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The Indy Explains: Has NAFTA worked, and what’s at stake as Trump Administration renegotiates it?

In spite of some resistance along the way, the U.S. has been on a steady trajectory toward more open markets since the Great Depression, with even Democratic President Barack Obama leading the charge toward expanding major free trade agreements.

But that changed in the 2016 election cycle, which brought Donald Trump and his pronouncements that the North American Free Trade Agreement “is perhaps the greatest disaster trade deal in the history of the world.” His promises to stanch the bleeding of manufacturing jobs moving to Mexico struck a chord among workers who watched their once-bustling factory towns hollowed out when companies chased cheaper labor.

Experts say that while NAFTA is an easy political scapegoat for frustrations about the economy, it probably doesn’t deserve all the credit or blame it receives. The highly visible deal is a relatively small factor in a sea of changes that includes technological innovation, an increasingly global economy and currency devaluations.

Nevertheless, representatives from the U.S., Mexico and Canada will gather this month in hopes of giving NAFTA the first major overhaul in its 23-year history. It’s the first step in a process that’s expected to take months.

Vice President Mike Pence gives a speech at the National Governors Association meeting in Providence, Rhode Island on July 14, 2017. Photo by Michelle Rindels.

Publicly, leaders of the three countries have reaffirmed their friendship and projected continued cooperation as they head into talks. Vice President Mike Pence said in a July speech at the National Governors Association that the deal would be a “win-win-win” for the three countries, and Canadian Prime Minister Justin Trudeau applauded the renegotiation.

“We’re gearing up for a modernization of NAFTA, which is both important and necessary,” Trudeau said. “And we’re going to get the best results for all North Americans.”

But Trudeau’s very presence at the convention, and his private meetings with state leaders, including Nevada Gov. Brian Sandoval, to shore up the U.S.-Canadian relationship, underscore that there’s a lot to lose in the process. The law gives Trump broad authority to make trade decisions, such as pulling out from the agreement altogether or slapping punishing tariffs on Mexican goods — things he’s threatened in the past.

With trade accounting for one third of American gross domestic product — a huge increase from when it was less than 5 percent in the 1970s — and businesses increasingly setting up international supply chains, the terms of the agreement could affect everything from jobs and business health to the price and availability of avocados and strawberries.

Where Nevada fits

International trade agreements aren’t necessarily in the purview of America’s governors, but Sandoval has taken an interest in how re-negotiating trade deals could affect Nevada.

The Republican governor, who in 2016 publicly endorsed the proposed Trans-Pacific Partnership, met last month with Trudeau as well as other Canadian and Mexican officials concerned about successful NAFTA renegotiations.

Gov. Brian Sandoval talks with reporters on June 5, 2016.

“Everybody agrees that we need a NAFTA 2.0 — that it needs to be modernized and updated and it can be, as they say, a win-win-win,” he said in a July interview at the National Governors Association meeting in Rhode Island. “States are in a really unique place because we can get things done immediately.”

Nevada and Mexico had $924 million in bilateral trade in 2015, and an estimated 55,000 Nevada jobs depend on trade with Mexico. Nevada and Canada have $2.3 billion in bilateral trade, which supports about 83,000 jobs in the Silver State.

But NAFTA itself can often take a back seat for state officials, who are more busy dealing with Nevada-specific issues — like attracting individual businesses to the state through trade missions — and not the renegotiation of trade agreements. Economic development chief Steve Hill said that while modifying NAFTA would undoubtedly have an impact on the state’s economy, most businesses in the state weren’t bringing up concerns with his office.

“I don’t have businesses coming to me saying NAFTA is a problem,” Hill said. “I don’t know if they’d even think about coming to me to say that NAFTA’s a problem.”

Here are things to know about NAFTA, Trump and what’s ahead for trade:

Where did it come from?

The origins of NAFTA can be traced back to at least 1979, when Ronald Reagan announced his candidacy for president and laid out a vision of close cooperation and increased development in all three countries.

“The key to our own future security may lie in both Mexico and Canada becoming much stronger countries than they are today,” he said in a speech.

After he became president, Congress passed legislation granting the president fast-track authority to negotiate agreements, and Reagan signed a deal with Canada in 1988.

But Canada called for something more — an agreement with Mexico, which at the time had high tariffs, or taxes on the import and export of goods. It was Republican President George H.W. Bush who negotiated the deal.

