Free trade and free taxes: How our intellectuals help the rich

from Dean Baker

Since I came to Washington in 1992, I have been working alongside friends in the policy community, labor movement, and community organizations in fighting against a series of trade pacts. NAFTA was the immediate issue in 1992, but a couple of years later we had the Uruguay Round of the GATT that created the WTO. At the end of the Clinton administration, we had China’s admission to the WTO and then various other smaller pacts.

Those of us who opposed these deals (which were not really about free trade), argued that they would put downward pressure on the wages of manufacturing workers, by putting these workers in direct competition with low-paid workers in the developing world. This mattered in a big way because manufacturing had historically been a source of comparatively good-paying jobs for workers without college degrees. Therefore, using trade to depress the wages of manufacturing workers would lead to downward pressure on the pay of non-college educated workers more generally, thereby increasing inequality.

We also raised other objections, most notably that the stronger and longer patent and copyright monopolies (the opposite of free trade) in these pacts would raise the price of prescription drugs and other items subject to these protections. The most recent deals, like the Trans-Pacific Partnership, also included rules that locked in the current regulatory structure of the Internet which, for example, obstruct efforts to regulate Facebook and Google.

Of course, these deals did in fact lower the pay of manufacturing workers, as millions of manufacturing jobs were lost due to trade following the opening to China. In the last decade we have gotten an acknowledgement from many in the economics profession that trade did have a large impact on the manufacturing economy and the regions that depended on these jobs. This was due in large part to the work of M.I.T. labor economist, David Autor and his colleagues.

While it was great to see Autor’s work and the impact it has had on the policy debate, there was nothing really surprising about his findings. It shouldn’t really be surprising that when workers are subject to competition from workers in other countries who get much lower pay, their pay drops. (Just ask doctors how they feel about opening the door to more foreign-trained doctors.) This was even a well-established result in economic theory, with a key article co-authored by no less than Paul Samuelson, the first American winner of the Nobel Prize in economics.

Anyhow, the point is that we had a trade policy that was really bad news for large segments of the country’s population, yet it managed to get overwhelming support in the policy community. Leading news outlets overwhelming featured both opinion and news pieces that favored these trade pacts. Opponents of these pacts were treated as ignorant know-nothings and/or tools of special interest groups that might lose from these deals.

The news outlets were reflecting the consensus within intellectual circles. My friends arguing against these trade deals were largely treated with contempt. New York Times columnist Thomas Friedman reflected the elite attitude perfectly when he said on a talk show:

“I was speaking out in Minnesota — my hometown, in fact — and a guy stood up in the audience, said, ‘Mr. Friedman, is there any free trade agreement you’d oppose?’ I said, ‘No, absolutely not.’ I said, ‘You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.’”

Friedman may have been more explicit in his views than most, but there can be little doubt that his comments reflect elite opinion. He has been a columnist at the New York Times for more than two decades, is a regular commentator on CNN, and his books consistently make the best seller list. Whatever one thinks of the quality of his work, Friedman is very much at the center of establishment thinking on the issues where he voices an opinion.

The point was probably best stated by Meg Greenfield, who was the Washington Post’s editorial page editor during the NAFTA debate. Responding to complaints that the paper’s opinion pages had been entirely one-sided in supporting NAFTA, she said:

“On this rare occasion when columnists of the left, right and middle are all in agreement . . . I don’t believe it is right to create an artificial balance where none exists.”

In short, intellectual types were overwhelmingly on board with the trade policy of the last three decades. This mattered because it created a political atmosphere in which it was possible to override the groups that would lose from these trade deals, in this case, the majority of the country’s workers as well as some domestic manufacturers who were devastated by foreign competition.

It is interesting that it was possible to get this sort of elite consensus around U.S. trade agreements, both since the policy was obviously disadvantageous to a large group of people and the basic argument was wrong. The idea that increasing trade along the lines prescribed by these deals would lead to large economic gains without substantial costs to some groups was absurd on its face, but our elites were totally prepared to embrace this line.

