The Case for Economic Openness in the Time of Coronavirus

The Case for Economic Openness in the Time of Coronavirus

After decades of increased income inequality and slow or stagnant wage growth, many Americans have concluded that the economy no longer works for them.¹Michael T. Owyang and Hannah G. Shell, “Measuring Trends in Income Inequality,” Federal Reserve Bank of St. Louis, March 30, 2016, https://www. stlouisfed.org/publications/regional-economist/april-2016/measuring-trends- in-income-inequality; Jay Shambaugh, Ryan Nunn, Patrick Liu, and Greg Nantz, “Thirteen FactsAbout Wage Growth,” Brookings, September 25, 2017, https:// www.brookings.edu/research/thirteen-facts-about-wage-growth/. Sadly, these views are well-supported by economic statistics that show a divergence between growth in national income – which remains quite strong – and growth in the income of a typical household – which is far flatter.²Federal Reserve Economic Data, Accessed June 15, 2020, https://fred. stlouisfed.org/graph/fredgraph.png?g=rcLN. These trends have only exasperated other types of inequality among groups, including the racial disparities that drive recent protests.

The coronavirus crisis has placed inequality in a particularly harsh light, as the poor and vulnerable have been far more likely to suffer illness and death, and far more likely to face job loss and economic adversity.³Max Fisher and Emma Bubola, “As Coronavirus Deepens Inequality, Inequality Worsens Its Spread,” New York Times, March 16, 2020, https://www.nytimes. com/2020/03/15/world/europe/coronavirus-inequality.html; Kim Parker, Juliana Menasce Horowitz, and Anna Brown, “About Half of Lower-Income Americans Report Household Job or Wage Loss Due to COVID-19,” Pew Research Center, April 21, 2020, https://www.pewsocialtrends.org/2020/04/21/about-half-of-lower-income-americans-report-household-job-or-wage-loss-due- to-covid-19/. And, while the early economic policy responses of both the Federal Reserve and Congress have been laudable, policymakers will need to be equally bold in the months ahead to avoid a long period of slow economic growth or stagnation.⁴Jeffrey Cheng, Dave Skidmore, and David Wessel, “What’s the Fed doing in response to the COVID-1 crisis? What more could it do?”, Brookings, June 12, 2020, https://www.brookings.edu/research/fed-response-to-covid19/; Sharon Parrott, Chad Stone, Chye-Ching Huang, Michael Leachman, Peggy Bailey, Aviva Aron-Dine, Stacy Dean, and Ladonna Pavetti, “CARES Act Includes Essential Measures to Respond to Public Health, Economic Crises, But More Will Be Needed,” Center on Budget and Policy Priorities, March 27, 2020, https://www. cbpp.org/research/economy/cares-act-includes-essential-measures-to-respond- to-public-health-economic-crises.

Unfortunately, the present crisis has also made isolationist economic policies look more attractive than they truly are.⁵Kimberly Clausing, “‘America First’ in the time of COVID-19,” The Hill, March 14, 2020, https://thehill.com/opinion/national-security/487571-america-first-in-the- time-of-covid-19. Barriers to trade and immigration will only make a bad situation worse; there are far more effective ways to generate broad prosperity and inclusive economic growth.

Consider first trade barriers. It is undeniably true that the swift expansion of trade with poorer countries in recent decades generated important sources of disruption for many U.S. workers.⁶“The China Trade Shock,” Accessed June 15, 2020, http://chinashock.info/. Still, many other factors also contributed to such disruption: rapid technological progress that shifted labor demand away from those whose labor was most easily replaced by computerization or automation, a rise in the market power of large companies in many sectors of our economy, a decline in private-sector unionization, changes in norms, and changes in economic policy that failed to counter, and at times exasperated, other sources of economic inequality.⁷Steven Brown and Pamela J. Loprest, “How is technological advancement changing the labor market?”, Urban Institute, September 28, 2018, https://www. urban.org/urban-wire/how-technological-advancement-changing-labor-market; Jonathan B. Baker, “Market power in the U.S. economy today,” Washington Center for Equitable Growth, March 20, 2017, https://equitablegrowth.org/market- power-in-the-u-s-economy-today/; “Union Members Summary,” U.S. Bureau of Labor Statistics, January 22, 2020, https://www.bls.gov/news.release/union2.nr0.htm#:~:text=The%20number%20of%20wage%20and,were%2017.7%20 million%20union%20workers; Dean Baker, Josh Bivens, and Jessica Schieder, “Reining in CEO compensation and curbing the rise of inequality,” Economic Policy Institute, June 4, 2019, https://www.epi.org/publication/reining-in-ceo- compensation-and-curbing-the-rise-of-inequality/; Kimberly Clausing, “Tax Policy in the New Gilded Age,” Milken Institute Review, April 27, 2018, https://www. milkenreview.org/articles/tax-policy-in-the-new-gilded-age.

