International Trade and Prosperity: Who Benefits?

1. International Trade and Prosperity: Who Benefits?

2. Mercantilists: Wealth = Gold

3. (Some) Modern gold-standard advocates): Wealth = Gold = Dollars

4. Proposition: Wealth = Happiness But, “happiness” is at best fuzzy and at worst completely immeasurable. Use a proxy that is correlated with people who report that they are happy.

5. Proposition: Wealth = Happiness Happiness reflected in “Consumption” But, goods and services don’t fall from the sky; they must be purchased. In order to consume, we need money (purchasing power).

6. Proposition: Wealth = Happiness Happiness reflected in “Consumption” “Consumption” requires Money (purchasing power) • Whence comes money? • Sell labor • Sell assets  sell past labor • Borrow  sell future labor • Inherit  sell someone else’s past labor

7. Proposition: Wealth = Happiness Happiness reflected in “Consumption” “Consumption” requires Money (purchasing power) Money accrues to those who sell Labor Labor and production are two views of the same phenomenon.

8. Proposition: Wealth = Happiness Happiness reflected in “Consumption” “Consumption” requires Money (purchasing power) Money accrues to those who sell Labor Labor = Production A country’s well-being is reflected in its level of production.

9. Qualifying issues: • Who summons the production (public vs. private)? • How many people consume the fruits of production? • What is the distribution of goods (income)?

10. Equity is Compatible With Wealth Source: World Bank and United Nations Statistics Division

11. Measure of Production: Per-capita GDP in US Purchasing Power Parity Dollars Per-capita GDP = Production per person US PPP $ = Convert foreign GDP into US dollar equivalent, but convert using PPP, not the exchange rate.

12. USA India Does size matter? Source: United Nations International Financial Statistics

13. Does size matter? Source: United Nations International Financial Statistics

14. Does size matter? Classic cases: India  17% of world population, but 1% of world output Japan  2% of world population, but 12% of world output

15. USA Russia How about resources? Source: United Nations International Financial Statistics and CIA World Factbook

16. How about resources? Source: United Nations International Financial Statistics and CIA World Factbook

17. How about resources? Classic cases: Russia  16% of world surface, but 1% of world output Germany  0.3% of world surface, but 6% of world output

18. USA Canada Access to water? Source: United Nations International Financial Statistics and CIA World Factbook

19. Access to water? Source: United Nations International Financial Statistics and CIA World Factbook

20. Access to water? Classic cases: Indonesia  8% of world coastline, but 0.6% of world output France  0.5% of world coastline, but 4% of world output

21. Climate? Source: United Nations International Financial Statistics and CIA World Factbook

22. …accompanies greater income More economic freedom… Economic Freedom? Source: United Nations International Financial Statistics and Heritage Foundation

23. “Poorest” 50% of Countries Source: United Nations International Financial Statistics and Heritage Foundation

24. “Richest” 50% of Countries Source: United Nations International Financial Statistics and Heritage Foundation

25. What About Climate? Coincidentally, countries with temperate climates have greater than average economic freedom. Source: Heritage Foundation and CIA World Factbook

26. What is Economic Freedom?

27. (Lack of) Economic Freedom is a composite measure of: • Restrictive trade policy • Fiscal burden of government • Government intervention in the economy • Monetary policy (price instability) • Restrictions on capital flows and foreign investment • Banking and finance regulation • Wage and price controls • Suspension of property rights • Economic regulation • Proliferation of black markets

28. In Perspective: • The US ranks 4th in Economic Freedom behind Singapore and New Zealand. • Singapore’s Economic Freedom Index is 40% “better” than that of the US.

