Riassunto International Economics, European Values in The Global Economy

Values Alesina: Why the US doesn’t have a European style welfare state

Economic, political, and behavioural explanations

There are different reasons why the US doesn’t have a European style welfare state. In the Alesina essay, three sets of explanations are examined: economic, political, and behavioural explanations. Economic explanations don’t explain the differences between the US and Europe. On the contrary, political explanations, including the electoral system and the role of the courts, are very important. The federal structure of the US contributed to constraining the role of the central government in redistribution.

Moreover, the presence of institutions that prevent minorities from gaining political power and that strictly protect individuals’ private property contributed to limiting redistribution. These political institutions result from particular features of US history and geography such as the Civil War and the open frontier in the 19th century; the absence of a large and influential socialist or communist party and its geographic decentralization. However, the big difference between the United States and most of Europe is the former’s greater political stability. Whereas many European monarchies were affected by world wars and revolutions, the United States has had an enormously stable system of government and it means that it is still governed by an eighteenth-century constitution designed to protect property. Monumental differences in the history and geography of the two regions contributed to creating a different climate and different attitudes towards the relationship between the individual and the state.

Behavioural explanation: Reciprocal altruism

The main behavioural explanation, observed in the Alesina essay, is reciprocal altruism. Reciprocal altruism implies that voters will dislike giving money to the poor if, as in the United States, the poor are perceived as lazy. In contrast, Europeans believe that the poor are poor because they have been unfortunate. Racial fragmentation and the disproportionate representation of ethnic minorities played a major role in determining beliefs about the poor and in limiting redistribution. In fact, welfare spending in the US goes disproportionately to minorities. America’s troubled race relations are clearly a major reason for the absence of an American welfare state.

In general, there are three main reasons why the US redistributes less than Europe: the majority of Americans believe that redistribution favors racial minorities; Americans believe that they live in an open and fair society and that if someone is poor it is his or her own fault and, in the end, because the political system is geared toward preventing redistribution.

The "Easterlin Paradox"

The “Easterlin paradox” shows us that the correlation between GDP per capita and the degree of happiness is unstable. While at low levels of GDP per capita its increases tend to associate with a parallel increase in happiness, when GDP per capita becomes higher its increases do not translate into a parallel increase in happiness. To the contrary, in those circumstances happiness may even decrease. Thus, the popular version of the paradox states: money doesn’t (always) buy you happiness. This evidence was originally found by Easterlin for the USA and it has been demonstrated also for other countries. As shown by Stefano Bartolini, relational goods may univocally promote happiness where instead GDP per capita has the mentioned nonlinear relationship with happiness.

Hence, the ability of a country to keep its people happy will depend (also) on its ability to promote the diffusion of relational goods. In turn, the ability to promote relational goods will depend on the attitude of the country towards material goods: the more a country focuses on material goods, the less it will be able to increase its relational goods. Here, referring to values becomes important. A country, like the US, which has shifted so deeply into individualism and materialism will find it difficult to invest in relational goods, something that should be less difficult to do for a country where solidarity attitudes prevail.

Materialism Study by Stefano Bartolini

Stefano Bartolini conducted a study on materialism, analyzing 6 countries over 25 years: Italy, France, Sweden, UK, USA, and Spain. The trend in Europe is different from the US: in the last materialism has increased, while in Europe it has decreased. However, some mixed patterns arise: UK and Spain have shown some symptoms of an increase in materialist values. The widespread diffusion of materialism in the US has been promoted by the economic reforms, culture, and educational institutions that this country experienced in the last 30 years.

Hofstede’s Study on Individualism

In Hofstede’s study, it is possible to analyze the relationship between the property rights protection index and the individualism index. There is a positive relation. Across the world, the countries more individualistic are Australia, the US, and UK instead the countries less individualistic are China, Indonesia, and South America.

European Capitalism

The European capitalism differs from financial capitalism and state capitalism. In Europe, individual liberty is secured but capitalism is characterized by mechanisms designed to satisfy the common interest as well: the large role of this sector, the presence of representatives in company supervisory boards, the high frequency of family-owned and run businesses, the dimension and nature of trade unions, and the public happiness tradition. These instances make clear that Europe’s capitalism is a stakeholder and community-oriented form of capitalism; the European capitalism appears better equipped to tackle sustainability.

International Trade Theory

World trade: An overview

Gravity model: Tij = A x Yi x Yj / Dij. T is the value of trade between the two countries, A is a constant, Y is the country GDP, D is the distance between the two countries. Trade is proportional to the product of the two countries' GDP and decreases in the distance between the two countries. Some countries trade more or less than the model would predict because of geographical factors, cultural affinity, borders, multinational corporations, and trade agreements.

Labor productivity and comparative advantage: The Ricardian model

The Ricardian model established that one country has a comparative advantage in producing a good or service when the opportunity cost of producing that good is lower in the country than in other countries. The opportunity cost of producing something measures the cost of not being able to produce something else with the resources used.

Moreover, the Ricardian model is based on several assumptions: there are only two countries, the home country and the foreign country; there are only two goods, wine and cheese, labor is the only factor of production, labor productivity varies across countries due to differences in technology but it is constant in each country (ignores the transportation costs), competitive allow workers to be paid a competitive wage equal to the value of what they produce and allows them to work in the industry that pays the higher wage.