Since trade is part of the source of worker disruption, that makes trade barriers a tempting solution. Yet most of the time, trade barriers hurt the very people they purport to help. First, tariffs – or taxes on imports – are best understood as a regressive consumption tax.⁸Jason Furman, Katheryn Russ, and Jay Shambaugh, “US tariffs are an arbitrary and regressive tax,” VoxEU, January 12, 2017, https://voxeu.org/article/us-tariffs- are-arbitrary-and-regressive-tax. Since the poor consume a higher fraction of their income and buy more imported products as a share of their total consumption, they also pay a higher share of their income in tariff costs. The research shows tariffs harming consumers time and again.⁹Mary Amiti, Stephen J. Redding, and David E. Weinstein, “New China Tariffs Increase Costs to U.S. Households,” Federal Reserve Bank of New York, May 23, 2019, https://libertystreeteconomics.newyorkfed.org/2019/05/new- china-tariffs-increase-costs-to-us-households.html?mod=article_inline; Jeanna Smialek and Ana Swanson, “American Consumers, Not China, Are Paying for Trump’s Tariffs,” New York Times, January 6, 2020, https://www.nytimes. com/2020/01/06/business/economy/trade-war-tariffs.html. Second, as the last three years have made perfectly clear, our trading partners do not sit on their hands when we raise trade barriers on their exports.¹⁰Chad P. Brown and Melina Kolb, “Trump’s Trade War Timeline: An Up-to-Date Guide,” Peterson institute for International Economics, March 13, 2020, https://www.piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china- date-guide They respond with tariffs of their own, and that hurts the many American workers whose jobs depend on exports, or access to imports.¹¹Sunny Glottmann, “Trump’s Costly Trade Wars,” Third Way, February 6, 2020, https://www.thirdway.org/memo/trumps-costly-trade-wars; Ben Casselman, Niraj Chokshi, and Jim Tankersley, “The Trade War, Paused for Now, is Still Wreaking Damage,” New York Times, January 22, 2020, https://www.nytimes.com/2020/01/22/business/economy/trade-economy.html.

Third, tariffs harm our ability to work harmoniously with other countries to solve truly global problems. The coronavirus crisis has made the benefits of international cooperation particularly salient. Still, there are also other pressing international problems – including climate change, tax competition, and nuclear proliferation – that require serious and sustained cooperation among nations. Trade wars make such cooperation far more difficult.

The novel coronavirus has focused attention on the need to ensure that we have adequate domestic stockpiles of essential drugs and medical equipment, but the crisis does not eliminate the substantial benefits from trade.¹²Kimberly A. Clausing, “Global medical trade in the time of the coronavirus pandemic,” Washington Center for Equitable Growth, May 6, 2020, https:// equitablegrowth.org/global-medical-trade-in-the-time-of-the-coronavirus- pandemic/. On the contrary, the crisis has shown the indispensable nature of international exchange, as scientists work in globally connected groups to share insights on fighting the virus and developing a vaccine. The world is a healthier place when talented scientists throughout the world share their knowledge through collaboration and trade. In contrast, trade barriers make a bad situation worse.¹³Chad P. Brown, “Trump’s trade policy is hampering the US fight against COVID-19,” Peterson Institute for International Economics, March 13, 2020, https://www.piie.com/blogs/trade-and-investment-policy-watch/trumps-trade- policy-hampering-us-fight-against-covid-19.

