Oldies but goodies

Sometimes the value of an idea depends on the passage of time.

Take for example the proposal for a U.S. -EU Free Trade Agreement (FTA). The recent White House announcement of the start of negotiations to achieve such an agreement has been widely greeted with approval and support. This was not always the case. Back in 1997 when the Council on Foreign Relations published the first book calling for such a deal, the proposal was widely rejected and sharply criticized by the leading think tanks, commentators, and other purveyors of the conventional wisdom. It was said that such a deal would threaten to destroy the nascent World Trade Organization (WTO), that it wouldn't really produce much in the way of economic benefits because the two economies were already highly integrated, and that it was objectionable because it represented nothing more than the with guys ganging up against the rest.

A lot of water has gone over the dam in the past seventeen years and now, wonder of wonders, the very same people who made these earlier criticisms are now by and large singing the virtues of a potential agreement. Now they are saying that the deal may be necessary in order to save the WTO, that it could kick start economic growth in both the United States and Europe, and that such a deal between the two major western economies would assure the setting of liberal standards before other less open and liberal economies become more dominant.

By the same token, in his New York Times column yesterday, David Brooks said his dream Obama would propose introduction of a value added tax (VAT) that could be used to offset the impact of much of the income tax, rising young family debt, and rising entitlement costs while also enabling reduction of corporate taxes. It all sounded so good coming from David that I wondered why the idea had been rejected when I proposed it back in the 1960s and when numerous other colleagues have proposed it since. I proposed it for a reason that wasn't mentioned by Brooks but should have been. It is that virtually all the other countries in the world have such a tax which is rebated on exports and imposed on imports, thus acting as a kind of indirect tariff on imports and subsidy for exports. For example, let's say that Volkswagen in Germany produces a Passat and exports it to the United States and that the VAT in Germany is 20 percent (its actually about 17 percent, but let's make the math easy). If the car is sold in Germany by VW for $40,000 with the VAT included, it will sell into the United States at $32,000. Meanwhile, if Ford sells an Explorer in the U.S. market for $40,000, its Explorers exported to Germany will be sold at $48,000. The widespread prevalence of this tax combined with America's allergy to it, is a major contributor to the chronic U.S. trade deficit, loss of jobs, and loss of U.S. tax revenue.

Brooks seems to think Republicans would back this kind of a tax. All I can say is that in my experience in the Reagan administration and from my observations of the two Bush administrations, Republican economists think of a VAT as anathema, as protectionist, and as something Americans shouldn't do. Maybe Brooks can convince them they're wrong, not least because they are. But it's also a good idea even if it is an old one.

Tonight's final example comes from a just released MIT study labeled Production in the Innovation Economy (PIE). Essentially the study by an eminent panel of economists, engineers, and political scientists concludes that more domestic production of a wider variety of items maximizes innovation and reduces the overall cost of production. That the loss of spillovers and externalities constitutes a high but difficult to quantify cost of the off-shoring of production has long been suspected by a few industry analysts such as Harvard's Willy Shi and Gary Pisano and IBM's former chief scientist Ralph Gomory. But any hesitation about breaking up the supply chain and moving parts of it offshore, has always been strongly attacked by economists as costly protectionism contrary to free trade. Now, after  decades of argumentation, the distinguished MIT panel has concluded that the old arguments weren't so dumb after all.

All this brings to my mind the wisdom of the old Swahili aphorism that: "Before a man does away with the old Gods, he must first make sure he has something of value with which to replace them."  


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