintain protection against imports from places such as Taiwan, so tariffs remained high on sneakers even as they fell on leather shoes. The tariffs, however, haven't kept shoe firms from moving most of their production to developing nations with low-cost, high-productivity labor pools -- China in particular."

Here's a link to the article:
The Tariff Mismatch
Purchasers' Unseen Penalty Hits Hardest on Low-End Items
By Paul Blustein
Washington Post Staff Writer

Tariffs aren't the only invisible tax on low-income families. Early in November, the U.S. negotiated quotas to limit imports from China. The agreement covers shirts, slacks, underwear, fabric and other textile products. It's intended purpose is to protect American jobs, but it's not at all clear that it will accomplish that goal; at best it might just lengthen the time over which the American textile industry collapses. (The agreement lasts three years.)

The article in the Post notes that U.S. tariffs will soon be discussed in Hong Kong during the next round of negotiations by members of the World Trade Organization. The journals, Foreign Affairs has devoted a whole issue to this subject.

Here's a link to an overview article by Jagdish Bhagwati, who teaches at Columbia Univ and is a senior fellow at the Council on Foreign Relations: From Seattle to Hong Kong, From Foreign Affairs, December 2005 -- WTO Special Edition

As you might expect, the plight of low-income families in the U.S. is low on the list of WTO priorities. Poor nations suffer greatly from European and U.S. farming subsidies. The EU's complex system of farm subsidies accounts for 42.2 per cent of Europe's £72 billion budget. In the U.S. the system of subsidies for cotton farmers keeps west African farmers in poverty. Although west African countries produce cotton far more cheaply than we do, U.S. farmers receive hundreds of millions of dollars in subsidies that enable them to produce cotton in vast quantities and dump their produce on world markets, thus reducing prices.


As I said yesterday, there has been little or no progress in solving international financial problems. One case in point is the U.S. deficit. Early in November, the press reported a huge increase, mostly resulting from the disruption caused by hurricanes Katrina and Rita and by the related increase in oil prices. But deficit growth was higher than economists expected. The reports said analysts now expect the gap for 2005 to be much higher than 2004 was: more than$700 billion for 2005, compared with last year's record of about $615 billion.

Fortunately, or unfortunately, depending on your point of view, the U.S. economy remains so strong that politicians have little gumption for dealing with the deficit. American consumers are the backbone of the world economy and their confidence remains strong. Employment and unemployment stats are good. Interest rates have been growing very slowly and remain low.

Perhaps most importantly, foreign investors continue to invest in U.S. securities. Though our interest rates seem low to us, they are high relative to those in Europe and Japan and the U.S. economy continues to grow at a faster rate than the economies of other industrial nations.

So, the warnings of Federal Reserve Chairman Alan Greenspan continue to go unheeded.

He says deficits and a current fiscal policy are unsustainable. He says the government likely will not be able to make good on promised Social Security and Medicare payments and will probably have to reduce benefits to future retirees. He says, the world economy could be adversely affected by a combination of "fiscal instability" in the United States and growing protectionism. "At some point, foreign investors will balk at a growing concentration of claims against U.S. residents, even if rates of return on investment in the United States remain competitively high, and will begin to alter their portfolios." (I didn't capture a link for this quote.)

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