Protectionism Abroad and Socialism at Home

Protectionism Abroad and Socialism at Home

One of the most insidious ways politicians expand government is by creating new programs to “solve” problems created by politicians. For example, government interference in health care increased health care costs, making it difficult or even impossible for many to obtain affordable, quality care. The effects of these prior interventions were used to justify Obamacare.

Now, the failures of Obamacare are being used to justify further government intervention in health care. This does not just include the renewed push for socialized medicine. It also includes supporting new laws mandating price transparency. The lack of transparency in health care pricing is a direct result of government policies encouraging overreliance on third-party payers.

This phenomenon is also observed in foreign policy. American military interventions result in blowback that is used to justify more military intervention. The result is an ever-expanding warfare state and curtailments on our liberty in the name of security.

Another example of this is related to the reaction to President Trump’s tariffs. Many of America’s leading trading partners have imposed “retaliatory” tariffs on US goods. Many of these tariffs target agriculture exports. These tariffs could be devastating for American farmers, since exports compose as much as 20 percent of the average farmer’s income.

President Trump has responded to the hardships imposed on farmers by these retaliatory tariffs with a 12 billion dollars farm bailout program. The program has three elements: direct payments to farmers, use of federal funds to buy surplus crops and distribute them to food banks and nutrition programs, and a new federal effort to promote American agriculture overseas.

This program will not fix the problems caused by Tramp’s tariffs. For one thing, the payments are unlikely to equal the money farmers will lose from this trade war. Also, government marketing programs benefit large agribusiness but do nothing to help small farmers. In fact, by giving another advantage to large agribusiness, the program may make it more difficult for small farmers to compete in the global marketplace.

Distributing surplus food to programs serving the needy may seem like a worthwhile use of government funds. However, the federal government has neither constitutional nor moral authority to use money taken by force from taxpayers for charitable purposes. Government-funded welfare programs also crowd out much more effective and compassionate private efforts. Of course, if government regulations such as the minimum wage and occupational licensing did not destroy job opportunities, government farm programs did not increase food prices, and the Federal Reserve’s inflationary policies did not continuously erode purchasing power, the demand for food aid would be much less. By increasing spending and debt, the agriculture bailout will do much more to create poverty than to help the needy.

Agriculture is hardly the only industry suffering from the new trade war. Industries — such as automobile manufacturing — that depend on imports for affordable materials are suffering along with American exporters. AFL-CIO President Richard Trumka (who supports tariffs) has called for bailouts of industries negatively impacted by tariffs. He is likely to be joined in his advocacy by crony capitalists seeking another government handout.

More bailouts will only add to the trade war’s economic damage by increasing government spending and hastening the welfare–warfare state’s collapse and the rejection of the dollar’s world reserve currency status. Instead of trying to fix tariffs-caused damage through more corporate welfare, President Trump and Congress should pursue a policy of free markets and free trade for all and bailouts for none.

Reprinted from ronpaulinstitute.org.

How to Look at Tariffs

How to Look at Tariffs

The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries.
Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each state of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by inefficient, high-priced New York or Rhode Island textile manufacturers who would then be complaining about the “unfair,” “cheap labor” competition from various low-type “foreigners” from Tennessee or North Carolina, or vice versa. Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by inefficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, interstate tariffs are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose interstate tariffs in another guise. Part of the drive for continuing increases in the federal minimum wage law is to impose a protectionist device against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R,NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms (and the workers struck by unemployment) hardest hit by an increased minimum wage will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of “safety.” Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk “unsafe.” If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America’s first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose-fortunately not fulfilled-to prohibit all “imports” from outside of Detroit, and citizens were exhorted to “buy only Detroit.” If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e. “imports,” into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn’t the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade-such as protectionism-cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of inefficient producers, at the expense of competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.

Excerpted from Protectionism and the Destruction of Prosperity, Published in The Free Market Reader
Murray N. Rothbard made major contributions to economics, history, political philosophy, and legal theory. He combined Austrian economics with a fervent commitment to individual liberty.
TGIF:  A Public Choice Perspective on Trade

TGIF: A Public Choice Perspective on Trade

Let’s say you could make a strictly economic case for government interference with people’s trading activities, that is, with their ability to cooperate freely with others across the world. (I have no idea what “strictly economic case” even means, but stay with me.) Would we free traders have to give up? No way.