Immigration barriers are an even more foolish response to our economic challenges. Throughout American history, our large immigrant populations have been a source of economic strength and dynamism.¹⁴Economic and Fiscal Impact of Immigration, (Washington, DC: National Academies Press, 2017), https://www.nationalacademies.org/our-work/ economic-and-fiscal-impact-of-immigration. Immigrants bring much-needed labor market skills to our workforce, and they also create jobs, since immigrants are more entrepreneurial than their native-born counterparts. Immigrants and their children are responsible for founding over 40 percent of Fortune 500 companies, and immigrants were involved in the founding of half of our billion-dollar start-ups.¹⁵Ian Hathaway, “Almost half of Fortune 500 companies were founded by American immigrants or their children,” Brookings, December 4, 2017, https:// www.brookings.edu/blog/the-avenue/2017/12/04/almost-half-of-fortune- 500-companies-were-founded-by-american-immigrants-or-their-children/; Stuart Anderson, “Immigrants and Billion Dollar Startups,” National Foundation for American Policy, March 2016, https://www.immigrationresearch.org/report/ other/immigrants-and-billion-dollar-startups. Because immigrants create both supply and demand for labor, there is little evidence that they have harmful effects on native-workers’ employment prospects.¹⁶Economic and Fiscal Impact of Immigration, 264-278.

Immigrants also fuel innovation and knowledge creation, both essential as we seek treatments and vaccines from the novel coronavirus.¹⁷Ryan Nunn, Jimmy O’Donnell, and Jay Shambaugh, “A Dozen Facts about Immigration,” The Hamilton Project, October 9, 2018, https://www. hamiltonproject.org/papers/a_dozen_facts_about_immigration. Americans have won the majority of Nobel prizes in scientific fields in recent decades, and a majority of these U.S. Nobel prizes were won by foreign-born researchers.¹⁸Sari Pekkala Kerr, William Kerr, Çağlar Özden, and Christopher Parsons, “Global Talent Flows,” Journal of Economic Perspectives 30 no. 4 (Fall 2016) 83-106, https://www.aeaweb.org/articles?id=10.1257/jep.30.4.83. The United States is tremendously lucky to attract the world’s talent to our universities and too often become the new home of many international students who decide to stay and become American citizens. We should do everything we can to retain such advantages.

Immigrants also relieve U.S. demographic pressures.¹⁹Kenneth Megan and Theresa Cardinal Brown, “America’s Demographic Challenge: Understanding the Role of Immigration,” Bipartisan Policy Center, August 2017, https://bipartisanpolicy.org/wp-content/uploads/2019/03/BPC- Immigration-Americas-Demographic-Challenge.pdf. The retiring of the baby-boom generation has generated heavy burdens on Social Security and Medicare programs, but the taxpayers’ fiscal burdens would weigh far more heavily without the additional population growth that has resulted from recent generations of immigrants.

Unfortunately, in recent years, the U.S. policy stance has become far less welcoming to immigrants, and our policy changes have ranged from merely wrongheaded to deeply immoral (e.g., the child separation policy).²⁰Sarah Pierce, “Immigration-Related Policy Changes in the First Two Years of the Trump Administration,” Migration Policy Institute, May 2019, https://www. migrationpolicy.org/research/immigration-policy-changes-two-years-trump- administration. Such policy steps are out of step with the best attributes of our American experience, and they also defy economic logic. These policy choices also speak to the fact that scapegoating is a more attractive policy strategy when economic growth is not widely shared. Still, the American public is less isolationist than our present policy stance might reflect. In recent years, polling data have revealed substantial majorities of people in favor of both trade and immigration.²¹“Climate Change and Russia Are Partisan Flashpoints in Public’s Views of Global Threats,” Pew Research Center, July 30, 2019, https://www.people-press. org/2019/07/30/climate-change-and-russia-are-partisan-flashpoints-in-publics- views-of-global-threats/; Ana Gonzalez-Barrera and Phillip Connor, “Around the World, More Say Immigrants Are a Strength Than a Burden,” Pew Research Center, https://www.pewresearch.org/global/2019/03/14/around-the-world-more- say-immigrants-are-a-strength-than-a-burden/.

