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1. The U.S. has experienced sizable balance of payments deficits over the past three decades. This trend has continued in the past decade, with our trade deficit becoming even larger during that time. Discuss what factors you believe to have contributed significantly to this. Then, point out the benefits and costs of any economy having a balance of trade deficit. Beyond what you have identified as having contributed to the recent U.S. balance of trade deficit, discuss three or four other determinants of balance of trade changes.

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Beverley Smith
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24 Jul 2018

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Too Late to Compensate Free Trade’s Losers

CAMBRIDGE – It appears that a new consensus has taken hold these days among the world’s business and policy elites about how to address the anti­globalization backlash that populists such as Donald Trump have so ably exploited. Gone are the confident assertions that globalization benefits everyone: we must, the elites now concede, accept that globalization produces both winners and losers. But the correct response is not to halt or reverse globalization; it is to ensure that the losers are compensated.

The new consensus is stated succinctly by Nouriel Roubini: the backlash against globalization “can be contained and managed through policies that compensate workers for its collateral damage and costs,” he argues. “Only by enacting such policies will globalization’s losers begin to think that they may eventually join the ranks of its winners.”

This argument seems to make eminent sense, both economically and politically. Economists have long known that trade liberalization causes income redistribution

and absolute losses for some groups, even as it enlarges a country’s overall economic pie. Therefore, trade deals unambiguously enhance national wellbeing only to the extent that winners compensate losers. Compensation also ensures support for trade openness from broader constituencies and should be good politics.

Prior to the welfare state, the tension between openness and redistribution was resolved either by large­scale emigration of workers or by re­imposing trade protection, especially in agriculture. With the rise of the welfare state, the constraint became less binding, allowing for more trade liberalization. Today the advanced countries that are the most exposed to the international economy are also those where safety nets and social insurance programs – welfare states – are the most extensive. Research in Europe has shown that losers from globalization within countries tend to favor more active social programs and labor­market interventions.

If opposition to trade has not become politically salient in Europe today, it is partly because such social protections remain strong there, despite having weakened in recent years. It is not an exaggeration to say that the welfare state and the open economy have been flip sides of the same coin during much of the twentieth century.

Compared to most European countries, the United States was a latecomer to globalization. Until recently, its large domestic market and relative geographical insulation provided considerable protection from imports, especially from low­wage countries. It also traditionally had a weak welfare state.

When the US began opening itself up to imports from Mexico, China, and other developing countries in the 1980s, one might have expected it to go the European route. Instead, under the sway of Reaganite and market­fundamentalist ideas, the US went in an opposite direction. As Larry Mishel, president of the Economic Policy Institute, puts it, “ignoring the losers was deliberate.” In 1981, the “trade adjustment assistance (TAA) program was one of the first things Reagan attacked, cutting its weekly compensation payments.”

The damage continued under subsequent, Democratic administrations. In Mishel’s words, “if free­traders had actually cared about the working class, they could have supported a full range of policies to support robust wage growth: full employment,

collective bargaining, high labor standards, a robust minimum wage, and so on.” And all of this could have been done “before administering ‘shocks’ by expanding trade with low­wage countries.”

Could the US now reverse course, and follow the newly emergent conventional wisdom? Back in 2007, political scientist Ken Scheve and economist Matt Slaughter called for “a New Deal for globalization” in the US, one that would link “engagement with the world economy to a substantial redistribution of income.” In the US, they argued, this would mean adopting a much more progressive federal tax system.

Slaughter had served in a Republican administration, under President George W. Bush. It is an indication of how polarized the US political climate has become that it is impossible to imagine similar proposals coming out of Republican circles these days. The effort by Trump and his Congressional allies to emasculate former President Barack Obama’s signature health­insurance program reflected Republicans’ commitment to scaling back, not expanding, social protections.

Today’s consensus concerning the need to compensate globalization’s losers presumes that the winners are motivated by enlightened self­interest – that they believe buy­in from the losers is essential to maintain economic openness. Trump’s presidency has revealed an alternative perspective: globalization, at least as currently construed, tilts the balance of political power toward those with the skills and assets to benefit from openness, undermining whatever organized influence the losers might have had in the first place. Inchoate discontent about globalization, Trump has shown, can easily be channeled to serve an altogether different agenda, more in line with elites’ interests.

The politics of compensation is always subject to a problem that economists call “time inconsistency.” Before a new policy – say, a trade agreement – is adopted, beneficiaries have an incentive to promise compensation. Once the policy is in place, they have little interest in following through, either because reversal is costly all around or because the underlying balance of power shifts toward them.