Why not? Because we could deploy solid persuasive public choice arguments against such interference. I like to think of the Public Choice school of political economy (Buchanan, Tullock, et al.) as emphasizing the incentive problem inherent in government policymaking. Where the Austrians emphasize varieties of the knowledge problem — policymakers cannot know what they must know to plan our economic activities intelligently — the Public Choice school focuses on, among other things, the perverse incentives that policymakers, bureaucrats, and citizens face.

Before public choice came along, people tended to operate on a public-interest model of policymaking. They simply assumed that when a man or woman moved from the profit-seeking private sector to the (misnamed) public, or political, sector, he or she suddenly became single-mindedly devoted to the public interest. Egoism gave way to altruism. (Note the additional assumptions that there is such a thing as the public interest and that “public servants” know what it is.) This devotion need not be examined or even questioned; it was axiomatic. If a politician was exposed as corrupt, he was merely an outlier, like the supposed lone “bad apple” who slaughtered noncombatants at My Lai during the U.S. government’s war in Vietnam.

The Public Choice school questioned the hitherto unquestionable. Perhaps, its proponents said, if we assume that people acting politically are similar to people acting privately, we could make better predictions about outcomes. This simple move exposed the conventional perspective as naive. Of course, people are people, whether acting privately or politically. All are interested in looking after themselves — in raising their incomes, influence, and prestige. Political actors are not issued halos and wings when they enter government jobs. But the resistance to the public choice orientation has persisted, and you can detect the opposing model every day — most especially from newscasters and pundits.

I should add that Robert Higgs makes an important point on this matter. Yes, people are indeed people, but people who are attracted to power are not exactly like the rest of us. Lord Acton famously said that “power tends to corrupt,” but Higgs adds, in effect, that power also lures the already corrupted. This makes the public choice case even stronger.

Thus the public choice and Austrian critiques together deliver a one-two knockout punch to government interference with social cooperation. Contrary to the civics textbooks and pundits, politicians and bureaucrats lack 1) insight into what’s really good for us who constitute the public and 2) the incentive to pursue it even if they knew what it was. Even if voters sincerely intend to benefit all of society and not just their own personal interests (as Bryan Caplan suggests), that doesn’t mean those good intentions will be carried into policy. Human beings enact and execute policies.

Now let’s talk about trade. Gather round, folks, and I’ll tell you the story of the great Chicken War of the 1960s. In response to lobbying by special interests, France and Germany raised tariffs on cheap American chicken imports. To “retaliate,” the U.S. government put a 25 percent tariff on (all countries’) light trucks, potato starch, dextrin, and brandy. The truck tariff, which was known as the “chicken tax,” was specifically targeted at Germany. The chicken war lasted from 1961 to 1964, and then it ended — except for one aspect. The tariff on light trucks stayed in place and exists to this day. (For an accounting of the significant unintended consequences of this tariff, see Bryce Hoffman’s “If You Aren’t Worried about a Trade War, You Don’t Know about the Chicken Tax.”)

If the truck tax was retaliation for the European chicken tariff, and the chicken tariff disappeared, why does the truck tax still exist?

It’s not hard to answer that question. Behind the truck tax was a powerful lobby that didn’t give a hoot about America’s chicken farmers. That lobby enjoyed its protection against foreign pickup trucks, not only German but also Japanese. So why would the automakers want to let go of their shelter from competition merely because the chicken farmers were freed from their foreign tax? They wouldn’t, and they didn’t. As a result, Americans pay more for pickups than should have to. (Bryce Hoffman notes that the tariff would have disappeared with the Trans-Pacific Partnership.)

Note the public choice lesson. Bad unintended consequences will likely flow from government policy, regardless of intentions, because it will be driven by concentrated and well-organized special interests and politicians who usually will be more sensitive to those interests, which can deploy money and votes, than to consumers, who are diffuse and unorganized. (We might say that the consumers’ interest is the best approximation of the public interest.)

That’s only part of the picture. Whenever the government has the power to interfere with our trade, it also has the power to exert leverage on others, including other governments, that may have nothing to do with trade. Thomas Jefferson loved to impose trade embargoes, which he called “peaceful coercion.” This week Donald Trump delayed for 30 days the imposition of new tariffs on imported steel and aluminum from the European Union, Canada, and Mexico. He also moved toward canceling those tariffs for Australia, Brazil, Argentina. Is he seeking something in return for scrapping the tariffs? Is he telling the Europeans that if they do not support his hawkish position on Iran, he will go ahead with the trade restrictions? What did he get in return from the other countries?

