Wednesday, April 24, 2013

Why "Free Trade Agreement" Is a Misnomer: Some Thoughts on Trade Liberalization

I am someone who believes that words have value and meaning, and we should therefore use them with care. This would explain why I get annoyed when people inaccurately apply words and labels to ideas and concepts, and also why I enjoying the idea of calling a spade a spade. In the spirit of "calling it like it is," I can't help but direct that sentiment to the notion of a free trade agreement (FTA). But how can someone such as myself, being libertarian and capitalist, question the notion of an FTA? Isn't free trade a good thing? Of course it is! The more liberalized trade is, the greater the economic wellbeing. What I question is whether FTAs actually engender adequate free trade.

So what are FTAs? Free trade agreements are deals between two or more countries in which they agree  to eliminate trade barriers on most, if not all, goods amongst themselves. So where is the issue? More countries are removing trade barriers. This should be a good thing. Without getting into related topics such as the sweatshops in Mexico [also known as maquiladoras] or outsourcing, I still have to wonder where exactly in these FTAs free trade exists.

Free trade does not require a treaty because all a government has to do is voluntarily remove the trade barriers. At best, free trade should require a memorandum of understanding (MOU) or a free trade organization like the World Trade Organization (WTO) to confirm a commitment to free trade. In terms of procedure, the process is least in theory.

If free trade is a simple process, then why are there so many stipulations and exemptions in FTAs? Take a look at the North American Free Trade Agreement (NAFTA): the sheer amount of exceptions and clarifications illustrates that free trade agreements are nothing more than a form of protectionism under the guise of free trade.

If we want to give these trade agreements a more accurate label, we would call them preferential trade agreements (PTAs), instead of free trade agreements. Those nations within the trade bloc remove the trade barriers amongst themselves, but the tariffs and other trade barriers on countries not in the trade bloc still exist.

This is not to say that PTAs are without benefit. More trade creation exists prior to the creation of the PTA, but there is also more trade diversion. What takes place in trade diversion is that the composition of trade changes: production from low-cost nations who are not part of the agreement gets diverted to nations with higher production costs (e.g., NAFTA shifted some production from China to Mexico). The net effect of economic wellbeing is the gains from trade creation minus the losses from trade diversion. Typically, the trade creation exceeds the trade diversion, as can been seen with Mercosur or with agriculture under NAFTA. However, this net positive welfare takes place relative to a previous situation with even higher levels of trade barriers. Advocating for PTAs with this comparison presents a false dilemma that neglects a third option: multilateral free trade. Removing all trade barriers with all countries is better than using PTAs because trade liberalization means greater economic freedom, which improves overall wellbeing. The idea that free trade creates a net positive welfare and improves overall wellbeing is one of general consensus amongst economists.

Does this mean that I think we should remove all PTAs? Not necessarily. If it is between autarky (i.e., no free trade) and using preferential trade agreements, I opt for the latter. Nevertheless, the discrimination induced by PTAs is not optimal. Using PTAs diverts goods and services from being produced and allocated in the most efficient way possible. Even though I believe the best option is a multilateral agreement in which trade barriers are [next to] non-existent, there is a political reality with which I have to contend: preferential trade agreements are here to stay. The implementation of PTAs has increased substantially over the past twenty years. It also makes for good politics. Certain interest groups, such as labor or environmental groups or even domestic producers (e.g., sugar tariffs), further complicate the process. All of this complication creates the spaghetti bowl effect, in which the complex, intertwined network of PTAs creates paradoxes and inefficiencies. PTAs might pull developing countries from economic stagnation in the short run, but in the long run, it diverts from the ultimate goal of economic liberalization. The only good free trade agreement is one that promotes actual free trade.

Wednesday, April 17, 2013

Making a Case for Legalizing a Market in Human Organ Sales

I can hear the arguments against creating a market for selling human organs. "It turns humans into commodities. You'll most likely exploit the poor for their organs. Simply despicable! How dare you put a price on something like human organs?" This is yet another instance in which people feel like their personal beliefs should dictate public policy. Rather than give into something like a repulsion towards an individual selling one of their organs, we should take a look at whether providing a legalized market for selling organs is the preferable policy option to the status quo of banning the sale of one's organs.     

Basic economics can predict what happens in this scenario. Although current law allows you to donate an organ without financial compensation, by banning the legal and voluntary sales of human organs, what the government does in this instance is create a de facto price ceiling of $0. What happens when you put a price ceiling on a good? Much like with anti-price gouging laws, when prices are artificially depressed, there is a shortage of a good (e.g., transplantable organs). We can see theory lines up with practice because there is a shortage in the organ market. As of today, there are 117,959 patients in the United States on the waiting list for organ donations (U.S. Department of Health and Services). In 2011, there were under 18,000 transplants performed, which is well below the number required to fulfill all transplant needs.