The time for compensation has come and gone. Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to

globalization’s adverse effects. To bring the losers along, we will need to consider changing the rules of globalization itself.

QUESTIONS:

a. According to Rodrik, why is it that "trade deals unambiguously enhance national wellbeing only to the extend that winners compensate losers?" Explain completely.

b. Rodrik draws a historical link between globalization and the "welfare state." Explain this link.

c. Rodrik mentions a previous proposal by Scheve and Slaughter called "A New Deal for Globalization." What was the essence of this proposal? What has become of it?

d. What is the "time inconsistency" problem and why is it relevant for Rodrik's argument?

e. In your opinion, what is one weakness in Rodrik's argument? Explain.

Hello, could you please assist with this discussion question for the Economics course? Thank you.

5) Go to the internet and find an article that discusses the problems of income inequality in the U.S. economy, summarize key points, and post in the Discussions area.

http://neweconomics.org/2014/12/why-inequality-is-an-economic-problem/

Why Inequality Is An Economic Problem

Rising economic inequality was a major driver of the financial crisis. With the OECD recently debunking ‘trickle-down’ economics, our new report sets out the links between inequality, the growth in scale and influence of the financial sector, and the dangers for financial stability.

A fragile recovery

A return to growth in economies such as the UK and USA has been welcomed as a sign of recovery from the 2008 financial crisis. But as GDP picks up, so too has the widening gap between rich and poor.

The crisis may be over for the wealthy but the aftermath for ordinary workers depressed wages and growing debt is only getting worse.

Most nations have mustered only negligible growth and this has failed to benefit the vast majority of those nation's populations.

In the seven years following the crash, the UK has suffered the longest sustained decline in real wages since records began.

This decline hasn't has been shared equally across the income spectrum latest annual data up to the end of 2013 shows real earnings for the top 10% increasing by 3.9% and a 2.4% fall for the remaining 90%.

Households are once again piling on risky personal debt at a rate of almost $1billion a year.

Globally, wealth grew by 8.3% last year to $263 trillion, even as living standards stagnate for the majority. Income inequality has seen a sharp return the top 1% of earners have reaped 95% of the USA's economic gains since the crash.

Inequality increases as economies are financialised

Over the past four decades, financial sectors have been extensively deregulated and have expanded enormously as a result, particularly in the UK and USA.

This deregulation produced two systemic outcomes: finance has been freed to become the motor of the economy while the pursuit of greater equality of citizens, as was the focus after the second world war, has been abandoned.

Instead, the notion that unrestrained pursuit of wealth would trickle-down from rich to the poor has been embraced in the mainstream political and economic arenas.

Financial markets, products, and firms now play a much larger role in many areas; from pensions and social insurance to homes and public infrastructure.

Privatization and the doctrine of maximizing value for shareholders have increased the amount of economic activity focused on extracting the largest possible short-term profit. These trends are referred to collectively as ‘financialisation’.

Until now the connections between this increasing prevalence of financial activities and the steady increase in economic inequality have not been clear. But when these two trends reached a boiling point in the mid-2000s they fuelled a global collapse of financial systems.

The polarization of wealth and incomes fed asset bubbles, risky financial activity,, and necessitated vast levels of household debt – resulting in the 2008 financial crash. With little done since to address these interconnected drivers, the threat of another crisis is very real.

This diagram lays out the seven indicators of economic instability, each fuelled by rising inequality and increasing financial sector activity:

Our report describes how these indicators laid the path for the 2008 crash, and threaten to do the same again:

Increasing inequality depresses demand since consumption levels depend more on the wages of those at the lower end of the income scale than the profits of the wealthy

In the face of stagnating wages, households rely increasingly on debt to maintain their lifestyles with rising asset prices, especially in residential housing, worsening this.

Financial liberalization allows money to flood into countries with trade deficits, such as the USA and the UK, providing the funds for debt-led consumption.

Snowballing wealth at the top increases risky financial speculation.

Inequality doesn't bring growth, it brings economic instability

In recent years there has been a marked slowing of growth across the world's wealthiest economies, with none returning to the growth trends experienced before the crisis. Many have begun to speculate that this stagnation could, in fact, be a permanent development meaning that wealthy economies are fundamentally unable to create enough demand to keep growing.

The mainstream political consensus has for decades now suggested that inequality is a price worth paying for economic growth.

But new research from the Organisation for Economic Co-operation and Development (OECD) shows definitively that this inequality/growth trade-off is false adding to a growing body of research showing that inequality actually prevents economies from growing. This points to a fundamental structural flaw in the economy: if the proceeds of growth are not shared, the pie stops growing.