We don’t know. But if Trump has the power to restrict trade, he has the power to forgo restrictions in return for other things he wants — and those other things are unlikely to be good for most Americans, not to mention the rest of the world.

David Hume said that in proposing government policy, we should assume that the people who will carry them out are “knaves.” That of course means trade policy too.

 

TGIF: The Dangerous Deficit in Trade Understanding

TGIF: The Dangerous Deficit in Trade Understanding

I was chatting with my tobacconist the other day — I have no rabbi, no priest, no minister, no imam, no chiropractor, and no lawyer, but I do have a tobacconist — when it struck me that my trade deficit with him is astronomical.

How could I have let this happen? For the nearly 20 years I have been patronizing his venerable establishment — nay, institution — it is I who has pushed money — make that plastic — across the counter. But not once has he pushed even a red cent to me. Come to think of it, this is also the case with Kroger, Walmart, McDonald’s, and a variety of gas stations.

See the pattern? The money moves in one direction only. What the hell is going on!

I realize that each time I gave those merchants my hard-earned dollars, I received things — but they were mere goods. Money is where the action is, right? Everybody knows that in any trade, it’s the money side that wins. I think Donald Trump said something along those lines, and he wouldn’t lie. He has a very fine brain — just ask him — so he couldn’t be mistaken.

Yet I have this nagging feeling my torment is misplaced. After all, no one forced me into those stores. Each time, I had an internal reason; in the case of the tobacco shop, it was my habit hobby. I wanted the pipe tobacco, groceries, double-cheeseburgers (keto style: no bun, no fries), and gasoline. Still, while I buy from those merchants week after week, none of them has ever bought a damn thing from me. Not once have they paid me to write or an edit an article for them. Not one time!

But this thought keeps nagging at me: does it matter?

Let’s approach this from another direction. Whenever I buy from them, I transfer money to which I hold proper title. It wasn’t a gift, so that means I’d previously provided services to somebody. The tobacconist doesn’t buy my services, but someone else does. Meanwhile, the tobacconist spends the money I give him to buy other people’s products and services. This suggests that when we abandon barter, what looks like two-sided exchange is really triangular, even though one of the parties is absent.* In fact, the emergence of triangular exchange marks the move from barter to money. (“Hey, I know what I’ll do. Even though I don’t want this rice being offered for my products, I’ll accept it in exchange because I know I can trade it to someone else for what I do want.”)

Maybe it doesn’t matter, then, that those to whom I sell are not the same as those from whom I buy. I shouldn’t care about any bilateral “deficit.” What matters is just that I don’t chronically spend more money than I bring in by borrowing excessively. But as is now evident, my “trade deficit” has essentially nothing to do with any budget deficit I might run up.

I also don’t see the point in “adding up” different people’s trade situations in an attempt to a get “better” view of things. Let’s say my next-door neighbor, Jones, happens to be a wholesaler who deals in pipes and tobacco, and during the year he happens to sell as much in dollar terms to my tobacconist as I buy from him. Do we learn anything important when we see that Richman-Jones has a perfect balance of trade with the shop? I think not. What if that’s the case with my whole block, neighborhood, town, county, or state? Same answer. Who cares?

Okay, then maybe this would be a problem: rather than buying things from anybody, the tobacconist invests the money he receives from me. If he invests well, that money will make him money because those who borrow it will be able to produce more, better, or cheaper goods for the (world) community. Nope, I see no problem there.

If I’m right about all this, then Adam Smith was being anything but hyperbolic when he wrote in The Wealth of Nations that “nothing can be more absurd than the whole doctrine of the balance of trade.”

“Yes, yes,” a Trumpster will say. “That’s all well and good. But what if the person on the money side of my transaction is — gasp! — not an American?”

There’s a definitive two-word answer to that question: so what?

*I could have said trade is at last quadrangular rather than triangular. The two parties to an exchange have each exchanged or will exchange with two other people.

TGIF: Economic Nationalism: Elitism in Populist Clothing

TGIF: Economic Nationalism: Elitism in Populist Clothing

My old friend and former American Conservative editor Dan McCarthy gets it all wrong about Donald Trump’s “national security” tariffs on aluminum and steel.

