Fair trade and the law of unintended consequences

Some businesses cynically promote “giving” that is more about making us feel good about ourselves than truly helping others.  Think of companies who sell marked up water where a deliberately undefined percentage of the proceeds goes to charity.  Instead of paying an extra 50 cents for a commodity where perhaps a nickel goes to some ill-defined charity and the other 45 cents profits the company, I recommend donating the whole 50 cents and buying your water elsewhere.  Or drink tap water.  Now you get to release endorphins for being generous and wise.

Fair trade coffee is all the rage in many churches.  Does it really help those it attempts to, or is it another counterproductive measure? Read some interesting thoughts at Is fair trade really fair? | Reason To Stand.

  • Fair trade trades in the same markets of empathy that charities do.
  • It does not have the power to lift whole nations out of poverty like free trade has because it ignores basic market principles.
  • It preys on the desire to feel good (as opposed to actually doing good) that many people (mostly liberals) have.
  • It assumes an unsubstantiated predatory view of markets.
  • It encourages inefficient economic practices (by discouraging mechanization)
  • It encourages people to stay in agriculture when they could move to other industries which could produce more wealth for more people.
  • It fosters a moral hazard where lower quality goods can be foisted onto artificially captive markets (ie. moral-minded churches) while higher quality goods are sold on the free market. I’ve been the unlucky recipient of this sort of deal where a local church provides fair trade coffee which costs as much as Starbucks but tastes like burnt rubber. This is wholly unfair to the consumer.
  • Fair trade is based on a Marxist economic understanding where equality of outcomes is held to be the standard of “justice”. For this reason you’ll hear a lot of talk of “social justice” in pro-fair-trade material.

Tax and free trade basics

money2.jpgCorporate taxes: If corporate taxes are too high it sends jobs overseas.  When I worked at Compaq the company shipped tons of jobs to Singapore, and it wasn’t for the lower wages.  They would have been offset by the logistics costs (freight, handling and timing). 

We moved the jobs because the corporate tax rate in the U.S. was 35% and Singapore gave us an extended tax holiday – a rate of 0%.  Even with the added freight and duty costs it was a no-brainer.  The tax break was like getting free labor and overhead (buildings, equipment, etc.). 

The U.S. added duties to the notebook computers we built there, but it took about 30 minutes to get around that.  We just assembled the maximum amount we could and added a couple parts once they got to the U.S. or Europe.  That avoided most of the duties.

All this took place when I was managing the factory finances for our Houston plants.  We cut costs where we could but it was impossible to compete with the Singapore model.  Lots of jobs went overseas.

Later, when I was the controller for the Notebook Division, my favorite meeting of the year was with the Singapore Economic Development Board.  They always had all sorts of incentives for us – training grants, tax breaks, help with partnerships and more. 

Taxes affect behavior.  You get less of what you tax.  More tax on investments = less investments.  More tax on businesses = less businesses to tax (and less employees to pay taxes and more people needing welfare).

Keep this in mind when you want to soak those big, bad corporations.  I’m not saying they should pay zero taxes.  But it is a fact that higher tax rates send jobs overseas.  Obama either doesn’t know that or doesn’t think it would be a popular campaign idea.  Either way it is bad.

Free trade: Free trade hurts some people, though usually temporarily, and is very visible.  Free trade helps most people, and for a longer period, but the benefits aren’t as visible.  Free trade is always best in the long run.  Avoid politicians who oppose it.

Estate taxes: Death taxes are ghoulish.  You do not want the government to profit from your death.  Just sayin’.