In the AFR of 14 November there was an excerpt from the editorial in The
Wall Street Journal of November 11 stating that as a result of the steel
tariffs domestic steel prices hiked by 30 per cent. The International Trade
Commission found that in their first year the levies inflicted a $US680
million hit on the US economy. The editorial continues:

“A study done earlier this year for the Consuming Industries Trade Action
Coalition went further. It found that the higher steel prices cost 200,000
American jobs and $US4 billion in lost wages from February to November
2002.”

“Those 200,000 jobs were more than the total number of people employed by
the steel industry itself. That’s one reason more than 200 companies and
organisations representing steel-consuming and related industries sent [US
President George] Bush a letter last month begging for relief.”

By any sensible measure it seems that Bush has shot himself in the foot big
time. Why did he do it?

My best guess was that he was trying to prove his credibility on trade
matters to Congress. Hence the steel decision and the hike in farm subsidies
demonstrated his ostensible commitment of the national interest. The reward
was the Trade Promotion Authority (TPA). The TPA, granted by Congress to the
President, allows the President to negotiate trade agreements without the
formal involvement of Congress until the final approval stage.

What will Bush do now? Who knows, I don’t!

I’ve had one or two guest posts in the past, and I’ve decided to make this a little more frequent if I can. I’m taking this slowly as, in keeping with my conservative standpoint, I don’t want to make radical changes to something that is, I think, working well. For the moment, I’ll aim at putting in one guest post a week, if I get an an adequate supply.Mainly I want to give regular commenters the chance to put together something a bit longer from time to time.

I find comments hard to read when they get past about 150 words, and I’ll be looking for guest posts in the range 200-600. I’ll be posting one by Brian Bahnisch fairly soon.

For the moment, I’m not going to run posts that are clearly inconsistent with the blog’s social democratic perspective, but I’m not going to impose any sort of narrow party line. So if you’ve got something to say that would burst the seams of my comment box, now’s your chance.

Thinking about the chronic mess in the Middle East, it struck me that, for the last decade or so, no-one has known what to do about Iraq, but lots of people have been determined to do something.

On the other hand, everyone knows what needs to be done about Israel-Palestine, but no-one who matters has been prepared to do it.

The answer to the Israel-Palestine is simple and well-known and has been proposed many times over from the Clinton plan to the more recent Geneva Accord, which varies only marginally from Clinton. The elements are

• Two states with the 1967 borders, allowing modest adjustments but no net transfer
• Sharing of Jerusalem as capital of both
• Compensation of refugees from pre-1967, but no right of return

. The problem is that Sharon and Arafat are beholden both to the groups within their communities who would lose out (the Israeli settlers and the Palestinian refugees) and to outside ideologues with maximalist demands (Islamic rejectionists and American neocons like Daniel Pipes). This seems unlikely to change until the West presents them both with an offer they can’t refuse: either accept the Clinton plan (under a new name natch) in full and without negotiation, or face a withdrawal of all dealings with whichever side refuses it. And of course, that won’t happen as long as Bush is in office.

On Iraq, until the invasion of Kuwait, pretty much everyone in the West was happy to deal with Saddam as both a wealthy customer and the enemy of the Iranian mullahs. And there was fairly general agreement about throwing him out of Kuwait by force if necessary. From then until 2003, opinion has been divided into three camps regarding Saddam: forgive and forget, sanctions and containment, and war. Behind that was a debate about what should be done after a war, which is, of course, the relevant issue now. There are all sorts of options, none of them appealing from “cut and run” to “stay the course, for decades if need be”.

A secondary but still important issue raised by Peter Saunders in his CIS paper is that of the lifetime impacts of redistribution. Given that the same person may be poor in one period, and rich in another, is anything gained if we tax the rich and give to the poor?

To think sensibly about this question, we need to distinguish a number of different processes that may be at work in changing people’s relative income positions over time.

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Update In view of continuing interest in this topic, I’ve put it back up to the top of the page. New commenters include PM Lawrence and John Craig. Now read on …

My column in today’s Fin (subscription required) is an expansion of points I’ve made previously on this blog. After defending the bicameral system, I go on to the polticisation of the GGs office and advocate direct election (following Ken Parish and David Solomon). My final para

Of course, an elected President would be more likely than an appointee to come into conflict with the Prime Minister and therefore with the majority in the House of Representatives. To analysts fixated on the idea that Westminster is the model of democracy, this seems like a catastrophic outcome. The Australian public knows better and has voted for checks on the autocratic power of Prime Ministers whenever it has had the chance.