I won’t discuss Dan’s strictly economic case for the tariffs — I’ve already discussed this — but I want to draw attention to a few other things, beginning with his lament — which is embraced by many other conservatives and progressives — that the American economy has become a “service economy.” In fact, all economies are service economies, as Bastiat well understood. There is nothing intrinsically better about heavy industry. People grow richer when they produce things that other people value. We have no grounds to disparage “services.” (See Mark Perry’s discussion of the dominating role played by service employment.)

Dan shows he’s not keeping up when he writes, “[A] middle class is hard to imagine in a postindustrial economy consisting of a tiny capital-controlling elite and a vast population of Amazon warehouse workers.” While I oppose all government measures that have created and fostered the capital-controlling elite, Dan is wrong to disparage service workers as mere warehouse drones. (Not that this sort of work is per se deserving of disparagement.) Paul Thanos writes:

The services sector is wide and diverse and covers a wide array of sectors including retail, financial services, digital services, real estate, hospitality, education, health, social work, computer services, recreation, media, communications, and electricity, gas and water supply.

While employment in manufacturing has indeed declined — beginning before the demonized NAFTA, WTO, and Chinese membership in the latter — manufacturing output has done the opposite. As Mark Perry points out:

In inflation-adjusted constant 2014 dollars, US manufacturing output has increased more than five-fold over the last 67 years, from $410 billion in 1947 to a record-setting level of output last year of $2.09 trillion.… Although we frequently hear claims that the US manufacturing sector is dying or in a state of decline, manufacturing output in the US, except during and following periods of economic contraction like the Great Recession, has continued to increase over time, and reached the highest level of output ever recorded in 2014.

It is mainly technology, not trade, that has done away with old-style factory jobs, so there aren’t so many jobs for Trump’s tariffs to save. Dan says little about the many people who could lose jobs — in export and steel- and aluminum-using industries — because of the tariffs. How is that good for “the country” or the middle class?

But doesn’t the elimination of jobs create hardship for those who have to find new work? Of course. Life is change and adjustment. Instead of trying to thwart that inexorable process, the government should remove its special-interest impediments to adjustment, such as barriers to economic and geographical mobility, among them occupational licensing and land-use restrictions. (See my “How the Government and Special Interests Thwart Economic Mobility.”)

Nor need we worry that manufacturing is down as a percentage of GDP. Perry again:

The decline in manufacturing’s share of U.S. GDP over the last forty years is nearly identical to the decline in world manufacturing as a share of world GDP, which fell from 26.6% in 1970 to 16.2% in 2010. Therefore, we can conclude that the declining share of manufacturing’s contribution to GDP is not unique to America, but reflects a global trend as the world moves from a traditional manufacturing-intensive “Machine Age” economy to more a services-intensive “Information Age” economy. [Emphasis added.]

These developments, of course, have come in an economic order that is far from free. Corporatist government intervention has certainly distorted development here and abroad. But we can be confident a truly free market would also have seen the emergence of a “services-intensive ‘Information Age’ economy.” The big difference, I surmise, is that without government privileges, capital would be more widely owned and, as earlier libertarians predicted, bosses would be hunting up workers rather than vice versa.

Be that as it may, Dan is wrong to believe the “service economy” imperils the middle class. Yes, it’s shrinking, but that’s because people are moving up and out of it. Donald Boudreaux writes: “The American middle class, if it is disappearing, is disappearing – contrary to Mr. McCarthy’s implication – not into the lower class, but into the upper class.”

That calls for emphasis. So let’s turn to Scott Sumner (pay attention to the graph Sumner displays): “The main reason that the middle income group has shrunk is that more and more Americans have incomes above the (arbitrary) cut-off point, and fewer and fewer are either “middle income” or poor.”

Dan also buys the national-security argument for the tariffs, something Trump’s own secretary of defense [sic] does not:

[T]he US military requirements for steel and aluminum each only represent about three percent of US production. Therefore, DoD does not believe that the finds in the [Commerce Department] reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.

Moreover, if the U.S. government were not policing the world, its demand for resources and labor would shrink considerably, leaving them available for more and better consumer goods. (For more on the national security canard, see this and this and this.)

