Kafka

The TPP sounds… okay, I guess?

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JDN 2457308 EDT 12:56

So, the Trans-Pacific Partnership (TPP) agreement has been signed. This upsets a lot of people, from the far-left who say it gives corporations power over democracy to the far-right who say it makes Obama into a dictator. But more mainstream organizations have also come out against it, particularly from the center-left or “radical center”, such as the Electronic Frontier Foundation and Medecins Sans Frontieres.

Bernie Sanders was opposed to it from the beginning, and now Hillary Clinton is opposed as well—though given her long track record of support for trade agreements it’s unclear whether this opposition is sincere, or simply reflects the way that Sanders has shifted our Overton Window to the left. Many Republicans also opposed the deal, and they’re already calling it “Obamatrade”. (Apparently they didn’t learn their lesson from Obamacare, because it’s been wildly successful, and in about a generation people are going to say “Obamacare” in the same breath as “Medicare” and “the New Deal”, and sticking Obama’s name onto it is going to lionize him.)

In my previous post I explained why I am, like the vast majority of economists, strongly in favor of free trade. So you might think that I would support the TPP, and would want to criticize all these people who are coming out against it as naive protectionists.

But in fact, I feel deeply ambivalent about the TPP, and I’m not alone in that among economists. Indeed I feel a bit proud to say that my view on the agreement is almost exactly aligned with that of Nobel Laureate Paul Krugman. (Krugman is always one of the world’s best economists, but I’d say he should be especially trusted on issues of international trade—because that was the subject of his Nobel-winning research.) The original leaked version looked pretty awful, and not knowing exactly what’s in it worried me, but the more I hear tobacco and pharmaceutical companies complain about it, the more I like the sound of it.

First of all, let me say that I’m still very angry they haven’t released the full text. We have a right to know what our laws are, as a basic principle of democracy. If we are going to be bound by this agreement, we have a right to know what it says. This is non-negotiable. To be bound by laws you haven’t been told about is literally—and let me be clear on the full force I intend by that word, literally—Kafkaesque. Kafka’s The Trial is all about what happens when the government can punish you for disobeying a law they never told you exists.

In the leaked draft version, the TPP would have been the largest handout of corporate welfare in world history. By placing the so-called “intellectual property” of corporations above basic human rights, it amounted to throwing several entire Third World countries under the bus in order to increase the profits of a handful of megacorporations. It would have expanded “investor-state dispute resolution authority” into an unprecedented level of power for multinational corporations to influence the decisions of national governments—what the President of the Capital Institute called “trading away our sovereignty”.

My fear was that the TPP would just be a redone and expanded version of the TRIPS accord, the “Agreement on Trade-Related Aspects of Intellectual Property Rights” (somehow that’s “TRIPS”), which expanded the monopoly power of “intellectual property” corporations, including the music industry, the film industry, and worst of all the pharmaceutical industry. The expansion of patent powers reduced the availability of drugs, including life-saving drugs, to some of the world’s poorest and most vulnerable people. There is supposed to be a system of flexibility provisions that allow exceptions to intellectual property laws in the service of public health, but in practice these are difficult to implement and many Third World governments don’t know how to use them. Based on UNCTAD estimates, Thomas Pogge found that TRIPS and related trade agreements amount to a transfer of wealth from the Third World to the First World on the order of $700 billion per year. (I’m also a bit confused by the WTO’s assertion that “For patents, [TRIPS] allows governments to make exceptions to patent holders’ rights such as in national emergencies, anti-competitive practices, […]”; aren’t patents by definition anti-competitive practices? We’ll protect your monopoly, as long as you don’t try to have a monopoly?) If TPP makes these already too-strong provisions stronger, millions of people could be denied medicines they need—which is why Medecins San Frontieres is among the organizations opposing the agreement.

Yet, in principle free trade is a good idea, and it’s definitely a good thing to remove the ridiculous tariffs we still have on Japanese cars. Of course, Ford Motor Company is complaining about the additional competition, but that’s a good sign—corporations complaining about extra competition is exactly the sort of response a good trade agreement would provoke. (Also, “razor-thin profit margins”? I think not; car manufacturing is near the very top of capital-intensive industries with high barriers to entry, and Ford Motor Company has a gross profit margin of 16% and net income margin of 5%. So, that 2.5% you might have to cut prices because you no longer get the tariff support… well, you could just take it out of your profits, and I don’t see why we should feel bad if you have to do that.)