29. Restrictive Trade Policy USA Source: United Nations International Financial Statistics and Heritage Foundation

30. Price Instability USA Source: United Nations International Financial Statistics and Heritage Foundation

31. Wage and Price Controls USA Source: United Nations International Financial Statistics and Heritage Foundation

32. Suspension of Property Rights USA Source: United Nations International Financial Statistics and Heritage Foundation

33. Banking/Finance Regulation USA Source: United Nations International Financial Statistics and Heritage Foundation

34. Problems: • Correlation is not causation. • Problems: • Correlation is not causation. • Example: Pepsi does not cause hepatitis! • Problems: • Correlation is not causation. • Example: Pepsi does not cause hepatitis! • Example: Babies should sleep on their backs! • No, their fronts! • No, their backs! • Problems: • Correlation is not causation. • Example: Pepsi does not cause hepatitis! • Example: Babies should sleep on their backs! • No, their fronts! • No, their backs! • Example: Most shark attacks occur in 3 to 4 feet of water! • Problems: • Correlation is not causation. • Example: Pepsi does not cause hepatitis! • Example: Babies should sleep on their backs! • No, their fronts! • No, their backs! • Example: Most shark attacks occur in 3 to 4 feet of water! • Example: Poor readers make erratic eye movements. • Problems: • Correlation is not causation. • Example: Pepsi does not cause hepatitis! • Example: Babies should sleep on their backs! • No, their fronts! • No, their backs! • Example: Most shark attacks occur in 3 to 4 feet of water! • Example: Poor readers make erratic eye movements. • The Index of Economic Freedom is rigged by market-happy conservatives! • Problems: • Correlation is not causation. • Example: Pepsi does not cause hepatitis! • Example: Babies should sleep on their backs! • No, their fronts! • No, their backs! • Example: Most shark attacks occur in 3 to 4 feet of water! • Example: Poor readers make erratic eye movements. • The Index of Economic Freedom is rigged by market-happy conservatives! • There’s more to life than beer and pizza.

35. Solution: • Look at the change in per-capita GDP over time and compare this to the change in economic freedom over time. • Solution: • Look at the change in per-capita GDP over time and compare this to the change in economic freedom over time. • Find an alternate data set acceptable in other partisan quarters. • Solution: • Look at the change in per-capita GDP over time and compare this to the change in economic freedom over time. • Find an alternate data set acceptable in other partisan quarters. • Find a data set that measures more than just income.

36. Human Development Index Data covers 159 countries over 23 years. Published by the UN Development Programme. Composite measure of: • Life expectancy • Educational enrollment • Adult Literacy • Per-capita income

37. Predicted Impact of Trade Growth on HDI Source: United Nations Development Programme, and Quinlivan and Davies, “The Impact of Trade on Social Welfare”

38. Predicted Impact of Trade Growth on HDI Not only is freer trade associated with greater per-capita income, but: • Consistently over time and over countries, past augmentations of free trade are associated with future growths in HDI. • Consistently over time and over countries, past augmentations of free trade are associated with future growths in HDI. • Per-capita income is only a fraction of HDI. Factors having the majority of influence on HDI are: life expectancy, literacy, and education. • Consistently over time and over countries, past augmentations of free trade are associated with future growths in HDI. • Per-capita income is only a fraction of HDI. Factors having the majority of influence on HDI are: life expectancy, literacy, and education. • HDI measure is maintained by United Nations Development Programme.

39. International Trade and Prosperity: Who Benefits? • Prosperity accrues disproportionately to those countries with greater economic freedom. • Prosperity accrues disproportionately to those countries with greater economic freedom. • Prosperity is not a “zero-sum” game. The prosperity that accrues to one country is not taken from another – the prosperity is generated. • Prosperity accrues disproportionately to those countries with greater economic freedom. • Prosperity is not a “zero-sum” game. The prosperity that accrues to one country is not taken from another – the prosperity is generated. • Prosperity is a “positive-sum” game. Trade allows more-prosperous countries to become more interdependent with less-prosperous countries. All countries benefit.

40. What is the Implication for Government? • Economic freedom is one of the most powerful engines for prosperity and equality. But, without government, there can be no economic freedom. • Government aids markets by defining and defending freedoms. • Not “government or market” but “government for market.”

41. International Trade and Prosperity: Who Benefits?