Bill Clinton sounded cautious notes on NAFTA during the 1992 campaign, but got behind the trade agreement once he took office and added some “side agreements” on labor and the environment. He helped push it through Congress on split votes, and it took effect on Jan. 1, 1994.

The agreement, which was meant to tie the economies of the U.S., Mexico and Canada closer together, was controversial because it was the first major free trade agreement between two wealthy countries and a developing country. Usually, it’s two countries on more equal economic footing that make such deals.

It was sold as a way not only to create hundreds of thousands of jobs, but to raise the standard of living in Mexico, creating a stronger market for American goods there and reducing immigration to the U.S.

“NAFTA means jobs, American jobs and good-paying American jobs,” Clinton said at a 1993 signing ceremony for the trade agreement. “If I didn’t believe that, I wouldn’t support this agreement.”

Still, criticism abounded. Independent presidential candidate Ross Perot famously argued that the disparity in wages between the U.S. and Mexico would draw jobs from north to south and create “a giant sucking sound.”

At the time, Mexico had highly protectionist policies, including requiring Mexican businesspeople to obtain an import license for hundreds of different types of products. Over several years, NAFTA eliminated tariffs on most goods traded between the countries, including agricultural goods, automobiles and textiles.

Trump’s crusade against it

NAFTA has taken heat in subsequent election cycles, including the 2008 Democratic primary in which President Barack Obama criticized his opponent Hillary Clinton for shifting positions from for to against the agreement. She indicated during the campaign that she wanted to renegotiate the agreement, saying “it has not lived up to its promises.”

Bernie Sanders has long called NAFTA disastrous. In his 1997 book, he said the deal “was a sellout to corporate America” and said such agreements “make it easier for American companies to move abroad, and to force our workers to compete against desperate people in the Third World.”

But the most blunt criticism came from Trump, who railed against NAFTA in packed Rust Belt rallies, calling it “a defective agreement” and “the worst trade deal maybe ever.” His opposition can be traced back to the beginning of the agreement, when he criticized the deal as something that would only benefit Mexico, according to local news reports at the time. Even in the 1980s, he took out a $100,000 ad in the New York Times to say the Reagan Administration was doing horribly on trade.

He’s threatened to impose a 35 percent tariff on companies that move overseas, and floated the idea of a 20 percent tariff on Mexican imports and a 45 percent tariff on Chinese imports — something legal experts say he could very well do [unilaterally].

He often threatened to withdraw from NAFTA altogether — including after taking office during a few tense days in April.

He relented after pleas from allies and the business community, saying that terminating NAFTA would be a shock to the system and that the U.S. would “give renegotiation a good, strong shot.”

While Republicans have traditionally supported free trade agreements, Trump’s opposition to such deals aligns him more with characters on the left including the AFL-CIO. The group says that while the agreement has ramped up the volume of trade, it has led to stagnant wages and benefits have accrued mainly to corporate executives and shareholders and doesn’t do enough to hold labor rights violators accountable.

“NAFTA needs to be fundamentally rewritten, not merely tweaked, and working people are united in our demand to rewrite NAFTA,” the union’s president Richard Trumka told reporters in July. “If the group in Washington refuses to get the job done, American workers will find leaders who will.”

What can be done about NAFTA?

Any of the three participating countries can withdraw from the agreement if they give six months’ notice, although the provisions would remain intact between the other two parties. Trump doesn’t need congressional approval to start the process — Article II of the Constitution and a series of subsequent laws give the president the authority to negotiate with foreign governments — but he said he’ll try reworking it first.

Trump moved toward that on May 18, 2017, when he had United States Trade Representative Robert Lighthizer notify Congress of the administration’s intent to launch a new set of NAFTA negotiations. That clears the way for the first round of negotiations between the three countries to take place between Aug. 16 and 20.

Since the initial notice, USTR has been conducting extensive dialogue with Congress and other stakeholders. A call for public comment yielded more than 12,000 responses, and more than 140 witnesses testified over three days of public hearings in late June.

The USTR said that feedback has influenced a set of negotiating objectives released in July, which include outlines of plans to reduce the federal trade deficit with Mexico, limit currency manipulation used to subsidize exports and eliminate a dispute settlement mechanism that allows businesses to appeal decisions made by domestic courts in regards to trade remedies to an alternative source.

“Too many Americans have been hurt by closed factories, exported jobs, and broken political promises. Under President Trump’s leadership, USTR will negotiate a fair deal. America’s persistent trade imbalances, break down trade barriers, and give Americans new opportunities to grow their exports. President Trump is reclaiming American prosperity and making our country great again,” said Ambassador Lighthizer.