Free Taxes

When progressives propose various policies ranging from Medicare for All (M4A) or financial transactions taxes (FTT), a standard response from policy types is that these proposals might be good in principle, but the power of various interest groups (e.g., the insurance industry or the financial industry) will make them impossible to get through Congress. To date, this assessment has largely proved correct.

Any progress in extending health care coverage has come largely with the cooperation of the insurance industry. They are making money selling policies in the health care exchanges created by the Affordable Care Act. Efforts to have a publicly run alternative, or simply opening up Medicare, were beaten back. Similarly, a FTT faces an enormous uphill battle because the revenue from the tax would come almost entirely out of the pockets of the financial industry. The fact that a powerful lobby stands opposed to these policies is generally taken as a basis for throwing up hands and acknowledging the impossibility of change, not a doubling down to rally the troops, as was the case with trade policy.

While both M4A and a FTT are policies that, to my view, would provide large benefits to the vast majority of people in the country, there are arguments against them (more with M4A than with FTTs) that can at least be a reasonable basis for caution. Let me throw out another policy where there is no other side: government preparation of tax returns.

The idea here is a simple one. Instead of having taxpayers struggle with their returns every year, the I.R.S. would fill out a return for them, based on the data it already has on file about the person’s income and family size. The form would be sent out each year for review. People could accept the information as correct and get whatever refund was indicated, or pay the additional taxes for which they were billed. Alternatively, they could contest the I.R.S. calculation by providing documentation that showing that it was incorrect.

Currently people pay over $27 billion a year to have their tax returns prepared, most of which could be saved if the I.R.S. prepared tax returns for people.[1] This comes to about $200 per household, or around 0.13 percent of GDP. If the latter figure sounds trivial, it is very much in the ballpark for the projected gains from trade deals like NAFTA, CAFTA, and the TPP. (A 10-year figure would put the savings over $300 billion.) Also, the direct savings might be the smaller part of the benefit. People spend hours working over their returns and many have anxiety about filling them out incorrectly and the potential consequences. Almost all of this would instantly vanish if the I.R.S. did the forms for people.

The notion of the I.R.S. filling out returns should not sound far-fetched. Several European countries have been doing this for decades, and they are not that much smarter than we are. In short, we have an entirely doable reform that would save tens of billions of dollars a year and save people a huge amount of time and anxiety. So why doesn’t it happen?

The obvious reason is the political power of the tax preparation industry. NPR’s Planet Money had a fascinating piece a few years ago about an effort to have California’s revenue service prepare people’s state income tax for them under a program called “ReadyReturn.” The tax preparation industry fought the proposal with all guns blazing. They were undoubtedly concerned about not only losing the market for preparing California’s state taxes but also the precedent this could set for the country as a whole. As it turned out, in spite of widespread bipartisan support, the legislature ended up passing a very watered-down version which would only benefit people too poor to use tax services anyhow.

This story is not surprising for those of who have followed U.S. politics over the last four decades, but it does raise the free trade question. Why were our elites silent on this issue? Measures like ReadyReturn could help a huge swath of the population while only hurting a relatively small industry that provides no inherent benefit to society. Where were the denunciations of politicians who would sacrifice the greater good for this special interest?

It seems that sort of denunciation is only there for opponents of recent trade pacts. If we look for the differences between what is involved, the class aspect is front and center. The winners from our trade deals were overwhelmingly those in the top 10 percent of the income distribution. It’s good for doctors, lawyers, professors, and other workers who have college and advanced degrees to pay less for cars and clothes. The losers were directly the people who make these things and indirectly all the workers in the service sector who have to compete with workers displaced from manufacturing.

In short, from the standpoint of the top ten percent, the trade deals of the last three decades really were no-brainers.  That is why Thomas Friedman can proudly boast that when he sees the words “free trade,” he doesn’t have to read any further. He knows that he is looking at a pact that will benefit him and his friends. The opponents are to be treated with contempt or simply ignored.

That’s not a pretty story about the state of policy and academic debate in the United States, but it is important that we recognize reality. The class bias in these debates are immense. If we ever hope to counteract them, acknowledging them is the first step.

[1] This can be found in the National Income and Product Accounts, Table 2.4.5U, Line 297. (I used the 2019 number since 2020 is likely atypical due to the pandemic.)