As a result of this piece I received a paper by Clerk of the Senate, Harry Evans which, with his permission I’m making available here (word file). The key quote on Westminster

The Westminster system as described in the current paradigm is a relatively recent development. Originally, the system was described (classically, by Walter Bagehot) as the electors choosing a parliament, the parliament choosing a government, and the parliament holding the government responsible, if necessary by ejecting it from office between elections. Similarly, the mandate theory, that governments have a mandate to govern by legislating as they wish after an election, is a recent rationalisation of this relatively recent development of so-called Westminster government. In sum, the Westminster/mandate paradigm is a rationalisation of what may reasonably be regarded as a degeneration of a system.

Certainly Australia does not have, and was not intended by its founders to have, a Westminster/mandate system. In so far as it was known to the framers of the Constitution, as an emerging phenomenon, they rejected it

As is apparent from the names of our houses of Parliament, the framers of the Australian constitution preferred the American model of democracy to the Westminster system, still theoretically based on a mixture of democracy, aristocracy and monarchy.

It’s important to note that the mandate doctrine does have a role to play in Britain which still has an unelected Upper House. I had a bit more to say about mandate theory here.

I’m responding (as usual with a long delay) to a post by Chrish Bertram over at Crooked Timber on the Baumol effect and also to discussions more recently on this blog about public spending on health and education. The reference is to a paper from the 1960s: Baumol, W. (1967), ‘Macroeconomics of unbalanced growth: the anatomy of the urban crisis’, American Economic Review 57(3), 415–26.

To simplify drastically, the Baumol effect arises when productivity growth is more rapid in the goods-producing sector than in the service sector, and particularly in the provision of ‘human services’, including health, education, culture and recreational services (including the subject of Chris’ post, restauarants). Since labour and capital are mobile between sectors in the long run, wages grow at much the same rate in both sectors, so the price of services has to rise relative to the price of goods.

In addition, we need to assume that, for broadly defined categories of goods or services, demand is inelastic. That means that, when the price goes up, we consume less, but not so much less that our total expenditure falls. (This won’t be true in cases where goods with declining prices, such as vacuum-packed cassoulets in Chris’ example, are close substitutes for services with rising prices).

Given all this, we can expect to see an increasing share of income being spent on services like health and education, even though the real supply of these services is increasing only modestly (in the extreme case of zero productivity growth in services, supply will actually decline). Conversely, we will consume substantially increased quantities of manufactures even as employment in the manufacturing sector declines.

Since productivity is rising in at least part of the economy, we expect incomes to rise as well. But it’s useful to observe that the relative price effects would arise even if there were no income growth at all.

Once we understand the role of relative prices, it’s easy to understand things that puzzle a lot of quite smart people. For example, in the last few years we’ve seen a book called Myths of Rich and Poor by Cox and Alm asserting that even the poor are much better off than they used to be, and another called The Two-Income Trap , by Warren and Tyagi asserting that even the middle classes are finding it hard to pay for the bare necessities. These books are reminiscent of the story of three visually challenged persons examining an elephant.

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Peter Saunders has challenged me to provide a more detailed response to his paper ‘Do we still need the welfare state?’ The full paper is here (PDF). The core of the argument is summarised reasonably well by this para from his comment.

My argument is essentially about ‘churning’ (i.e. the fact that most of us pay in taxes for most of what we get back in welfare payments and services), not poverty. I explicitly recognise that some provision still needs to be made for those who cannot look after themselves (I estimate this at no more than 5% of the working-age population – back in the sixties it was only 3% and we are a lot wealthier now than we were then, so it really shouldn’t be much more than 5%). In my AIFS paper in February this year, for example, I note: “There will always be some people who for one reason or another are incapable of supporting themselves on a long-term basis. But their numbers are not so large as to require a welfare system on anything like the current scale to support them.”
My key point is that, unlike 100 years ago when the *mass* of the population could not earn enough to provide its own basic necessities (which is why a *mass* welfare system evolved to fill the gap), today this is patently no longer the case. …The image that most of us have of the welfare state is of a system that takes from those who can afford to pay and reallocates to those who are poor. The reality, however, is that as welfare spending has grown, so it has had to be funded increasingly by taking money from all sections of society, not just the wealthy or high income earners. This means many people now pay with one hand and receive the money back with the other, and that most beneficiaries end up paying for most or all of what they receive. Indeed, the main reason many welfare recipients appear to need government assistance is that the government has taken so much of their income away in taxation, thereby pushing them into dependency.