We don't live in a world with an unlimited supply of organs. Although one would be more likely to donate a kidney to a close friend or family member, we also don't live in a world where the vast majority of people are altruistic to the point where they would donate an organ to a complete stranger. Since most are not incentivized by altruism, using the price mechanism in a liberalized organ market would incentivize more people to donate than what is currently being donated. Increasing the supply of kidneys [or any other organ that could be donated] would mean more transplants, which would mean fewer people dying while waiting for a kidney, not to mention that less people have to pay for palliative care (e..g, a very expensive dialysis treatment).

What about taking into consideration those who donate? Poor people will be more likely to donate their organs than rich people because of financial strain. Wouldn't this be an exploitative practice? Well, no. Even if there are certain financial pressures or incentives for poor people to donate, there is still a reasonable trade-off between donating an organ and creating an opportunity for improving one's financial stability. Life is full of instances in which we have to make trade-offs, even when they are dangerous ones (e.g., fighting in the military, working in a coal mine or at an oil rig). Life is also replete of examples in which we commoditize valuable things. We can treat art or music as "priceless," but we have nevertheless markets in which paintings and concert tickets have prices.

We shouldn't treat adults like children. Selling one's organs should be treated like any other health care decision in which one is informed before going ahead with a certain procedure or treatment. If the money accrued from donating one's organ helps improve the economic welfare of an individual without harming others, who are we to say otherwise? If the idea of "my body, my choice" were to mean anything, wouldn't this be a good example of illustrating the importance of personal choice? Furthermore, does it make sense to pay the nurse and the doctor for service provided, but not to compensate the donor, who undoubtedly plays a vital role in a lifesaving procedure such as a transplant? We pay teachers who provide our children with education and firefighters who save children from burning buildings. We don't question the purity of the motive with the teacher or the firefighter when their service is complemented with financial compensation, so why should we view the organ donor any differently?

If you're still worried about the wellbeing of the individual, keep in mind that one is not going to trade an organ if it means certain death. As of date, 80% of those on organ transplant waiting lists are waiting for a kidney. Although it's preferable to have two kidneys, only one is necessary. Another 12.86% are waiting for liver transplants, and a partial liver transplant (i.e., a removal of a lobe of a liver) can heal some of those in need of a liver transplant. As for the other organs that cannot be traded while alive, a futures market in organs could be created.      

What happens when cases of fraud occur, like those of Levy Rosenbaum? First, fraud is fraud. Those who defraud should be prosecuted like any other criminal. Second, and more to the point, scenarios like this occur when there is a black market. When demand is so high for a good and that good is not provided in licit/legal markets, where do people go? To the black market. There are many unintended consequences when you drive goods to the underground market. One of those consequences is that suppliers charge exorbitantly high prices. It is so much easier to exploit people in need [of an organ] when the exchange takes place in the black market.

People also like to bring up the possibility of organ thefts or people being murdered for organs, for which my response is two-fold. One is that legalizing organ sales would address the shortage, thereby lessening or even eliminating the need for said theft or murder. Two is that the transplant would be unsuccessful not only because finding a match between donor and recipient in a random theft or murder is next to nil, but because getting a qualified surgeon and adequate facilities is also arduous. Bringing organ sales out of the black market would be the best way to assure that people are not intimidated or defrauded because market forces and social pressures would kick in. By bringing organ sales to a legal market, prices would plummet in comparison to what the going rate is for an organ in the black market, which would make a kidney more affordable.

Some people have an issue with permitting a legal organ market because it's repulsive. To harken back to Thomas Jefferson, "if it doesn't pick my pocket or break my leg," what do I care what another individual does with their life? If you don't like marijuana, don't smoke it. If you don't like same-sex marriage, don't marry someone of the same sex. If you don't like the idea of selling your kidney for profit, then don't do it. If anything should be morally repulsive in this case, it should be that 6,500 people die every year because repulsiveness towards selling organs is a driving force that prevents people from getting transplants they need.

[Another thing that is intriguing is that out of all the countries in the world, the one that legalizes organ sales is Iran, and to add further intrigue, it worked well enough where the Cato Institute wrote a policy analysis on the Iranian organ market.]

Postscript: Wisdom of repugnance, also known as the "yuck factor," plays a huge role for many in terms of how they feel about certain practices, whether it is organ sales or even something like sweatshops. It becomes difficult to look at a policy more objectively when the yuck factor is in play. Regardless, transcending sentiments such as the yuck factor is what makes for good policy analysis. An organ sale is a voluntary transaction in which a consenting donor is compensated for providing a patient with a lifesaving transplant. Both parties benefit from the procedure. When comparing a liberalized organ market to the alternative of a government-induced organ shortage, it's no contest as to which one I would select.

