From: thompson@atlas.socsci.umn.edu (T. Scott Thompson)
Subject: Re: Trade War?
Reply-To: thompson@atlas.socsci.umn.edu
Organization: Economics Department, University of Minnesota
Date: Mon, 16 Nov 1992 04:15:15 GMT

nelson_p@apollo.hp.com (Peter Nelson) writes:

>In article <thompson.721676187@daphne.socsci.umn.edu> thompson@atlas.socsci.umn.edu writes:

>>First, if the goal is simply to keep these farmers in business then
>>that can be accomplished with far less disruption to world commodity
>>markets through lump-sum cash subsidies and elmination of the
>>distortionary price supports. 

>  How does a cash subsidy change the basic economics of the
>  situation? -- it still allows the farmer to undercut his
>  competitors.

On the contrary.  Under the scheme I proposed French farmers would
compete in the world marketplace for their products.  They would not
be able to receive a price substantially higher than the price
received by U.S. producers of the same good.  Their incentives to
produce would be greatly reduced.  The reason that price supports are
bad (from an efficiency perspective) is they encourage production that
is not profitable from a social accounting standpoint.  (By this I
mean that the same resources could produce goods of higher total value
if employed in a different fashion.)  A lump-sum subsidy produces no
such incentives.

>> Simply give each landholder a fixed annual sum to keep their land
>> pastoral. 

>  Except that it's farming as an activity, and not just countryside
>  they want to protect.

I agree that the lump-sum payment would tend to cause many farmers to
shut down production.  From an efficiency viewpoint that is what they
should do.  But I cannot deny that this may not be acceptable from a
cultural perspective.  That is why I introduced a second, less
efficient option:

>> Or else offer a price subsidy, but only for a limited amount of output.

>  But note that limiting output limits the need for farmers.  France is
>  losing 10's of thousands of farmers every year.  An important goal
>  for them is to keep people working _as farmers_.

I do not see that limiting output necessarily means losing farmers.
If we are going to subsidize inefficient production, then there are
plenty of ways to provide the incentives for keeping inefficiently
large numbers of farmers employed, with each one doing relatively
little useful work.  Don't you think that something akin to the U.S.
welfare system could be arranged?  After all, a price support system
is really just a form of welfare, but cleverly disguised.

Furthermore, if farmers are leaving agriculture under the current
system, then this shows that the existing price support system is not
providing the proper incentives to keep people working as farmers.
All the more reason to look for a better solution.  Price supports
promote excessive output, but they do not distort the intramarginal
decisions about things like land/labor/capital ratios to use in
production.  I am not surprised that a price subsidy on final
production fails to keep a high level of utilization of an
increasingly expensive input, namely labor.  That is what price theory
predicts.

>> The current system ("Grow as much as you can -- We guarantee a buyer
>> at an artificially high price") leads to excessive, inefficient
>> production,  
>  
>  No doubt, but as I indicated, *efficiency* is not their goal.  
>  That people in other countries may not share our preoccupation
>  with efficiency seems hard for some Americans to grasp.

Two thoughts on this:

1.  The efficiency notion that I had in mind was not one that is
country specific.  It may very well be the case that both European and
U.S.  farmers are doing as well as is possible at producing
efficiently given the price structures that they face.  However, if
they face differing price structures (ignoring for the moment
transportation costs) then the _global_ allocation of resources may
still be inefficient.  Formally, the EC program prevents competitive
markets from equalizing the marginal rate of transformation between
agricultural goods and other goods across countries.  The latter is a
necessary condition for world production to be on the production
possibilities frontier.  It does not prevent each country from
operating on its individual PPF, however.

2.  Efficiency (as I have characterized it above) is the main
theoretical argument for why there are gains from international trade.
I have trouble understanding why you are worried about trade wars if
you are not concerned about efficient international production.

>> artificially high costs for European consumers,

>  To the contrary, France is Europe's biggest food producer.  By
>  subsidizing French farmers with their taxes the French are 
>  keeping prices artficially LOW for other Europeans.   Of course
>  this may not help *other* European farmers but this is no concern
>  of the US.

Perhaps I don't know how the EC system works.  I thought that it is
roughly equivalent to the old U.S. agricultural price support system.
That is, a minimum price is maintained by having the government be the
buyer of last resort, with the excess production that is purchased by
the government stored, destroyed, given away, or dumped on the world
commodity markets.  Is France allowed to dump its excess production
in, say, Germany?  If so, then I should have said "French" instead of
"European" in my comment.  It is still the case that _some_ European
consumers are indirect victims of the policy.

>> and distortion of world markets.

>  But again, there's no such thing as a level playing field.  The
>  US has the lowest cost-of-capital in the industrialized world,
>  thanks to the Fed, and this gives US firms an advantage.  We 
>  could just as easily be accused of "distorting" markets on this
>  basis.   We also have some of the lowest energy costs.  And
>  of course we also heavily subsidize our own farmers and we export
>  more food than France by far!   Trying to make everything "fair"
>  and "equal" through government actions is a peculiar fascination
>  of modern governments but it only creates more distortions.

