If Canada is divisible, then Quebec is divisible. If Quebec is divisible, then Montreal is divisible.

Gabriel Mihalache tries to pull the old reducto ad absurdam on my contention that nations are places, and the implication that quality-of-place considerations might lead to deviations from the traditional case for free trade. He writes:

Why not ask… if localities can benefit from these deals, this industrial policy—to quote another skeptic—then why not apply the same idea to streets, town squares, and beyond? — Maybe we should have a sort of street prefect, with his own budget, ready to subsidize business start-ups on his street?

Why allow for free movement between 1st Avenue and 5th Avenue? Maybe 1st Avenue could benefit from some regulation or from offering subsidies? Why not?

To which I answer enthusiastically, "why not indeed!" Shopping malls are places too. Shopping mall developers often want big-name retailers as "anchor stores", so they offer national chains great deals on rent, and sometimes sweeten the deal with cash. This might seem economically foolish, at first glance. But the subsidy turns out to be small compared with the increased certainty that the mall will attract customers, and the higher rents boutiques will pay to sit between popular behemoths.

Malls are hardly a unique example. Most commercial real-estate owners will offer discounts to tenants they consider particularly "desirable", whose presence will in some hard-to-pin way increases the value of the property they have on offer.

People who live who live on nice streets often spend a great deal of money to maintain the exteriors of their homes, the quality of their lawns and gardens, etc. Part of this one can chalk-up to "consumption" — people take pleasure in having a nice spaces. But a lot of this represents a kind of informally coordinated public investment, enforced by social norms. The value of properties is contingent in part on the niceness of the street, and everyone is expected to do their part. Some neighborhoods are developed as mini nanny states, with coercive regulations one must adhere to as a homeowner in order to ensure that residents don't shirk in maintaining (often uninspiring) "standards". Neighborhoods organized as condominiums have the power to tax and spend to maintain and enhance the quality of space. Lots of people are pleased to submit to all this. (I don't necessarily endorse these neighborhoods. The uptight, snooty ones make me go "ew". But hey, it's the free market in action!)


Maybe, but exactly like free trade, these deals have winners and losers (who, just as with free trade, won't get compensated). Also, there's the issue of the “relevant moral community”. (Do poor Chinese children enter into your welfare judgments?… and the like.)

Basically, this boils down to choosing between two patterns of winners and losers, which is a political choice. You can show, maybe, that with an utilitarian “social welfare” function, the “development deal” is preferable. But that's a big “maybe”. And it's still politics, so it's not a matter of knowing something that the economists don't.

I won't argue much with this, except to note that, just as with free trade, enhancements of place may create winners and losers, but large overall gains. Many shopping malls could not survive without subsidized anchors. Boutique owners might be unhappy to subsidize the rent of retailers with much deeper pockets than themselves, and some potential renters might be so pissed off they refuse to rent. Still, it's hard to argue that there isn't a large overall gain from the subsidy.

A condominium association might decide that common spaces need to be repainted annually, and fees will be increased to cover the expense. Some homeowners undoubtedly will consider the fresher halls to be worth less than the money they pay out. Given heterogenous and uncertain utility functions, one objector's sheer misery might be enough to outweigh any gains to other tenants. But, under ordinary assumptions, if the vast majority enthusiastically support the change, we usually presume overall gains. The case for overall gains is at least as clear as in the argument for free trade.

Of course, if leadership of the condominium association has been hijacked by unrepresentative busy-bodies, or by a board member whose kid brother is a painter, large overall losses might result. But the possibility of agency problems oughtn't prevent us from considering potentially welfare-enhancing subsidies. Both action and inaction are potentially flawed choices. In the real world, we do our best to control agency costs, but we still make decisions.

I do want to emphasize that I am playing with ideas here, and not quite endorsing the idea of legitimizing state subsidy as a normal part of international trade. It's a surprisingly interesting idea, and one can make the case for it in very "orthodox" terms. (If one does so, one finds that what is destructive of overall welfare is to abstain from subsidizing!) But the agency problems are, to say the least, daunting.