Addendum 3-13-2015: The American Enterprise Institute published an article making a case for compensating kidney donors.

Tuesday, April 9, 2013

Are Women Really Paid Less Than Men?: Demystifying the Gender Wage Gap

Lies, damned lies, and statistics. What a great Mark Twain phrase. I love how he points out how trying to impress people with numbers, especially those yanked from their context, can give a false sense of reality. That certainly comes into play today, which happens to be Equal Pay Day. The premise behind Equal Pay Day is to close the wage gap in which "women make 77¢ for every dollar a man makes" (Census, p. 5). Being libertarian, I believe in the equal treatment of individuals under the law, regardless of gender. Shouldn't I be outraged that women are being subjected to this labor market discrimination?

I'm not disputing the 77¢ statistic itself. What I am disputing is distortion behind the statistic, mainly done via an omitted variable bias. What the statistic does is the following: First, it aggregates the salaries of all women and divides it by the number of women in the labor market. Second, the salaries of all the men are then aggregated and divided by the number of men in the labor force. The numbers are then expressed in the ratio of 77:100, and voilĂ , "women make 77¢ for every dollar a man makes." The issue is that the statistic is an apples-to-oranges comparison. Why? It assumes that women invest and utilize their human capital in the exact same way that men do. To make the findings more accurate, one would need to compare two similarly-situated co-workers of different sexes with the same skill set and background who are working in the same industry and doing the same work for the same amount of hours.

Before I outline my argument, I would like to postulate how I find the argument to be intuitively problematic. The rhetoric I hear often on the Left is that businesses are greedy, which would mean that ultimately, an employer cares about the bottom line. Let's also assume that male chauvinism is the primary, or even the sole, factor in the depression of female wages. If I were an employer in this scenario, would I pay a man to do a certain job, or would I pay a female a fraction of the cost to do the same exact job? If I ultimately cared about profit maximization, you better believe that I would enjoy a huge advantage over my competitors by replacing as many of my male employees with female ones so I could increase my profit margins.

Now let's lay out some reasons as to what makes the raw wage gap so different from the actual wage gap:

Educational attainment and occupational choice: Although more women are acquiring college degrees than men, women still select career fields that pay less (e.g., nursing, education, clerical work) than men do (e.g., sciences, business, law). Women have a better sense of work-life balance, which is why they tend to choose jobs that have more regular hours and have more comfortable conditions, whereas men gravitate towards jobs that have more erratic work hours an involve more risk or specialization, which result in better pay. The Federal Reserve Bank of St. Louis postulates that this selection of career fields is the primary factor behind the wage gap.

Labor force attachment: According to the Bureau of Labor Statistics, men have a higher participation rate in the labor market than women. Furthermore, men are more likely to work full-time, whereas a larger proportion of women work part-time. Even assuming that wages are equal, the gap in weekly earning is going to be sizable since women work less hours (American Time Use Survey, BLS, Table 1). What is biggest factor in this wage-hour gap? Motherhood. It might be 2013, but women are still predominantly responsible for raising children. Since childrearing engenders a weaker attachment to the labor force, women are employed in jobs that require less capital and on-the-job training.  

Postscript: This is not to say that sexism does not exist or it doesn't play a role in the gap. It does, but it plays a relatively small role in explaining the raw wage gap. Much of the gap can be explained by such factors as occupation selection, experience and length in the workplace, as well as hours worked, as is confirmed by a study (p. 2) recently published by the feminist group American Association of University Women (AAUW). This study shows when these factors are taken into account, the wage gap closes to about 94¢ for every dollar a man makes. A study commissioned by the U.S. Department of Labor comes to a similar conclusion. It is also why Politifact pointed out that the 77¢ claim is "mostly false."

Some would like the government to intervene in closing the reminder of the wage gap. Government's good intentions in this case would lead to more regulations, red tape, and frivolous lawsuits. There are ways that these issues can be solved in the free market. If pay is that much of an objection, females can be encouraged to pursue careers in business or the STEM (science, technology, engineering, and mathematics) field to counter the cultural stereotypes (Blau and Kahn, 2000). Fathers can take further responsibility for child-rearing, or alternatively, employers can provide better family-leave and child-care policies. We should empower women to make whatever lifestyle or career choices they like, but let's not pass faulty legislation such as the Paycheck Fairness Act in hopes that the government can attempt to fix a problem that by and large does not exist.

12-4-2016 Addendum: Using 2015 Bureau of Labor Statistics data, the American Enterprise Institute finds that once you control for such factors as age, hours worked, marital status, and having children, the gender wage gap is all but nonexistent.

8-1-2017 Addendum: The American Enterprise Institute provides a nice, concise list of 20 reasons why the wage gap is all but nonexistent.