It still angers me that they won’t tell us exactly what’s in the deal, but some of the things they have told us are actually quite encouraging. The New York Times has a summary that suggests lukewarm approval on their part.

The TPP opens up Internet traffic, creating international regulations that prohibit the censorship of cross-border data. (With that in mind, I’m a bit baffled that the EFF is so strongly opposed; isn’t free data exchange your raison d’etre?) China hasn’t signed on, and this might well be why—they’d love to sell us products without tariffs, but they aren’t prepared to stop censoring the Internet in order to do that.

It lowers barriers on the cross-border exchange of services (as opposed to only goods). Many services really can’t be traded much across borders (think restaurant meals and haircuts), and in practice this mostly means finance, which is a mixed bag to be sure; but in general I think allowing services to compete across borders is a good ideas.

The TPP also places limitations on government-owned enterprises, though not very strict ones (probably because we in the US aren’t likely to give up the US Postal Service or the Federal Reserve anytime soon). Basically this is designed to prevent the sort of mass state expropriation that has destroyed the economies of several authoritarian socialist countries, like Cuba and Venezuela. It’s unlikely they would be strong enough to stop more legitimate nationalizations of industry or applications of eminent domain, since Japan, Canada, and probably even the US would have been unwilling to sign onto such an agreement.

The leaked draft of the TPP would have given extremely strong protections to drug patents, but the fact that pharmaceutical companies are angry about it says to me that the strongest of these provisions must not have made it in. It sounds like patents are being made stronger but shorter, which like most compromises makes both sides mad.

Best of all, it includes some regulations on human rights, labor standards, and environmental policies, which is something that has been sorely lacking in previous trade agreements. While the details are still sketchy (Have I mentioned how angry I am that they won’t release the full text?) it is claimed that the agreement includes a system of tariff penalties that can be implemented against countries that oppress LGBT people and other marginalized groups. Because Brunei, Malaysia, and Singapore currently criminalize homosexuality, they would already be in noncompliance from the moment they sign the treaty, and would be subject to these penalties until they change their laws. If this is true, it actually sounds like a step toward the “human rights tariff” that I would like to see implemented worldwide.

In general, the TPP sounds like a mess, a jumble of awkward compromises that does some good things and some bad things, and doesn’t really satisfy anyone. In other words, it sounds like policy.

The Asymmetry that Rules the World

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JDN 2456921 PDT 13:30.

One single asymmetry underlies millions of problems and challenges the world has always faced. No, it’s not Christianity versus Islam (or atheism). No, it’s not the enormous disparities in wealth between the rich and the poor, though you’re getting warmer.

It is the asymmetry of information—the fundamental fact that what you know and what I know are not the same. If this seems so obvious as to be unworthy of comment, maybe you should tell that to the generations of economists who have assumed perfect information in all of their models.

It’s not clear that information asymmetry could ever go away—even in the utopian post-scarcity economy of the Culture, one of the few sacred rules is the sanctity of individual thought. The closest to an information-symmetric world I can think of is the Borg, and with that in mind we may ask whether we want such a thing after all. It could even be argued that total information symmetry is logically impossible, because once you make two individuals know and believe exactly the same things, you don’t have two individuals anymore, you just have one. (And then where do we draw the line? It’s that damn Ship of Theseus again—except of course the problem was never the ship, but defining the boundaries of Theseus himself.)

Right now you may be thinking: So what? Why is asymmetric information so important? Well, as I mentioned in an earlier post, the Myerson-Satterthwaithe Theorem proves—mathematically proves, as certain as 2+2=4—that in the presence of asymmetric information, there is no market mechanism that guarantees Pareto-efficiency.

You can’t square that circle; because information is asymmetric, there’s just no way to make a free market that insures Pareto efficiency. This result is so strong that it actually makes you begin to wonder if we should just give up on economics entirely! If there’s no way we can possibly make a market that works, why bother at all?

