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A Progressive Economist Makes the Case for Free Trade and Immigration

Summary:
With her new book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital, Reed College economics professor Kimberly Clausing has planted her flag in what has become sparsely inhabited political territory. She’s a progressive who embraces free trade and globalization. Some on the American left today have made common cause with more Trumpian conservatives, blaming trade, outsourcing, and immigration for the woes of American workers. But not Clausing. While displaying her progressive credentials on other issues, she offers a cogent, accessible, and compelling case for a more open US economy. Open is really two books under a single cover. One book is a defense of openness as an economic agenda—openness to imports as well as exports, to immigration, and to international

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With her new book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital, Reed College economics professor Kimberly Clausing has planted her flag in what has become sparsely inhabited political territory. She’s a progressive who embraces free trade and globalization.

Some on the American left today have made common cause with more Trumpian conservatives, blaming trade, outsourcing, and immigration for the woes of American workers. But not Clausing. While displaying her progressive credentials on other issues, she offers a cogent, accessible, and compelling case for a more open US economy.

Open is really two books under a single cover. One book is a defense of openness as an economic agenda—openness to imports as well as exports, to immigration, and to international capital flows. The other book offers a detailed plan for reform of the US tax system along progressive lines, while decrying tax havens and “excess profits.” The connection between the two parts is not clear, and a reader could accept one line of reasoning without the other.

On trade, Clausing challenges the mercantilist fixation on exports and trade balances. She notes that imports benefit American families, especially lower-income households that spend a larger share of their budgets on tradable goods such as food, clothing, and shoes. As a consequence, tariffs are one of the federal government’s most regressive forms of taxation. “In the United States,” she writes, “tariffs take a bite out of the after-tax incomes of the poorest 20 percent of the population three times larger, in percentage terms, than they take from the top 20 percent.”

For US manufacturing firms, imports provide lower-cost intermediate inputs, machinery, and raw materials that allow US firms to compete in global markets. Tariffs on steel and other inputs damage US productivity and export prowess. “The US firms who are the biggest exporters are also often the biggest importers. It is difficult to reduce imports without creating collateral damage,” she writes.

Clausing hits a home run on the US trade deficit, where the gap between basic economic sense and political posturing is arguably the widest. As somebody who has been writing about this same subject for years, I admire her pithy explanation of how the trade deficit is driven by underlying rates of savings and investment, not by differing tariff rates among nations. “Protectionist trade policies are futile when it comes to affecting trade balances, since they do not affect their underlying causes,” she says.

In the tradition of Presidents Franklin D. Roosevelt and John F. Kennedy, Clausing sees expanding trade as not only an economic policy, but as a means for promoting a more peaceful and prosperous world. She cites World Bank figures that show a sharp decline in global poverty since 1990—a development that should warm the hearts of American progressives but one that remains oddly unappreciated on the left. To Clausing, “This is truly the most astounding economic progress in the history of the world.”

On the role of multinational companies, Clausing paints a largely positive picture. While decrying tax avoidance and “excess profits,” she notes the important role of international business in providing needed competition: “The world’s largest multinational corporations are typically successful for a reason,” she writes. “They make good products, and they spread information, technological progress, and innovation. They also provide variety to customers throughout the world.”

On immigration, Clausing rejects the nativism of both President Donald Trump and Senator and Democratic presidential candidate Bernie Sanders. She marshals research to show that immigrants are boosting US growth and innovation, starting businesses, and providing needed skills in the workplace. Current immigrants are both assimilating in US society and deepening America’s global connections. She also advocates offering green cards to foreign-born graduates of US universities.

The other part of Clausing’s book is less convincing, at least to this reader. She accepts as fact that Americans are suffering from “middle class wage stagnation.” Her analysis would have benefited from a more serious consideration of the growing literature on how people have systematically overstated inflation and thus understated the growth in real incomes in recent decades.

The weakest section of the book (again, in my humble opinion) is her sustained argument for a radical overhaul of the US tax system. I’m not a tax policy expert, but it was hard to see the direct connection between her views on taxes and her otherwise solid arguments for a more open US economy. She rejects the 2017 GOP tax reform bill as giving away too much revenue and aggravating societal inequality. Instead, she advocates for a system that would “tax all types of income earned by the same person or business at the same rate, regardless of form or location, [and] close loopholes, including international tax avoidance.” She also wants a carbon tax to discourage the burning of fossil fuels and to allow lower rates on other forms of taxation.

While rightly celebrating increased competition among private businesses, Clausing decries regulatory and tax competition between national governments. She advocates for international agreements to “help governments counter the pressures of policy competition,” but this sounds like collusion by another name. A reader may wonder why a progressive would think it’s bad for companies to collude to keep prices high, but desirable for governments to collude to keep tax rates high.

Clausing also complains about corporations earning “excess profits,” what she defines as profits above the normal (market equilibrium) return on capital. Her fear is that companies earn such profits by “squeezing the returns for other factors of production throughout the economy.” By that same logic, Apple or Google or many of America’s other most successful companies could be accused of earning excess profits. But instead of squeezing suppliers, they are instead creating products that are delighting customers around the world, thus spreading prosperity to their suppliers and the communities where those suppliers locate.

Clausing’s policy prescriptions are on more solid ground when she advocates for greater public and private investment in infrastructure, basic science, and education. She advocates for more reliance on community colleges to prepare American workers for the changing demands of the US labor-market. And she notes the success of the US interstate highway system, in contrast to other progressives who advocate for “road diets” and ever-higher fuel economy standards.

As I argue myself in a recent paper for the Mercatus Center, and consistent with the arguments made in Clausing’s book, the right response to the challenges facing US workers in the 21st century is not—in a mistaken effort to protect the jobs of the past—to stifle a free and open market that is raising productivity and living standards for millions. Instead, the best approach is to equip US workers with the skills and tools they need to meet the evolving demands of the labor market.

In the end, Clausing gets the big picture right with her assertion that a more open economy serves America’s broader interests in the world: “We share a common humanity on our planet. Ideal economic policies should not pit countries against each other in an imagined zero-sum battle. Instead, economic policies can promote common interests. An open world economy is the best path forward for humanity, both at home and abroad.”

Those are welcome words of wisdom today for political leaders of all stripes.

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