Obama on Trade, Part IV

Obama's Patriot Employer Act provoked a bizarre column by a couple of European economists who consider it to be evidence of "dangerous protectionism." (See here for a roundup of responses to the column.)

The legislation would provide a tax credit equal to 1 percent of taxable income to employers that fulfill the following conditions:

1. Not decrease their ratio of full-time workers in the United States to full-time workers outside the United States and maintain corporate headquarters in the United States if the company has ever been headquartered there.
2. Pay a minimum hourly wage sufficient to keep a family of three out of poverty: at least $7.80 per hour.
3. Provide a defined benefit retirement plan or a defined contribution retirement plan that fully matches at least five percent of each worker’s contribution.
4. Pay at least sixty percent of each worker’s health care premiums.
5. Pay the difference between a worker’s regular salary and military salary and continue the health insurance for all National Guard and Reserve employees who are called for active duty.
6. Maintain neutrality in employee organizing campaigns.

Via Greg Mankiw, Jagdish Bhagwati, the most rabid free-trader economist you could find, published a surprisingly good column in the FT titled "Obama's free-trade credentials top Clinton's." The column is a far better reply to the "protectionism" column than I could have come up with.

Bhagwati interprets the Patriot Employer Act as essentially a symbolic act that is unlikely to have much effect:

.... Mr Obama has smartly seized John Kerry’s proposal to remove the incentive to invest abroad and has gone further by proposing that those who invest at home will be given a tax incentive. It is dubious that this proposal will survive challenges from existing bilateral and World Trade Organisation agreements, or can achieve much when other countries can do the same. It is exactly the sort of policy that a constituency fearful of losing jobs demands but, by meeting that demand, President Obama would be left free to abandon the anti-trade rhetoric and embrace the multilateral free trade that has served the American and the world interest so well.

It's probably true that Obama figures that the Patriot Employer Act is a good response to the anti-trade forces. But I think he genuinely believes what he said in the press release about the bill:

Our bill will create a new patriotic corporate ethic in America that unites workers and their employers in the mutual goal of building a stronger, more prosperous democratic business sector to compete in the twenty-first century global economy.”

While the forces of globalization are not going to go away, modern economic theory offers a number of reasons to think that the goals of this proposal are sensible, if a bit lofty. Perhaps most familiar to the typical economist is the idea of "efficiency wages," which suggests that employees who receive better compensation are more productive. Related to this is the concept of high road / low road labor organization. Very briefly, the idea is that firms have a choice between the "high road" with high wages, high rates of employer retention, high investment in employees, and high productivity, or a "low road" with all the opposite qualities. In this view, a goal of government policy might be to encourage firms to take the high road. Finally, there is a variety of research in labor economics that suggests that institutions and norms are as important as market forces in establishing worker relations. The bill could have the effect of helping to shift the norms of corporate employment in America for the better.

(I wondered how much this bill could cost. According to data on this IRS page, in 2004 the total taxable income of corporations was $772 million, which means that if every single corporation qualified as a "Patriot employer," the annual cost would be below $8 billion, less than the monthly cost of the Iraq war.)