Regardless, people like Don Boudreaux who want to argue for traditional free trade based on the example of trade within the United States need to grapple with the historical fact of ubiquitous subsidy. And I'm not just playing when I suggest that any model of trade that looks only at gains and losses to individuals without considering quality of place is simply inadequate as a basis for policy.

Steve Randy Waldman — Friday July 20, 2007 at 10:46am permalink
Gabriel (mail) (www):
Public money vs. private money. Although in this case, it's a matter of:

1) You going to the rules (taking a job, buying into a condominium, renting in a mall);


2) The rules coming at you (the public authority deciding--oh boy!--that this and that "needs" to be done, and you have to pay).

Quality of place matters, sure. And, as long as those are private places, where you go willingly, more power to them: firms, condominiums, malls, etc.

What I don't find reasonable is to take that same mechanism and apply it to the State, where people are sort of trapped and they have to submit to the subsidy schemes.

The idea that there might be free lunches caused by collective action problems/coordination failures is sort of overplayed, IMO. What it shows is that there is a potential improvement.

As far as actually realizing that improvement... skepticism abounds for good reason.

I think you can cast Bodreaux's point in a relative light: freeER trade, like that between US states, is better than less free trade, such as that between North and South Korea. :-) And I'll leave it at that because I'm overdue with some stuff.
7.20.2007 11:10am
Lord (mail):
Private vs public is next to irrelevant. Was the rule in place before or after you joined? Were you represented? Were you overruled? If not content, there is always the prerogative to walk. Welcome to Club America, love it or leave it. Of course if you are in North Korea you might have more difficult time of leaving it.
7.20.2007 11:02pm
Gabriel (mail):
Lord, if side A and side B disagree, which one should go away? Who should abandon their homes and all that?

Do as the State/Congress/Fuhrer says or go away is bad politics.
7.21.2007 4:06am
Steve Randy Waldman (mail) (www):
Gabriel — I don't really disagree with you, but we're talking apples to oranges. Normative questions about the proper role for the state, acceptable uses of coerced taxation, etc. are beyond the scope of my argument. As an economic matter, I think there's a strong case that distorting subsidies by agents concerned with quality-of-place can lead to overall gains, in the same way that trade is said to lead to overall gains. If you want to argue (as you have, and very eloquently!) that utilitarian calculations are beside the point, because open trade with no coercively-funded subsidies is the only morally acceptable position, that's fine. We'll disagree, but in the straightforward way that people whose axioms are different do, each understanding that both parties are correct in the context of divergent logical frameworks.

The case for international trade is usually argued in utilitarian terms, though, and that's the sandbox I'm playing in. My own perspective, as I think you know, is mixed. I dislike what you think of as state coercion, and prefer to minimize it, but I justify that on utilitarian grounds rather than moral grounds, which means utilitarian arguments can override my libertarian preferences.

Lord's comment is very on-point, from my perspective, because the harms of state coercion or loss-of-liberty diminish with the degree to which submission is voluntary, an ability to walk away is a big part of that. One might argue, on utilitarian grounds, that subsidy makes more sense in intra-US trade than international trade, because the cost of moving from one state to another to avoid misguided taxes is much lower than the cost of international/intercultural/interlinguistic emigration. So local government policy within the US may be relatively voluntary, while national government policy might be more deeply coercive. I don't think I buy this argument (at least when subsidies are small relative to total taxation), but it would depend on how one guesstimates magnitudes.

Re people like Don Bordreaux, I give no quarter. He doesn't gently suggest that trade within the US is free-ish, and maybe that's a positive datapoint for free trade. He throws down the gauntlet to anyone who argues for variations on his preferred trade policy, challenging skeptics with an implication of hypocrisy if they fail to support trade-affecting intervention within the US. I think it's perfectly fair to point out that there already is such intervention, that commerce within the US may well have thrived because of rather than in spite of it, and that we skeptics are perfectly happy to support meddling by states when we think there is a good case that overall gains, and not mere rent-transfer, will result.
7.21.2007 9:15pm
Gabriel (www):
I'm back! I was busy for a while there, sorry.