The pursuit of higher returns for the already wealthy within this dwindling pie cannot persist forever. With wealth refusing year on year to trickle down, debt has been used to plug the wage-consumption gap for the rest.

The signals are showing quite plainly that this pursuit of growth, via inequality, is ineffective and unsustainable.

Economist claim that terrorist attacks can be viewed as another type of trade barrier. Do you agree? Why?

After reading The African Business Journal article about Boko Haram in, "Boko Haram and its impact on the Nigerian Economy." Do you think this terrorist organization and it's action in Nigeria is having an impact on Nigeria's import/export industry (trade)?

If so, what type of affect do you think the terror group has on Nigeria's import/export business?

Boko Haram and its Impact on the Nigerian

Economy

By Angus Gillespie

Despite emerging from the murky shadows within Nigeria just a dozen years ago,

Boko Haram has quickly earned itself an infamous reputation for being one of the

most callous and violent radical Islamist groups in African history. In fact, it’s

already been tagged a terrorist group by western countries such as the United

States. Over the past 12 to 15 months, Boko Haram has unleashed a massive

wave of violence, fear and chaos throughout the northern African country – so

much so, that it’s know seen by many as having a noticeable impact on the way

the country operates, and by extension, is hindering its economic well being to a

widening degree.

Founded in 2002, Boko Haram is an ultra extremist Islamic cult focusing primarily

on the edict that Western education is forbidden. Military operations were

launched in 2009 to support their cause in creating an independent Islamic state.

It also has roots that can be traced to the northern part of Cameroon and parts of

Niger. The Boko Haram leadership has international connections to Al-Qaeda.

Suspected Boko Haram militants have killed dozens of Nigerians in recent weeks

and there is no sign of the violence abating. In one attack, gunmen disguised as

soldiers fired on a crowd in a church compound. The radical sect is known for

attacking churches, schools, and police stations. Tourists are also considered fair

game. Violence linked to the Boko Haram insurgency has resulted in an

estimated 12,000 killings since 2002, although that figure has gone up

considerably since 2009 when the group began to heavily arm itself as a militia.

Making matters worse for the Nigerian government of Goodluck Jonathan is that

some of the attacks come amidst reports some army generals have been aiding

the rebel militants, on the belief that a national coup is going to take place.

Nigerian media sources have reported that as many as 10 generals and five

other senior military officers have already been tried before the courts for

supplying arms and information to Boko Haram. However, at least one Nigerian

military spokesman called the reports “falsehoods”.

This contradicted Interior Minister Abba Moro said it was “good news” that the

army had identified soldiers who were undermining the fight against the

insurgents, and that it sent a strong message to other serving officers.

Boko Haram has waged an increasingly bloody insurgency since 2009 in an

attempt to create an Islamic state in Nigeria.

One small town that has been hard hit by the violence is Attagara, where the

village church came under attack leaving at least 20 people dead.

Nigeria’s government has been facing mounting pressure both at home and

abroad to do more to tackle the group and bring about the release of more than

300 schoolgirls kidnapped by the group on April 15.

President Jonathan originally declared a state of emergency in May of last year in

the three northern states where Boko Haram is, and has been, most active –

Borno, Adamawa and Yobe.

Boko Haram retaliated by stepping up its bombing campaign in cities and

launching mass attacks on small towns and villages.

Media correspondents in those regions say that since the infamous kidnapping of

more than 300 schoolgirls, the attacks have become an almost daily occurrence.

The campaign to free the girls that began in their home village has now gone

global, with the U.S., Canadian and British governments offering support to help

with the rescue. It’s believed about 55 girls have managed to escape their

captors since being taken hostage in April. The government has ruled out

swapping the girls for detained insurgents associated with Boko Haram.

President Jonathan has promised to address the poverty that helps fuel the

uprising — but only once the insurgency is put down. The World Bank says twothirds

of 170 million Nigerians struggle in poverty in Africa’s biggest oil producer.

Despite the fact there is so much poverty and lack of widespread education,

Nigeria remains Africa’s largest economy – thanks in large part to the massive oil

reserves that are often exploited by international corporations. That said, to put

things into perspective, only about 3% of the world’s oil supply is found in the

country. More recent successful business sectors have included the likes of

banking, telecommunications and a burgeoning film industry. Agriculture and

services have also been two traditional economic staples for the country,

although neither has shown much in the way of expansion over the past 10 to 20

years. To its credit, the country has also been diversifying the core economic

drivers away from energy and agriculture. The nation’s GDP is now $490 billion,

just shy of the economies of countries like Norway and Sweden.

