Investor's Business Daily, July 23rd, 2007
Free Trade: Several recent surveys show that globalization is widely viewed as unfair to the middle class and the poor, and that higher taxes on the rich are needed to even things out. It's a bad idea, if ever there was one.
A Financial Times-Harris poll of more than a thousand people found that those in the U.S., Britain and France were three times more likely to think globalization hurts their country than helps it.
And "in response to fears of globalization and rising inequality," wrote Financial Times reporter Chris Giles, "the public in all the rich countries surveyed ... want their governments to increase taxation on those with the highest incomes."
That is, people want to tax the rich -- an age-old urge -- believing it will somehow help feed the poor. Unfortunately for those who believe this, it doesn't work that way.
"Taxing the rich" might be satisfying on some level, given the general level of envy people have for those who are more successful. But carried out as a matter of national policy, such ideas will have disastrous consequences for the world economy, leading to less growth, less investment, fewer jobs and lower standards of living.
It's a well-established fact that globalization -- simply another word for free trade -- has been, overall, a major boon, raising both incomes and standards of living worldwide. And that includes rich countries as well as poor ones.
Raising taxes might make some people feel better -- after all, who doesn't want to take all those newly minted billionaires down a peg or two -- but it will do nothing .
Any nation that begins applying punitive tax rates to its rich will soon find that they are taking their money -- and the investments and jobs that go with them -- elsewhere.
Those who see the world "worse off" because of globalization must explain why, as global trade has surged over the last 30 years or so, the rate of poverty around the world has plunged.
As Surjit Bhalla, an economist affiliated with the Institute for International Economics, recently wrote: "World poverty fell from 44% of the global population in 1980 to 13% in 2000, its fastest decline in history. Global income inequality has dropped over this period and is at its lowest level since 1910."
But what about workers in rich countries like the U.S. who worry about inequality? Will higher taxes correct their so-called inequities? Not at all. U.S. economic inequality has virtually nothing to do with globalization or free trade, per se. It has everything to do with education and skills.
A recent study for the National Bureau of Economic Research found that those with a bachelor's degree can expect to earn $51,000 or so a year. Those with just a high school diploma earn $28,000.
So the "income gap" is really an education and skills gap. And it's quantifiable: $23,000 a year, or nearly $1 million over a career spanning 40 years.
Taking more money from people who did the right thing -- went to school or pursued more high-level training -- isn't the way to run an economy. That is, unless you want to run it into the ground.
Even so, globalization is a boon to all Americans. From 1980 to 2006, our total trade in goods and services soared 543%, from a mere $575 billion, or 20.6% of GDP, to $3.69 trillion, or 28% of GDP.
Has that huge swing decimated our economy? Hardly. We've created 46 million new jobs over that time. And personal disposable income after inflation has surged 64% to $27,770 from $16,938.
In a study released just last month, economists Matthew Slaughter, Grant Aldonas and Robert Lawrence found that American families gain as much as $15,000 a year due to globalization -- that is, freer trade. The benefits are not illusory. They're real.
By the way, countries that raise taxes to punish the rich end up punishing only themselves. At least that's the growing economic consensus. The largest recent study, by economists at the 26-nation Organization of Economic Cooperation and Development, found "tax rates negatively correlated with economic growth." A large number of earlier studies bolster their findings.
In other words, higher taxes mean lower growth. And vice versa. Higher taxes aren't a solution to inequality. Nor is protectionism.
Globalization isn't without its problems, of course, but overall it has made all of us a lot better off. We should be talking about how to improve it -- not how to kill it off by erecting trade barriers and raising taxes.