I think you misunderstood me a little. I was trying to make a revealed preference argument.

There's nothing wrong with welfare-improving schemes. My point was that if things are so, then I'd like to see people expressing their preference for them by joining (renting in malls, condos, etc.). This way, I know people are better off, or they think that they are better off.

If instead you push a scheme on people... I'm not sure how I can tell if it's a success or not, ex post, everything taken into account.

That's a consequentialist concern, or at least compatible with consequentialism.

Walking away is a way to reveal the preference that I don't like your scheme and it makes me sad and unhappy. :-) But since moving is costly, it might not work that way.

Erring on the side of caution--good old consequentialist risk aversion--would suggest that if at all possible: 1) make it optional rather than mandatory; 2) make exit cheap rather than costly. (This doesn't apply, of course, to redistribution. Only to supposedly Pareto welfare-improving scheme.)
7.24.2007 7:52am
Steve Randy Waldman (mail) (www):
Ah, but in a simple model, there'd be no status-quo bias, so people who would not have joined will walk away anyway, and we have no problem.

But, we don't live in that world, and forcing people to uproot to reveal a preference makes me sad too.

Measurement of any of this stuff is a bit much to ask for. We make hypotheses about other people's welfare, utility, or whatever. We can only know our own preferences, and not even that, really. We can't measure net gains from trade either (attempts to do so are usually quite tendentious, and assume claimed real per capita GDP == welfare).

Your argument suggests that "welfare-improving schemes", when they can not be ex ante voluntary (coordination problems), are probably best local, since the costs of switching near-localities is generally much more than the costs. But that invites free-rider problems, e.g. major cities constantly complain that suburbanites enjoy amenities of the city but avoid the taxes that fund them.

Which gets to your last point. My argument was really not about Pareto-improving schemes, but those one might claim (as you did) involve "winners and losers", and perhaps overall gains. Which means coercion is unavoidably part of the picture, at least with respect to individual schemes. To rehabilitate some notion of voluntariness (which I do want to do), we need to claim that locating in a place is a voluntary choice, but some agent on behalf of the place may make that location choice contingent upon residents (or visitors) acting in ways they might not otherwise freely choose. Individuals who gain very little and bear high costs from the place-manager's schemes leave, or never come. Individuals who stay, or come, gain from some schemes and lose from others, but individually perceive net overall gains. So long as people can always leave, and there is a large diversity of places, and the costs of moving are manageable, there is no "coercion of innocents", only an implicit agreement. We've reinvented the social contract.

Of course, to the degree moves are costly, the case for voluntary contract is questionable. That holds with attachment-to-place and many other sorts of arrangements, public and private. But we needn't take voluntariness to be the sine qua non of good outcomes. Free traders certainly don't. They seek to impose their preferred policy on those who will be losers, as well as those who will be winners. There might or might not be a moral case for one kind of imposition over another, but there's no bright line on consequentialist/utilitarian grounds. I prefer voluntary arrangements, on aesthetic grounds, because I think perceived freedom is a valuable good in and of itself to most people, and, as you say, out of modesty, risk-aversion. But the most salient welfare improving scheme of this moment in the context of international trade (expropriation of citizens' import-buying power to subsidize exports via real-exchange-rate manipulation) is not at all voluntary for most people, yet seems to have improved the welfare of those subject to them considerably. (Perhaps appearances are deceiving, though. We are left with counterfactuals, and preferences unrevealed.)
7.24.2007 11:36am
Note: You don't have to register to comment! Just use the pull-down menu to comment as "Guest".

Post as: [Register] [Log In]

Remember info?