When an organization managed to get the president of the country to declare a

state of emergency, it stands to reason it has the ability to unwieldy a

tremendous amount of damage on the country, be it through violence or

economic crippling.

Economic Impact

Since Boko Haram emerged from the shadows about four years ago, once armed

militarily, one of the first obvious economic concerns was the almost immediate

drop in foreign direct investment (FDI), with the concern being whether the

government had the wherewithal to deal with the serious insurrection and stave

off the many decades of political instability the country has faced. According to

the World Investment Report (WIR) 2013, FDI flows into Nigeria dropped by 21%

in just one year — from $8.9 billion in 2011 to $7 billion in 2012. The loss of $1.9

billion for a country in desperate need of money – such as Nigeria – was a

staggering blow.

The monumental decline in FDI over such a short period of time sent ripple

effects throughout the international community, creating a negative domino

effect. It’s a rock heading downhill that continues to gain momentum, and it will

be up to Jonathan and his government not only to slow it down, but to stop it

altogether, or it will begin all over again.

FDI into Nigeria has a direct impact on trade, while also ensuring progression of

economic development to the south. FDI inflow also supplements the available

domestic capital by stimulating the productivity of domestic investments.

Someone troublesome is the high codependency ratio between the inflow of FDI,

the Nigerian oil sector, and the country’s GDP.

A scientific study found that a unit increase in FDI into the Nigerian oil sector will

increase the country’s GDP by approximately 16 units. This shows that the

Nigerian oil and gas sector, which is the mainstay of the economy, has a high

rate of exposure to foreign direct investment.

Between the lack of jobs, and the increasing violence with the likes of terrorist

groups such as Boko Harm, there has been a mass movement of Nigerian

citizens looking to settle in areas not impacted by the violence. The trouble is

this: the areas not affected by the violence are most often areas that have

nothing in terms of sustainable economic activity that would allow a person or a

family to survive. Living in the dangerous regions is where there’s hope for

employment.

The rush to escape from the northern part of the country that has been hard hit is

already affecting the profitability of businesses in the region. It’s no reached the

point where accredited banks have begun closing down some branches due to a

huge decrease of economic activity. On top of that, a number of employees at

these businesses are demanding to be reassigned to areas that are less volatile.

As noted many times before, a lot of the current problems with terrorist uprisings

can easily be pinpointed to a lack of government leadership due to the constant

political insecurity, and especially so in the northern region.

Once the banks and other businesses decide to pack up and move elsewhere, it

leaves the region in a state of economic depletion, and one that won’t easily be

regained. It’s always quicker destroying something than it is building it up. The

people of Nigeria are hoping President Jonathan’s government takes drastic

action to bring about more stability in the country and soon. Or, it will be a long

road to recovery for a nation that can already ill afford this type of economic

setback.

More than $21 billion of foreign direct investment poured into Nigeria in 2013, up

28% from the year before. The country does not want to see that slide backwards

due to political instability and the onset of widespread violence. The country has

attracted the most foreign direct investment in sub-Saharan Africa since 2007,

according to Ernst & Young. But all of that could be quickly eroded if the violence

is not snuffed out.

Many financial analysts seem to be of the opinion that the impact on foreign

investment will largely be determined by geography. As example, investors may

pull out funding from manufacturing and infrastructure investments in northern

Nigeria, which has been ravaged by violence. But the resource rich southern

region has been spared from violence to this point. This could be one of the

factors as to why Nigeria’s stock market has been seemingly unaffected by all the

recent turmoil. The benchmark equity index has only declined about 1% since the

kidnappings in mid April; so for all intents and purposes, it has been business as

usual.

So just how bad is it in Nigeria? It is perhaps best summed up in a balanced

report by an analyst with Ernst & Young.

“Nigeria epitomizes this almost bipolar view of Africa,” says Henry Egbiki, West

Africa regional leader at Ernst & Young. “For many of us already doing business

on the continent it is an exciting, dynamic, high octane growth market; for some

others, often on the outside looking in, it seems chaotic, unstable, and uncertain.

The reality is obviously less cut and dried than either of these extremes.”

The next 12 to 18 months will be critical for the government and how it responds

to the upswing in violent outbreaks by radical groups such as Boko

Haram. Humanitarian groups and countries will be looking on from a human

rights point of view, but you can also bet that the international investment

community will be keeping a close watch as well.

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