Saturday, December 6, 2008

From the Comments: Import Tariffs and Tobin Taxes

I recieved two comments from presumably different posters (tying the all time record) on why I thought Rodrik's musings (to be fair, he never actually said it should be done) about the benefits of hiking import tariffs or instituting a Tobin tax as means to get out of the slump are dumb. Here are a couple reasons that come to mind:

1. The United States economy is a sufficently large that the worldwide efficiency loss means something to the US itself.

2. 1.8 is a substantial overestimate of the fiscal multiplier. Econbrowser/OECD say 1.1 after one year, 0.2 after four, and I subjectively think even that would be generous. Getting to 2.8 (as a result of these policies) is not in the cards.

3. The United States is not going to run a budgetary surplus anytime soon. Neither are the citizenry avid savers. Thus, internally financing the budget deficit (as a consequence of the Tobin tax) forces higher interest rates and increases the cost of the fiscal stimulus.

4. Further declines in asset prices as large numbers of buyers (i.e. foreigners) are removed from the market. Existing investments might also be sold off - e.g. if your business model is based on assembly overseas and retail in the US, now your US retail operation is rather pointless.

5. US industry does not have the capacity to produce many things. When was the last time you saw a television made in the US? The development of this capacity would almost certainly last longer than the recession - and constitute a huge loss when trade was reopened.

6. Other countries would do the same, depriving the United States of export markets.

7. Financial market panic. Anyone who uses American-denominated assets as a part of an investment strategy is suddenly ashore. Dollarized foreign economies are also in big trouble. Conversely, American firms who, say, use the yen or the swiss mark to hedge are also in big trouble.

Etc, etc, etc. It's just not a good idea. See Smoot-Hawley if you're still not convinced. If you want non-economic reasons, Obama/Clinton would have a real rough time trying to conduct foreign policy, for example.

1 comment:

Anonymous said...

". . . if the alternative is significantly lower growth and higher unemployment?" - D. Rodrik

As far as I can tell you miss the final hypothetical phrase in Rodrik's remark. And nothing, as far as I can tell, that you say here addresses the possibility. His claim are that the policy prescriptions he sketches may sound heretical but that we should not care about that if the alternative to hewing the orthodox line is lower growth and higher unemployment. Minimally you should have something more than your economist's intuition that the adhering to orthodoxy will "obviously" generate better outcomes.