Dan warns that if the government does not support strategic industries, the country won’t have the capacity to fight and win wars. He has the Civil War and World War II in mind. This requires further examination. One may reasonably attribute many evils to Lincoln’s violent crusade to preserve the Union, including the emergence of a continental, then hemispheric, then global empire that has wreaked havoc for generations. (Secession would have cut the distance of the Underground Railroad dramatically, shortening the escape route for self-liberated slaves, who would no longer be subject to the federal fugitive-slave law.) About World War II, may I point out that this horror could not have taken place had the U.S. government not had the resources to enter the Great War in 1917? Let’s please do a full accounting. World War II gave a big boost to the Soviet Union and the Chinese communists: aren’t those also to be chalked up as products of the U.S. government’s access to awesome industrial power?

I also want to highlight Dan’s mischaracterization of those he calls “free-trade ideologues” and “extreme free-traders.” He writes:

Free-traders are not indifferent to national security nor blind to the benefits a nation derives from having a middle class. But the priority of goods is different: Free-traders tend to believe that only by making economic efficiency the supreme goal of public policy can those other ends be achieved. Division of labor produces greater wealth, and so free trade makes everyone better off, with the harm to those whose manufacturing jobs are lost outweighed by the good that comes from, say cheaper flat-screen televisions. Dollars decide. The figures are the outward and visible signs of the fundamental economic truth. [Emphasis added.]

The economics discipline certainly has had many practitioners who appear to hold efficiency as the supreme goal of public policy. But radical free-traders never put their main case in those terms. From Adam Smith to Richard Cobden and John Bright to Frédéric Bastiat to Lysander Spooner to Henry George to Herbert Spencer to William Graham Sumner to Benjamin Tucker — and right on through to Ludwig von Mises, Milton Friedman, and Murray Rothbard, free trade was a primarily matter of individual freedom and the peaceful social cooperation it spawns. Dollars don’t decide. People do.

Yes, the “system of natural liberty” has the invisible-hand effect of enabling people to get the most value at the lowest cost, but “efficiency” was not to be the goal of government policymaking. (See Rothbard’s “The Myth of Efficiency.”) Let’s not confuse principled free-traders with the technocratic professors who spend their time scribbling equations, drawing curves, and describing one-dimensional “economic man’s” pursuit of material wealth. The free-trade movement, which coincided with the antiwar movement, aimed to liberate people so they could make better lives. (To see why economics is not essentially about wealth and efficiency, see my “The Ubiquity of Economic Phenomena.”)

Earlier Dan writes,

Economic nationalists do not accept the blame made by extreme free-traders that any degree of industrial protection must inevitably lead to less national wealth. But so what if it does? If the price of national security and a durable free middle class is a modest reduction in gross domestic product, the economic nationalist is willing to pay it.

Evidently the economic nationalist is not only willing to pay that price himself; he’s also willing to force it on everyone else. What Dan calls “a modest reduction in gross domestic product” may mean a great deal to the poor who struggle to make ends meet, not to mention advance. At any rate, that price isn’t required for a durable and growing (upper) middle class (and beyond) or security. It’s all cost and no benefit.

An indication of the flaw in Dan’s analysis can be found in this sentence: “For 25 years, free-trade orthodoxy has been a bipartisan consensus among America’s policy elite.” Really? Free-trade rhetoric and a lowering of tariffs (mostly in other countries because U.S tariffs were already low) — yes. But the so-called free-trade consensus has produced government-to-government trade agreements that, while moving tariffs in the right direction, have also included carve-outs for American cronies, such as sugar producers, and imposed rigid freedom-infringing intellectual-property regimes on developing countries. Alas, Dan has allowed himself to be fooled by labels.

Dan’s preference for economic nationalism misses something essential: it is elitism in populist clothing. Politicians, bureaucrats, and their “experts” — that is, an elite — would make life-altering decisions for the rest of us. He mocks free-traders for thinking that the “middle class … must take care of itself.” Who does he think should take care of it? Why, better “leaders in Washington” of course.

“Economic nationalism,” he writes, “requires constant balancing and adjustment if it is to be pursued correctly.” And just who is qualified for that delicate job (and why would the voters recognize him)? Dan ought to reread F. A. Hayek’s Nobel address, “The Pretence of Knowledge.” He should also reacquaint himself with the incentive problems elaborated by James Buchanan, Gordon Tullock, and the public choice school.

“Economic nationalists,” Dan writes, “are intent upon protecting not only certain industries but also a multilayered free-market political and economic order that is anchored by a healthy middle class” (emphasis added). Right, and George W. Bush “abandoned free market principles to save the free market system.”