The central problem with this argument is that Saunders confuses arguments about transfer payments with arguments about publicly provided services, lumping both together under the term ‘welfare’ and assuming that the purpose of these payments is to alleviate poverty.

As far as transfer payments (age and other pensions) are concerned, I agree with Saunders’ basic point that we should not tax ourselves heavily to fund universal benefits, effectively taking money out of one pocket and putting it back into the other. But of course, we don’t. As far as I’m aware, there are no cash welfare payments in Australia that are not subject to means tests, usually tight ones. Saunders may perhaps favour even tighter means tests, but this gets us straight into a huge and messy debate about effective marginal tax rates.

So even though the majority of Saunders’ discussion is about poverty-alleviation and cash transfers, the real issue, as far as Australia is concerned, is whether governments should reduce spending on services like health and education. There are strong arguments for public funding of these services which have little to do with income redistribution. Saunders concedes the crucial point early on his paper. While he’s opposed to governments actually providing health and education (a ‘socialised’ mode of consumption) and welcomes shifts towards funding of private schools and hospitals ‘a privatised mode of consumption’, he concedes that this does not imply big reductions in spending:

The overall level of government social expenditure might not fall much as a result of this transition, but what does change very visibly is the form in which services are produced and consumed. (emphasis in original)

If, with Saunders, we rule out substantial cuts in expenditure on health and education and we are already imposing tight means tests on cash payments, the only options remaining are to reduce the value of pensions and benefits and to tighten eligibility. These have been the approaches adopted in the US, and they have contributed to the outcomes noted in the previous post.

A number of readers have asked about Peter Saunders (the CIS one) and his claim that, with rising incomes, we no longer need the welfare state.* Although his argument raises a number of issues, the easiest response is to look at Saunders’ preferred model, the United States, and see what rising incomes have done to reduce poverty in the last 30 years or so. Here’s the data from te US Census Bureau
The measure used is an absolute one, calculated to equal a poverty-line budget in the 1960s. Price changes since then have had mixed effects, but the increased relative price of health and housing means that, overall, the standard of living associated with the poverty line income has probably gone down, not up.
You can read the whole Census Bureau report on poverty here (PDF file)

* In the comments thread, Peter Saunders takes exception to this characterization of his views and says his objection is to the *mass* welfare state. I don’t think this distinction is relevant to the point made in the post above. However, it is one of the more general issues, I mention, and hope to tackle later. Peter’s papers are available from the CIS website.

As expected, the World Trade Organisation has ruled that Bush’s tariffs on imported steel violate the WTO rules, and that countries affected can impose retaliatory tariffs.

It’s possible that the Administration will back down, though I can’t see an easy way to do so and save face. And it seems unlikely that the EU, which has already had lots of fun publicising the items on its list, targeted at swing states for 2004 (Harley-Davidsons, Florida orange juice) will refrain from exercising its legal rights. Once that happens, the possibility of a face-saving climbdown will be gone for good, and most of the Republican base will be pushing for another round of (illegal in WTO terms) retaliation. This would undermine the WTO, perhaps fatally.

As I’ve previously mentioned, the WTO made lots of enemies by overreaching itself in the 1990s, on the assumption that big-country governments would always back it up in the end. The wisdom of that assumption is now being tested.

Christopher Hitchens has a piece in Slate, deriding accounts of a last-minute peace offer from the Iraqis. I don’t think there’s much to the story, but I was struck by this paragraph, which gives an indication of the kind of parallel universe still inhabited by many hawks.

The Iraqi side openly conceded that U.N. inspections as then being conducted were a farce and a sham. Hassan al-Obeidi, chief of foreign operations of the Iraqi intelligence service, is at one point reported to have offered to allow “2,000 FBI agents” to enter Iraq and look at anything they wanted. He had clearly got bored with the easy and transparent routine of thwarting Hans Blix.

Given that there were no weapons, stopping Blix from finding any was indeed easy and transparent’.

Read as a whole, the piece seems to show Hitchens morphing from his original position (war for human rights) to one of generic hawkishness.