Critics of the objectives include Democratic Nevada Rep. Dina Titus, who called it “as feeble as Trump’s rhetoric sounds.”

“The report submitted to Congress is riddled with contradictions and walks back a lot of Trump’s tough talk,” she said in a statement. “I am not optimistic that this effort will be a boon for our nation’s workers and the relationships with our most important trade partners.”

Mexico recently released its own negotiating objectives, which notably seek to strengthen the dispute resolution mechanism that has attracted Trump’s ire.

Officials in Canada and Mexico have said they are willing to talk. The three nations could potentially benefit by examining where the agreement fell short and “modernizing” it with provisions that have emerged in more recent free trade agreements.

If the U.S. were to withdraw, that would likely mean tariffs with Canada would return to the levels from the prior U.S.-Canada free trade agreement, and Mexico would return to the “most favored nation” levels that apply to all nations that are part of the World Trade Organization (WTO). Without another free trade agreement in place, that would leave baseline tariffs up to 7.5 percent on American goods coming into Mexico, while Mexican goods could have a 3.5 percent tariff for any trade with its northern neighbor.

The U.S. in 1995 joined the WTO, which is the core framework of American trade with 163 countries.

If Trump were to make good on his more dramatic proposal of backing away from the WTO, the country could theoretically return to previous, more protectionist trade policies and lose access to much of the global market for American exporters.

Has NAFTA hurt the U.S.?

A 2012 survey of 41 prominent economists by the the University of Chicago found that 85 percent agreed that Americans, on average, were better off under NAFTA than under the previous set of rules. Five percent were uncertain and none disagreed, so why is public debate still raging?

NAFTA gets blamed for gutting US manufacturing jobs because it allowed companies to move easily to Mexico and staff their factories with cheaper, Mexican labor. Prior to the agreement, both countries had tariffs on trucks of between 20 and 25 percent, but NAFTA cleared those and made it far easier and thousands of dollars cheaper per vehicle to manufacture south of the border and sell in the U.S.

Mexico additionally has a Value-Added Tax (or “Impuesto al Valor Agragado”) that’s imposed on imports, though most economists don’t view it as a significant barrier to trade.

Today, cars are the No. 1 product imported into the U.S. among NAFTA trading partners, followed by crude oil, auto parts, commercial trucks and computer hardware.

In general, globalization tends to depress wages for low-skilled workers, when manufacturing could be done just as well in another corner of the world but with lower-wage workers. It can increase wages for certain high-skilled workers and accrues more benefits to those who already own land and capital, increasing inequality.  

The pain tends to be more concentrated in a few areas — such as factory towns that lose not only thousands of plant jobs at a time but feel the ripple effects of a departing business at restaurants, stores and other places that workers used to patronize. Research shows NAFTA substantially reduced wage growth by up to 17 percent for blue-collar workers in industries that depended heavily on tariffs on similar Mexican-produced goods, although college-educated workers were essentially untouched.

But economists at the Peterson Institute for International Economics point out that about 4 million Americans lose their jobs each year due to plant closures and mass layoffs, even without trade. The institute estimates that no more than 5 percent of those losses can be traced to imports from Mexico.

The benefits of getting cheaper, duty-free goods from Mexico and Canada as a result of NAFTA is spread out more broadly and is less obvious. Yale researchers concluded in 2014 that economic welfare among Americans grew by 0.08 percent from NAFTA’s tariff reductions, while Mexican welfare increased by 1.31 percent and Canadian welfare dropped by 0.06 percent.

It’s difficult to single out NAFTA’s role in the American economy amid larger trends. Manufacturing jobs had already been in decline before NAFTA was signed, and automation and information technology efficiencies have made companies more productive with fewer workers.

Economists from Ball State University estimate that nearly 88 percent of manufacturing job losses in the U.S. between 2000 and 2010 are a result of productivity increases, with the remainder a result of trade. In spite of the job losses, the manufacturing sector actually grew 17.6 percent from pre-recession 2006 to 2013, only slightly slower than the economy as a whole.

There have also been other geopolitical developments around the same time of NAFTA implementation. Tariff cuts in trade with Mexico happened at about the same time as similar cuts with other countries when the U.S. entered the World Trade Organization in 1995.

China entered the WTO in 2001, becoming a giant in the market and likely prompting more job losses than trade with Mexico did. That was exacerbated when China’s currency was undervalued, making exports from China cheaper and imports into China more expensive, thus prompting a flow of Chinese imports into the US. In 2015, total trade with China equaled around $659 billion, with the U.S. importing $336 billion more than it exported.

