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Why the Trans-Pacific Partnership is nearly dead

Robert Reich, professor of public policy | June 16, 2015

How can it be that the largest pending trade deal in history – a deal backed both by a Democratic president and Republican leaders in Congress – is nearly dead?

The Trans Pacific Partnership may yet squeak through Congress but its near-death experience offers an important lesson.

It’s not that labor unions have regained political power (union membership continues to dwindle and large corporations have more clout in Washington than ever) or that the President is especially weak (no president can pull off a major deal like this if the public isn’t behind him).

The biggest lesson is most Americans no longer support free trade.

It used to be an article of faith that trade was good for America.

Economic theory told us so: Trade allows nations to specialize in what they do best, thereby fueling growth. And growth, we were told, is good for everyone.

But such arguments are less persuasive in this era of staggering inequality.

For decades almost all the gains from growth have been going to a small sliver of Americans at the top – while most peoples’ wages have stagnated, adjusted for inflation.

Economists point to overall benefits from expanded trade. All of us gain access to cheaper goods and services.

But in recent years the biggest gains from trade have gone to investors and executives, while the burdens have fallen disproportionately on those in the middle and below who have lost good-paying jobs.

So even though everyone gains from trade, the biggest winners are at the top. And as the top keeps moving higher compared to most of the rest of us, the vast majority feels relatively worse off.

To illustrate the point, consider a simple game I conduct with my students. I have them split up into pairs and ask them to imagine I’m giving $1,000 to one member of each pair.

I tell them the recipients can keep some of the money only on condition they reach a deal with their partner on how it’s to be divided up. They have to offer their partner a portion of the $1,000, and their partner must either accept or decline. If the partner declines, neither of them gets a penny.

You might think many recipients of the imaginary $1,000 would offer their partner one dollar, which the partner would gladly accept. After all, a dollar is better than nothing. Everyone is better off.

But that’s not what happens. Most partners decline any offer under $250 – even though that means neither of them gets anything.

This game, and variations of it, have been played by social scientists thousands of times with different groups and pairings, and with remarkably similar results.

A far bigger version of the game is being played on the national stage as a relative handful of Americans receive ever-larger slices of the total national income while most Americans, working harder than ever, receive smaller ones.

And just as in the simulations, those receiving the smaller slices are starting to say “no deal.”

Some might attribute this response to envy or spite. But when I ask my students why they refused to accept anything less than $250 and thereby risked getting nothing at all, they say it’s worth the price of avoiding unfairness.

Remember, I gave out the $1,000 arbitrarily. The initial recipients didn’t have to work for it or be outstanding in any way.

When a game seems arbitrary, people are often willing to sacrifice gains for themselves in order to prevent others from walking away with far more – a result that strikes them as inherently wrong.

The American economy looks increasingly arbitrary, as CEOs of big firms now rake in 300 times more than the wages of average workers, while two-thirds of Americans live paycheck to paycheck.

Some of my students who refused anything less than $250 also say they feared allowing the initial recipient to keep a disproportionately large share would give him the power to rig the game even more in the future.

Here again, America’s real-life distributional game is analogous, as a few at the top gain increasing political power to alter the rules of the game to their advantage.

If the American economy continues to create a few big winners and many who feel like losers by comparison, free trade won’t be the only casualty.

Losers are likely to find many other ways to say “no deal.”

Instead of investing in dirty fuels, let’s start charging polluters for poisoning our skies – and then invest the revenue so that it benefits everyone.

Each ton of carbon that’s released into the atmosphere costs our nation between $40 and $100, and we release millions tons of it every year. 

Businesses don’t pay that cost. They pass it along to the rest of us — in the form of more extreme weather and all the costs to our economy and health resulting from it.

We’ve actually invested more than $6 trillion in fossil fuels since 2007. The money has been laundered through our savings and tax dollars.

This has got to be reversed.

We can clean our environment and strengthen the economy if we (1) divest from carbon polluters, (2) make the polluters pay a price to pollute, and (3) then collect the money.

Cross-posted from Robert Reich’s blog


Comments to “Why the Trans-Pacific Partnership is nearly dead

  1. My econ professor used this game theory exercise as well, simply to introduce game theory to the class. Coincidentally, I’d spent the summer researching TPP. As an economics major my focus is in behavioral economics. I was reminded of an acting exercise I’d conducted with 2nd graders more than 20 years ago. The outcome of what was essentially an empathy exercise showed me that fairness (enlightened self interest) was very well refined by the age of consent. In this exercise, the first transaction nullifies fairness, and what had been perceived as powerlessness became empowerment.

    Free Trade across the pacific would be wonderful and should enhance developing nations, making greater equity. Unfortunately fairness still is not in the business model, and those seven year olds have said we see through this game.

    Start Fair, take care of the environment, pay your fair share for the resources used, pay the full value of the resources used, and invest in the sustainability of those resources and the profit is yours. Until the business model reflects those costs, no one gets that $1,000. We, the labor force still have the skills,(potential). The other guy doesn’t even have that capital.

  2. A group of wealthy people (Senate Democrats — average net worth of $13 million each in 2012) have stalled the Trans-Pacific Partnership (TPP) trade agreement.

    The sticking factors are a Trade Promotion Authority (TPA) and a Trade Adjustment Assistance (TAA), each of which adds a significant level of complexity. A good shorthand description of the status:

    “Mr. Obama really wants to get T.P.P., but he needs T.P.A., and that requires T.A.A. Democrats like T.A.A., but will kill it to block T.P.A. ”

    Glib rhetoric is the default modality for demagogues of all persuasions, but facts are what paint a true picture.

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