I largely agree with this, although I do not think that my arguments
depend on any notion of what is "fair."  I have no idea what a "level
playing field" would be, and made no mention of one in my earlier
replies to your posts.

>>None of this is "culturally necessary."  Don't you think that the
>>cultural needs of France could be met without producing more output
>>than can be consumed domestically?

>  Probably, but this is their choice.  We're not obligated to
>  buy their stuff.

The complaint about EC agricultural policy is that it makes it hard
for us to sell our "stuff", not that it forces us to buy theirs.

>   But how does it make sense to penalize US
>  consumers or even French wine makers (who are not subsidized)
>  over this?  The US is the one who is escalating this into
>  a dangerous game of economic chicken.

This is a different issue.  I agree that it is probably not wise to
risk a trade war, and that the current policy is very risky.  But I do
believe that the complaints against the EC are legitimate.  You appear
to oppose the U.S. retaliation policy in large part because you feel
that we have no basis for complaint.  That is the part that I take
issue with.

>  If we have a problem
>  with their dumping cheap oilseed on the market then we should
>  limit our response to that. 

And how are we supposed to do that?  We do not buy their cheap
oilseed.

>>Second, given today's interdependencies there is no such thing as a
>>purely domestic economic policy.  I do not agree with your implicit
>>statement that a country should be allowed to do anything it wants
>>with its tax dollars, provided it spends them domestically.

>  This is dangerous apologia for all kind of interfence by the
>  powerful into the choices of the not-so powerful.  This same
>  kind of thinking has been used to rationalize all kinds of 
>  tyranny by powerful governments into the the national life
>  of their neighbors, and their own citizens ("there is no such
>  thing as a personal choice of lifestyle by individuals").

It appears that you are taking my claim: "We have a vested interest in
what they do" and turning it into a statement like "no individual
discretion about lifestyle should be allowed."  The latter does not
follow from the former.  And you fail to address the former.  Do you
deny that U.S. farmers have a vested interest in European agricultural
policy?

>  Would you agree that, say, the Canadians should have veto power
>  over US domestic policy because their economy is so inextricably
>  linked to theirs that whatever we do affects them?

Of course not, but they certainly have every right to complain loudly
and take actions that may be detrimental to us and to international
relations as well if U.S. domestic policy affects them adversely.
Policy cooperation is clearly an even better option.

>>I bet you'd change your tune real fast if the Japanese decided that
>>(as a matter of cultural necessity of course!) they were going to pay
>>Canon $10,000 dollars for every Laser printer they could produce and
>>have the government dump the ones that Japanese businesses don't want
>>to buy (which would be most of them at that price) on the
>>international market.  HP would be rather unhappy, don't you think?

>  Except that this is irrelevant fantasy.  Japan would rapidly 
>  bankrupt themselves with a stunt like that because it would 
>  artificially lower the price of their laser printers so much
>  that their sales volume would go way up and at $10,000 a pop
>  the Japanese taxpayers would go broke trying to keep up.
>  Notice you don't see them doing this.

Bankrupt them?  The whole country?  I think not.  But you apparently
miss the point.  (Lower the support price if you have trouble thinking
about my example as originally posed.  Anything above the competitive
price will do.)  This is a hypothetical example of a country hurting
itself economically in order to support a (hypothetical) cultural
objective.  The example is exactly parallel to the EC price support
system (as I understand it).  It has negative implications for world
productive efficiency and for international competitors in other
countries.  Only this time it is U.S. printer manufacturers rather
than farmers who are disadvantaged.

>>>   The bottom line, for the reasons I mentioned in another post
>>>   is that a "level playing field" is a complete fantasy; it has
>>>   never existed and never will exist, nor is it clear it even
>>>   offers any lasting benefits.   
>>
>>The benefits from an undistorted price system are quite clear (in
>>theory at least).  One can easily make a case against the EC
>>agricultural policies on grounds of pure efficiency. 

>  This is at least the second time you've used the word "efficiency"
>  in your posting, but as I said, "efficiency" isn't the issue!

Efficiency may not be the issue in France but it is very much the
issue that makes economists support free trade and worry about
policies that artificially distort world trade markets.  The economic
argument against price supports is only superficially different from
the economic argument against protectionism.  I do not see how you can
make a logical argument against protectionism that does not also work
against EC policy.  After all, explicit protectionism can be justified
on "cultural" grounds too.  Look at Japan's policy on rice imports for
an example.

>  Ultimately economics is about human choices -- it is, or should
>  be, a behavioral science.  As such you can't expect the theoretical
>  entities you model to always be trying to maximize "efficiency" 
>  because that's not what real flesh-and-blood humans do.  

Individual efficiency and collective efficiency (what economists
sometimes call "allocative efficiency") are two different things.  My
arguments involve the latter rather than the former, although they do
rest on an assumption that individuals are at least partly
self-interested and also on an assumption that behavior is for the
most part not self-contradictory.
--
T. Scott Thompson              email:  thompson@atlas.socsci.umn.edu
Department of Economics        phone:  (612) 625-0119
University of Minnesota        fax:    (612) 624-0209