Since NAFTA was implemented, the U.S. bilateral goods trade balance — the difference in monetary value between a nation’s exports and imports —  with Mexico has gone from a $1.66 billion surplus in 1993 to a $63.2 billion deficit in 2016. The trade deficit with Canada has stayed more steady — it was $9.9 billion in 1989 when the two countries struck their first agreement, and was $11.2 billion in 2016.

However, this deficit doesn’t have a significant bearing on the American economy, considering that total annual trade is measured in the trillions. Trade between the three countries has grown from around $290 billion in 1993 to surpass 1.1 trillion in 2016.

Some say the negative effects of trade agreements are best addressed by a stronger safety net, perhaps through wage insurance, retraining and the maintenance of Affordable Care Act-style policies that do more to divorce insurance coverage from employment. The existing Trade Adjustment Assistance program — a federal initiative designed to support U.S. workers who lose employment due to increased imports —  is generally regarded as ineffective.

Other flare-ups

A few specific market access issues that NAFTA doesn’t address have prompted flare-ups in the lead-up to the negotiations.

Around the time Trump was mulling a total withdrawal from NAFTA this spring, he took specific aim at a Canadian policy of controlling its milk supply. Canadian dairy farmers have gotten together and decided to lower their prices to be more competitive against American imports, but critics — especially in border states such as Wisconsin and New York — contend the protectionist policy violates trade laws.

“Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!,” he tweeted on April 25.

His administration also slapped duties on imported Canadian softwood lumber — used to build homes — amid a long-running dispute over that product. American lumber companies complain that the Canadian product is subsidized by provincial governments, giving Canadians an unfair leg up.

How has NAFTA helped the U.S.?

Under the deal, regional trade has tripled to more than $1.1 trillion in 2016. The U.S. Chamber of Commerce estimates that 14 million American jobs depend on trade with Canada and Mexico.

Businesses that export products to the other two countries — including retail chains and American farmers — are concerned about anything that could curtail their access to those markets. After all, more than a third of U.S. exports flow to Mexico and Canada.

The agreement also made a big splash on food. Since the agreement came about, Americans are consuming twice as much fruit and three times as many vegetables from their neighbors in the north and south.

If you like avocados, peppers, cucumbers and tomatoes year-round, thank NAFTA. It’s also helped usher in massive quantities of imported Mexican beers such as Corona and Modelo.

In turn, Mexicans are eating more American meat, feeding livestock with more American corn, and importing high-fructose corn syrup that’s fueled an obesity epidemic.

Beyond the agreement’s effect on tariffs — American products flowing into Mexico faced taxes as high as 12 percent prior to NAFTA and were subject to strict Mexican import license rules — the agreement has food safety clauses that have prompted Mexican farmers to generate more produce that can meet Food and Drug Administration standards.

The agreement is also credited with helping U.S. manufacturing by allowing for more cross-border supply chains. When car manufacturers put factories where they’re more efficient, the price goes down and the company is more competitive with Asian and European automakers.

Those improvements have accelerated trade. U.S. auto exports to Mexico have grown 262% from 1993 to 2016, while imports from Mexico have increased 765% in that period.

NAFTA has helped decrease or hold steady the price of consumer goods, but that savings is generally so much smaller and less personally impactful than a factory closure and job loss.

How has it affected Mexico?

A report from the World Bank a decade after NAFTA’s implementation concluded that the agreement helped Mexico get closer to the levels of development in the United States and Canada, spurring more foreign investment, increasing exports and speeding up the pace at which the country adopts new technology.

It’s spurred a bustling manufacturing industry that’s wary of potential changes to NAFTA. Today, some 2.7 million Mexicans are employed at maquiladoras, which are export-oriented factories that import materials duty-free and capitalize on lower labor costs in Mexico.

A controversial element has been the agreement’s effect on the Mexican agricultural sector, mostly among small-scale farmers. One study estimated that 2 million agricultural jobs were lost, largely because Mexico started buying cheaper, subsidized American corn.

But Mexico had been implementing its own reforms at the same time as NAFTA — removing price supports and privatizing state-owned enterprise — so it’s difficult to isolate the effects of those two initiatives.

Still, the hopes that NAFTA would close the wage gap between the U.S. and Mexico have largely failed to materialize. Experts say that the quality of Mexican national institutions needs to increase, and Mexico needs to invest more in education and infrastructure, to realize the potential of the agreement.