If barriers and walls are not the answer, what is? Luckily, there are many better policy solutions that go directly to the problems faced by American workers. If these strategies are pursued aggressively and wholeheartedly, we can effectively respond to those who have been left behind without sacrificing the many benefits of an open economy.

The first task is to ensure economic recovery from the coronavirus. The best public investments are in taming the virus itself, as recovery won’t occur if people are fearful of going about their normal economic lives. This means investing in testing, tracing, treatment, and vaccination. But even if the virus disappeared tomorrow (which it won’t), we also face the prospect of a deep recession if we don’t respond with continued counter-cyclical policies. For instance, state and local governments have taken a big hit to their tax revenues, and since subnational governments are far more constrained in their borrowing, revenue shortfalls will translate into job and public service cuts, generating a large contractionary force for the whole economy.²²Elizabeth McNichol, Michael Leachman, and Joshuah Marshall, “States Need Significantly More Fiscal Relief to Slow the Emerging Deep Recession,” Center on Budget and Policy Priorities, April 14, 2020, https://www.cbpp.org/research/ state-budget-and-tax/states-need-significantly-more-fiscal-relief-to-slow-the- emerging-deep. In recent months, unemployment has soared to historic levels, higher than at any time since the Great Depression, and job recovery in some areas, such as travel and restaurants, is likely to be particularly slow. Continued federal spending that includes help for state governments, and continued provision of liquidity by the Federal Reserve, will be essential.

Second, we need a tax system that is suited for our present economic challenges.²³Kimberly A. Clausing, “Fixing Five Flaws of the Tax Cuts and Jobs Act,” SSRN, February 3, 2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=3397387. This means making sure that economic growth translates into prosperity for all, and increasing the reward to work for poorer workers. This can be done by expanding the earned income tax credit, both in general and especially for childless workers; this expansion can be coupled with a higher (and indexed for inflation) minimum wage, to make sure that workers reap the benefits. The earned income tax credit is a powerful tool for making sure that our dynamic economy rewards work and creates a rising tide that lifts all boats.

Once the current crisis is over, we also need to collect more tax revenue in order to make wise investments in education, health- care, and infrastructure, and to fund our commitments to the elderly. This can be done, at reasonable tax rates, by a combination of modest increases in rates and an expansion of the tax base to better tax capital income, monopoly rents, inheritances, and untaxed income. Also, for companies, we can better level the playing field between foreign and domestic corporate income, while raising the corporate tax rate.²⁴Kimberly A. Clausing, “Options for International Tax Policy After the TCJA,” Center for American Progress, January 30, 2020, https://www.americanprogress. org/issues/economy/reports/2020/01/30/479956/options-international-tax- policy-tcja/; Kimberly A. Clausing, “Taxing Multinational Companies in the 21st Century,” The Hamilton Project, January 28, 2020, https://www.hamiltonproject. org/papers/taxing_multinational_companies_in_the_21st_century. Further, a carbon tax is long overdue; it will help seriously respond to climate change, allowing the United States the authority to work with other countries to address this important global problem.

Finally, we also need to help workers and communities that are left behind, whether due to technological progress, domestic competition, or competition from abroad.²⁵Kimberly A. Clausing, “International trade policy that works for U.S. workers,” Washington Center for Equitable Growth, February 18, 2020, https:// equitablegrowth.org/international-trade-policy-that-works-for-u-s-workers/. Wage insurance can help workers directly, but communities also benefit from investments in infrastructure and education.

An open economy is in the interest of U.S. workers, who benefit from the free flow of ideas, goods, services, students, entrepreneurs, and even policy solutions.²⁶Kimberly A. Clausing, Open The Progressive Case for Free Trade, Immigration, and Global Capital, (Harvard University Press, 2019), https://www.hup.harvard. edu/catalog.php?isbn=9780674919334. To retain the gains from international trade, immigration, and global capital flows, we need to modernize economic policy to suit the current era. This means serious steps to counter economic inequality, to help those left behind, and to respond aggressively to the current crisis.

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