In the Ricardian model, the possibility production frontier (alc*Qc+alw*Qw<L) is a linear function that shows the maximum amount of goods that can be produced for a fixed amount of resources. In the home country alc, that represents the constant number of hours of labor required to produce one unit of output is equal to 1 h/kg, while in the foreign country is equal to 2 h/kg. At the same time in the foreign country alw is equal to 5 h/L while in the home country alw is equal to 2. Therefore, the home country has a comparative advantage on wine because alw/alc is lower than alw/alc, instead, the foreign country has a comparative advantage on cheese because alc/alw is lower than alc/alw.

Specific factors and income distribution

The specific factors model is based on several assumptions: there are two countries, the home and the foreign country, there are two goods, cloth and food; perfect competition prevails in all markets, there are three factors of production capital, labor, and land; cloth is produced using labor and capital, instead, food is produced using land and labor; labor is a mobile factor, instead, capital and land are immobile factors.

The last assumption assumes strong importance in labor migration; in fact, in this model the wage rate w must be the same in both sectors, because of the assumption that labor is freely mobile between sectors, so it will move from the low-wage sector to the high-wage sector until wages are equalized. The wage rate is determined by the intersection between total labor demand and total labor supply.

No support for free trade: When there is no trade (i.e. we have autarchy) each country produces both C & F and, consequently, both K & T will be employed, besides L which, being the mobile factor, will always be used in the production of both goods. When we have free trade, following their comparative advantage, Home will specialize in producing one of the two goods while Foreign will specialize in producing the other good. Specialization may be complete or only partial, but anyhow when Home specializes in producing C the capitalists (those who own K) will benefit because the demand for the input they own will be higher and that will increase the return on K. On the contrary, landowners in Home will lose since the demand for T will decrease and, consequently, their remuneration is going to drop. Conversely, in Foreign, which will specialize in food, landowners are going to benefit while capital owners are going to lose. The above explains why there will be opponents to free trade.

When international labor mobility is possible, workers will want to move from the country with the low wage to the country with the high wage. We suppose that there are two countries and two factors labor and land, labor can move across countries instead land cannot move. We assume that in H the real wage is lower than in F, so the domestic workers will want to migrate to the foreign country until the purchasing power of real wage is equal across countries. Immigration, in the foreign country, decreases the real wage and increases the supply of labor instead emigration, in the home country, increases the real wage and decreases the supply of labor. However, labor migration increases world output because the world output is maximized when the marginal productivity of labor is the same across countries.

Resources and trade: The Heckscher-Ohlin model

The H-O model states that an economy has a comparative advantage in producing, and thus will export, goods that are relatively intensive in using its relatively abundant factors of production, and will import goods that are relatively intensive in using its relatively scarce factors of production. This one is true if assumptions are valid: there are two goods, there are two countries, the home and the foreign, there are two factors of production labor and capital; the supply of L and K in each country is constant and varies across countries; the mix of L and K used varies across goods.

In the long run, both labor and capital can move across sectors, equalizing their returns (wage and rental rate) across sectors. Owners of abundant factors gain, while owners of scarce factors lose with trade. A country as a whole is predicted to be better off with trade, so winners could in theory compensate the domestic losers. Empirical support of the Heckscher-Ohlin model is weak except for cases involving trade between high-income countries and low/middle-income countries or when technology differences are included.

Leontief found that U.S. exports were less capital-intensive than U.S. imports, even though the US is the most capital-abundant country in the world: Leontief paradox. On the contrary, an important study by Donald Davis and David Weinstein showed that if we relax the assumption of common technologies, along with assumptions underlying factor price equalization then the predictions could be valid.

Stolper-Samuelson theorem states that: If the relative price of a good increases, then the real wage or rental rate of the factor used intensively in the production of that good increases, while the real wage or rental rate of the other factor decreases. If the theorem holds, the increase in the relative price of cars with respect to pizzas (Pc/Pp) should translate into an increase in the relative price of K with respect to L. Hence, w/r will decrease.

Rybczynski theorem explains the relationship between resources and output. In fact, this model established that if one country holds output prices constant, as the amount of a factor of production increases, then the supply of good that uses this factor intensively increases and the supply of the other goods decreases. We assume that: there are two factors of production, labor (L) and capital (K); two goods (cloth and food); the production of cloth is relatively labor-intensive and the production of food is relatively capital-intensive. Now, we suppose that the supply of labor increases due to labor migration; if the supply of labor increases also labor force rises (the ratio between L and K). The possibility production frontier moves to the right, therefore to the production of cloth because the production of cloth is relatively labor-intensive. In this case, to employ the additional workers the economy increases the production of cloth and decreases the production of food.

The standard trade model

The standard trade model is a general model that includes Ricardian, specific factors and H-O models as special cases in which there are two goods (cloth and food) and each country’s PPF is a smooth curve. This latter determines the relative supply function of each country. National relative supply function determines a world relative supply function which along with world relative demand determines the equilibrium under international trade. Differences in labor services, labor skills, physical capital, land, and technology between countries cause differences in production possibility frontiers. The terms of trade refer to the price of exports relative to the price of imports: when a country exports cloth and the relative price of cloth increases, the terms of trade rise. An increase in the terms of trade increases a country’s welfare because the country can buy more imports thanks to gains on exports. According to the standard trade model, growth is usually biased: it occurs in one sector more than others, causing relative supply to change. In the Ricardian model, technological progress in one sector causes biased growth; instead, in the Heckscher-Ohlin model, an increase in one factor of production causes changes in the relative supply.