What’s at stake in the negotiations?

Some critics fear a new deal could disrupt the Mexican economy, creating job losses there and stoking a new wave of migration from Mexico.

If Trump were to make good on his more draconian campaign promises to raise tariffs on Mexico and China, it could launch a scenario called a trade war in which the two countries retaliate by imposing the same level of tariffs on U.S. products. That scenario would discourage exports and imports, spurring a long-term decrease in efficiency and some more immediate consequences for Americans whose jobs depend on trade.

Mexico could choose to take its corn-buying elsewhere, for example, disrupting the American farmers who depend on it.

While the high tariffs Trump has suggested could prompt some companies to move their manufacturing operations away from China and Mexico and back to the U.S., executives might also just move their production to others countries.

Potential areas of improvement and change

Experts say there’s plenty of room for improvement in NAFTA. The Congressional Research Service has identified several specific areas where the agreement could be modernized.

  • Auto sector: The countries could spur further development in the North American auto industry by raising the “rules of origin” requirement. NAFTA eliminated tariffs on vehicles if they’re made up of at least 62.5 percent North American components, but that could be adjusted to protect domestic industry.
  • Services: NAFTA could be modernized by expanding provisions on cross-border financial services, telecommunications and roaming charges.
  • Data storage: The Internet has evolved enormously since NAFTA was signed. The agreement could be updated with provisions about locating data centers and transferring data across borders. These topics were addressed in the TPP.
  • Environment: NAFTA could be expanded to address illegal fishing and the endangered species trade.
  • Energy: Mexico exempted some foreign energy investment in the original agreement. The U.S. might seek more access to Mexico’s energy sector in a renegotiated pact.
  • Customs: The parties might seek ways to streamline customs through automation or fast-track windows for importers and exporters.

What Is the “Free Market Welfare State” For?

June 5, 2017

Will Wilkinson’s new essay in the New York Times has sparked a great deal of discussion about the relationship between free markets and welfare state. Will’s view (and mine) comes down to a rejection of the usual right-left ideological axis, on one end of which lies anti-regulation and anti-welfare sentiments, and at the other, pro-welfare and pro-regulation sentiments. What if instead, as Wilkinson puts it, “the regulatory state and the size of government are intertwined, but they contain logically and practically separable strands”?

As Ed Dolan has deftly showed, there’s plenty of reason to think they do. A small government as a percentage of GDP is simply not correlated with economic freedom, nor with broader measures of the quality of governance. And at least from my liberaltarian point of view, what matters most for liberty is whether you are free to act and transact as you wish — “capitalist acts between consenting adults” — acts that are jeopardized by rules prohibiting the free movement of labor, or the diffusion of new technologies, or the exchange of benign substances, far more than they are by social insurance programs.

Indeed, there are even good reasons to think the welfare state and economic freedom are natural complements, both conceptually and in terms of stable political-economic outcomes. To see why requires unpacking exactly why the welfare state exists in the first place, and through that historical reconstruction, deriving, in some sense, what it is for.

“Three Normative Models of the Welfare State”

This is precisely what the philosopher Joseph Heath tries to do in his article “Three Normative Models of the Welfare State.” Heath’s writings on normative economics and business ethics are required reading for anyone interested in the connection between markets, ethics and the role of the state. This article is no exception.

In “Three Models,” Heath’s goal is to derive the normative underpinnings of the welfare state through its historical reconstruction. The idea is that normative theories are relatively moot if they are unable to describe, ex post, the emergence of the very sorts of institutions they purport to recommend. One by one, Heath moves through the leading normative models and rejects them as failing to make sense of actually existing social programs, from social security on down.

The leading model, that the welfare state exists to redistribute from the haves to have-nots, is wrong, according to Heath, despite being embraced by both its egalitarian supporters and its conservative critics. The core problem with the redistributive view is that it ascribes fundamentally different normative logics to the state and the market. The market is justified because it enhances productivity and efficiency, creating win-win outcomes for market participants. This is great, but inequalities inevitably arise which, for reasons of distributive justice, must be corrected after the fact by win-lose redistributions. In short, the market is for efficiency, the welfare state for fairness — two great tastes that, to liberal egalitarians, taste great together.

The Public Goods Model of Social Insurance

This view is problematic because it fails to explain much, if not most, of what the state actually does. Social Security retirement benefits, for example, represent a transfer from people who die young to those who live a long, long life — a structure that may even be mildly regressive in its first-order effects. Every year, thousands of millionaires collect unemployment insurance between gigs, having paid an outsize share of payroll taxes. And then there are infrastructure, policing, national defense, and all the other things the state provides out of general revenue, not due to fairness, but because they are public goods.

