Larry Summers for Treasury?

It is rumored that Larry Summers is at the top of Obama’s list of possible appointees for Treasury. On the domestic front, I suspect he would be at least as good as the current Treasury secretary, Henry Paulson. On the international front, I am less certain.

Last spring, Summers wrote two interesting op-eds on global trade and regulation.

Here is his view on globalization:

A strategy to promote healthy globalisation

Last week, in this column, I argued that making the case that trade agreements improve economic welfare might no longer be sufficient to maintain political support for economic internationalism in the US and other countries. Instead, I suggested that opposition to trade agreements, and economic internationalism more generally, reflected a growing recognition by workers that what is good for the global economy and its business champions was not necessarily good for them, and that there were reasonable grounds for this belief.

The most important reason for doubting that an increasingly successful, integrated global economy will benefit US workers (and those in other industrial countries) is the weakening of the link between the success of a nation's workers and the success of both its trading partners and its companies. This phenomenon was first emphasised years ago by Robert Reich, the former US labour secretary. The normal argument is that a more rapidly growing global economy benefits workers and companies in an individual country by expanding the market for exports. This is a valid consideration. But it is also true that the success of other countries, and greater global integration, places more competitive pressure on an individual economy. Workers are likely disproportionately to bear the brunt of this pressure.

Part of the reason why US workers (or those in Europe and Japan) enjoy high wages is that they are more highly skilled than most workers in the developing world. Yet they also earn higher wages because they can be more productive - their effort is complemented by capital, broadly defined to include equipment, managerial expertise, corporate culture, infrastructure and the capacity for innovation. In a closed economy anything that promotes investment in productive capital necessarily raises workers' wages. In a closed economy, corporations have a huge stake in the quality of the national workforce and infrastructure.

The situation is very different in an open economy where investments in innovation, brands, a strong corporate culture or even in certain kinds of equipment can be combined with labour from anywhere in the world. Workers no longer have the same stake in productive investment by companies as it becomes easier for corporations to combine their capital with lower priced labour overseas. Companies, in turn, come to have less of a stake in the quality of the workforce and infrastructure in their home country when they can produce anywhere. Moreover businesses can use the threat of relocating as a lever to extract concessions regarding tax policy, regulations and specific subsidies. Inevitably the cost of these concessions is borne by labour.

The public policy response of withdrawing from the global economy, or reducing the pace of integration, is ultimately untenable. It would generate resentment abroad on a dangerous scale, hurt the economy as other countries retaliated, and make us less competitive as companies in rival countries continue to integrate their production lines with developing countries. As Bill Clinton said in his first major international economic speech as president, "the United States must compete not retreat". The domestic component of a strategy to promote healthy globalisation must rely on strengthening efforts to reduce inequality and insecurity. The international component must focus on the interests of working people in all countries, in addition to the current emphasis on the priorities of global -corporations.

First, the US should take the lead in promoting global co-operation in the international tax arena. . . .

Second, an increased focus of international economic diplomacy should be to prevent harmful regulatory competition. . . . There has not been enough serious consideration of the alternative - global co-operation to raise standards. While labour standards arguments have at times been invoked as a cover for protectionism, and this must be avoided, it is entirely appropriate that US policymakers seek to ensure that greater global integration does not become an excuse for eroding labour rights.

Summers opposes countries competing by lowering tax rates. I agree that, other things being equal, coordinated tax rates would be better for the world. But, since tax coordination would likely tend to lead to higher, rather than lower, rates, other things are not equal. It would seem to be a good thing for Ireland to lower tax rates and, in effect, put pressure on the rest of the EU to do the same. If you restrict tax competition by forming a cartel (of countries), you get higher (cartel) pricing.

On "labour rights," I would favor more international agreements to ensure the right to work without employer or union coercion. But, unfortunately, most proposed international labor agreements are attempts to spread, not only worthwhile worker safety protections, but also union power to the rest of the world. Unionization in the United States tends to destroy overall wealth, productivity, and jobs, as any glance at unionized airlines and auto companies illustrates. Unions are thriving in the US mainly in the one area where there is little competition and where low productivity is tolerated -- government workers.