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A Note on the Race to the Bottom

Among the most frequently heard complaints against globalization is the "race to the bottom" argument.  In particular, this argument alleges that globalization undermines governments’ abilities to tax and regulate in the public interest.

Quite simply, the argument goes, if the likes of Chad and China have lower tax rates and fewer burdensome regulations, enterprise will flee to such havens, abandoning western nations with higher taxes and more regulations.  Western governments, in response, will have no choice but to reduce taxes and eliminate many regulations, resulting in the provision of too few social services and too few worthwhile regulations.

My point here is not to review this "race to the bottom" argument.  I content myself by mentioning that the evidence is against it.  A good summary of this evidence is in Douglas Irwin, Free Trade Under Fire, 2nd ed., 2005.)

I write, rather, to point out that that part of the "race to the bottom" argument that says that globalization forces western governments to reduce welfare-state activities (such as taxpayer-funded health care) is inconsistent with the argument that Wal-Mart and other U.S. employers are able to pay lower wages because the government provides workers with Medicaid and other welfare-state benefits.

If this argument were true — that is, if it were true that taxpayers subsidize Wal-Mart’s and other American employers’ hiring of workers, thus keeping wage rates lower than otherwise — then welfare-state measures such as Medicaid would attract employers.  Countries with the most generous welfare-state benefits would be magnets for employers.  Governments would then compete amongst themselves to offer ever-greater welfare-state benefits.

Of course, for reasons explained elsewhere — here, here, and here — Cafe Hayek doesn’t buy the argument that welfare-state benefits are a subsidy to employers.


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