Heath argues that a reconstructed history the welfare state shows that it should be thought of in terms of public-goods provision, as well. For example, he notes that

the single most significant economic risk faced by most women in our society is divorce – especially in the years immediately following the birth of a child. Rising divorce and abandonment rates have been the single most important factor driving the so-called “feminization of poverty” in our society over the past three decades. Thus any economically rational woman should want to buy “divorce insurance.” Yet there are no private markets for such insurance, for fairly obvious reasons. Such insurance would be subject to extreme moral hazard and adverse selection problems. Thus one of the functions that the welfare system has increasingly taken on has been to provide a (very low) baseline level of divorce insurance.

If Heath is right, the normative logic of the social safety net and the market are not at all in tension. States provide public goods for the very same win-win efficiency reasons that they enforce property rights and a robust legal system (public goods in their own right). We all benefit from things like national defense, but high transaction costs prevent us from organizing to provide them privately. We also all stand to benefit from the ability to insure against economic risks like the loss of a job — millionaires have bills to pay, too — even when information asymmetries make private-sector unemployment insurance a challenge. Too much insurance has costs, as well, like inducing overly risky behavior. Yet such “moral hazards” are a generic feature of all insurance, and an inevitable part of making trade-offs.

As Ronald Coase pointed out years ago, given non-zero transaction costs there will always be areas where hierarchy is efficient, even if public choice constraints prevent democracies from achieving first-best outcomes. That is doubly true for many insurance markets, which are particularly prone to failure or even non-existence due to forces like adverse selection. The growth of the welfare states across the developed world strongly suggests that various forms of social insurance are another such area. The upshot is that the welfare state is better thought of as a kind of democratic mutual insurance scheme rather than, as it is often portrayed, a nationalized form of private charity or a tool to soak the rich. We fail to realize this because the ex ante win-win nature of social insurance (and, indeed, insurance more generally) is obscured by the ex post win-lose transfer to the recipient. The Swedes’ concept of “the people’s insurance,” which developed alongside the construction of their own formidable welfare state, shows that this notion is not even foreign to the places that strong egalitarians look up to.

The Republicans’ Missed Opportunity

Of course, nothing I’ve said denies the possibility of egalitarian concerns, or genuinely nefarious ulterior motives, seeping into the deeper efficiency origins of social insurance. But it does raise a problem for the quest to abolish the safety net as we know it. If the welfare state were merely a matter of redistributing from the “makers” to the “takers,” its abolition would come with no long-run cost — in a zero-sum world, the transitional losers are canceled out by the winners. But if, instead, the welfare state is for facilitating higher forms of win-win cooperation — what economists call Pareto improvements — then destroying it could leave society as a whole permanently worse off. This is not to say that every social insurance program is properly funded, or perfectly designed to make some people better off and no one else worse off. But, as a normative model, that is what we should strive for. Arguing about the empirical extent of the market failure in social insurance is not the point of this post. That empirical debate only comes after conceding the normative ground that efficiency matters in the first place.

In a more rational world — the sort of world Wilkinson calls for in his Times piece — the Republican position on entitlement spending would not be so existential. Rather, they would concede its normative consistency with the market, and move to debate its ideal scope and design, prioritizing certain conservative principles and pushing back on egalitarian excesses. On that point, I could see conservatives embracing the power of social insurance to reinforce the market’s dynamism along three key dimensions:

  • As a substitute for protectionist and freedom-reducing regulation;
  • As a tool for risk transfer, to encourage innovation and entrepreneurship;
  • And as a compensatory mechanism, bringing the losers of free trade and creative destruction into the “Pareto improvement” space.

Each of these pro-market features of social insurance is worth a blog post of its own. My only goal here is to illustrate the problem with the current anti-entitlement orientation of the Republican party. It means Republicans squander the opportunity to be more effective and creative reformers — to be on the side of the continuous normative logic of the market and the social-insurance state, while working to improve their efficient operation.

It also means that they play into the hands of the progressive left, which revels in the myth that social insurance is an egalitarian game of Robin Hood with conservatives taking the side of King John. The result is what I call America’s reluctant welfare state: A hot mess of programs that just barely satisfies the country’s bottom-up demand for social insurance, but which creates new inefficiencies and injustices through its self-sabotaging and incoherent design.