But this is not the appropriate response. First of all, Pareto-efficiency is overrated; there are plenty of bad systems that are Pareto-efficient, and even some good systems that aren’t quite Pareto-efficient.

More importantly, even if there is no perfect market system, there clearly are better and worse market systems. Life is better here in the US than it is in Venezuela. Life in Sweden is arguably a bit better still (though not in every dimension). Life in Zambia and North Korea is absolutely horrific. Clearly there are better and worse ways to run a society, and the market system is a big part of that. The quality—and sometimes quantity—of life of billions of people can be made better or worse by the decisions we make in managing our economic system. Asymmetric information cannot be conquered, but it can be tamed.

This is actually a major subject for cognitive economics: How can we devise systems of regulation that minimize the damage done by asymmetric information? Akerlof’s Nobel was for his work on this subject, especially his famous paper “The Market for Lemons” in which he showed how product quality regulations could increase efficiency using the example of lemon cars. What he showed was, in short, that libertarian deregulation is stupid; removing regulations on product safety and quality doesn’t increase efficiency, it reduces it. (This is of course only true if the regulations are good ones; but despite protests from the supplement industry I really don’t see how “this bottle of pills must contain what it claims to contain” is an illegitimate regulation.)

Unfortunately, the way we currently write regulations leaves much to be desired: Basically, lobbyists pay hundreds of staffers to make hundreds of pages that no human being can be expected to read, and then hands them to Congress with a wink and a reminder of last year’s campaign contributions, who passes them without question. (Can you believe the US is one of the least corrupt governments in the world? Yup, that’s how bad it is out there.) As a result, we have a huge morass of regulations that nobody really understands, and there is a whole “industry” of people whose job it is to decode those regulations and use them to the advantage of whoever is paying them—lawyers. The amount of deadweight loss introduced into our economy is almost incalculable; if I had to guess, I’d have to put it somewhere in the trillions of dollars per year. At the very least, I can tell you that the $200 billion per year spent by corporations on litigation is all deadweight loss due to bad regulation. That is an industry that should not exist—I cannot stress this enough. We’ve become so accustomed to the idea that regulations are this complicated that people have to be paid six-figure salaries to understand them that we never stopped to think whether this made any sense. The US Constitution was originally printed on 6 pages.

The tax code should contain one formula for setting tax brackets with one or two parameters to adjust to circumstances, and then a list of maybe two dozen goods with special excise taxes for their externalities (like gasoline and tobacco). In reality it is over 70,000 pages.

Laws should be written with a clear and general intent, and then any weird cases can be resolved in court—because there will always be cases you couldn’t anticipate. Shakespeare was onto something when he wrote, “First, kill all the lawyers.” (I wouldn’t kill them; I’d fire them and make them find a job doing something genuinely useful, like engineering or management.)

All told, I think you could run an entire country with less than 100 pages of regulations. Furthermore, these should be 100 pages that are taught to every high school student, because after all, we’re supposed to be following them. How are we supposed to follow them if we don’t even know them? There’s a principle called ignorantia non excusat—ignorance does not excuse—which is frankly Kafkaesque. If you can be arrested for breaking a law you didn’t even know existed, in what sense can we call this a free society? (People make up strawman counterexamples: “Gee, officer, I didn’t know it was illegal to murder people!” But all you need is a standard of reasonable knowledge and due diligence, which courts already use to make decisions.)

So, in that sense, I absolutely favor deregulation. But my reasons are totally different from libertarians: I don’t want regulations to stop constraining businesses, I want regulations to be so simple and clear that no one can get around them. In the system I envision, you wouldn’t be able to sell fraudulent derivatives, because on page 3 it would clearly say that fraud is illegal and punishable in proportion to the amount of money involved.

But until that happens—and let’s face it, it’s gonna be awhile—we’re stuck with these ridiculous regulations, and that introduces a whole new type of asymmetric information. This is the way that regulations can make our economy less efficient; they distort what we can do not just by making it illegal, but by making it so we don’t know what is illegal.

The wealthy and powerful can hire people to explain—or evade—the regulations, while the rest of us are forced to live with them. You’ve felt this in a small way if you’ve ever gotten a parking ticket and didn’t know why. Asymmetric information strikes again.