Economic nationalism, obviously, is a kind of nationalism. Thus it’s tribalism, and tribes have a central leadership that demands sacrifice in the name of collective welfare and security. Another nationalist, John F. Kennedy, said, “Ask not what your country can do for you. Ask what you can do for your country.”

“Neither half of the statement,” Milton Friedman wrote in 1962, “expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society.”

Radical free-traders recognize the glaring category mistake in Kennedy’s admonition: a country can neither do things for you nor have things done for it.

What free traders oppose and economic nationalists embrace is the presence of rulers who do things to you.

TGIF: Trading Places

TGIF: Trading Places

“What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.” –Henry George

When Donald Trump can propose tariffs on imported steel, aluminum, washing machines, and solar-panels without being roundly booed off the stage, one has to wonder if reason has any power to win the day. Is this truly a democracy of dunces?

Trade is really not that complicated. Kids do it every day, and they know what they’re doing. But something happens when they grow up. Most people never grasp the most basic economics. They harbor what Bryan Caplan calls an anti-market bias. This seems in conflict with Adam Smith’s famous “propensity to truck, barter, and exchange one thing for another,” but that might just mean that people’s explicit notions conflict with their implicit, unacknowledged guide to everyday activities. They also rarely hear anyone make the clear principled case for free trade. Almost everyone in public life is a protectionist to some extent. Even those who lean toward free trade talk as though countries — rather than individuals — trade. Hence their favorable reception of government trade agreements. Once you buy into that sort of collectivism, you are bound for trouble. (Gary Johnson was no help at all in the 2016 campaign. Merely declaring yourself and your running mate “the free traders in the race” — without explanation — teaches no one anything.)

Beyond that, most people have no incentive to explicitly cultivate the economic way of thinking. Each person’s one vote amounts to squat, so voters have no incentive to acquire the tools with which to judge political candidates, who as officeholders have a lot to say about economic matters, e.g., imports, taxation, and regulation.

Still, Americans trade every day with others, so they implicitly “know” why trade is good and why restriction is bad. They like variety, choice, and bargains. Yes, they are nationalists, so they think differently about trade the moment goods and money cross a national boundary. They see virtue in buying “American,” even if “American” means many foreign factors of production. Nevertheless, when they shop, most of the time they act like free traders.

But come on! Even with these headwinds, we free traders — we advocates of the liberty — ought to have prevailed. “Money buys more under free trade,” goes an old British Liberal Party slogan. Why isn’t that persuasive? Perhaps it’s because people don’t ever hear it said. Perhaps it’s too logical, too simple.

“Trade wars are good,” Trump says with characteristic aplomb, “and easy to win.” Well, presidents always think about wars, trade or otherwise, that way. After all, they aren’t on the front lines. (I think of the line attributed to Bastiat: “When goods don’t cross borders, soldiers will.”) With trade wars the front lines are populated by consumers who face higher prices and the industrious folks who want to export their products but can’t or who use now-higher priced imported materials and machines. They get hurt, but most people, being economic illiterates, won’t know it’s the trade restrictors who have inflicted the casualties. In other words, they overlook “what is not seen,” as Bastiat would put it. So Trump will get off scot-free. True, some writers will identify the true culprit — George W. Bush and Barack Obama have been faulted for their steel and tire tariffs — but who reads those writers besides those who already understand? We’re all prone to confirmation bias.

Anyway, here’s the important stuff to keep in mind.

*We live in a world of scarcity, which means we constantly have to make choices and face trade-offs. Time, energy, labor, and resources used in one way cannot be used in another. Therefore, if the government puts its thumb on the scale for one industry or firm, other industries and firms will be unable to obtain the resources and labor services they need to serve consumers, who will have less money after paying higher prices to buy other things.

*We work to live, not vice versa. It shouldn’t take an Adam Smith to recognize that the purpose of production is consumption.

*Individuals, not nations, trade. Remind yourself of this truism and many fallacies melt away. I have no conflict of interest with Chinese or Canadian steelmakers or other foreign producers. On the contrary, we have a harmony of interests.

*Trade is positive-sum, not, as Trump emotes, negative sum. At the moment of an exchange, both parties expect to benefit and can do so — or else they would not trade. (One or both may later decide they’ve made a mistake, but that this irrelevant.)

*Exports pay for imports. The “wealth of nations” does not consist of cash. It consists of access to goods and services. We want what money can buy. But we have to give something up to get what we want. If we didn’t want to buy, we would not need to sell. It would be nice if we could get things without having to give up anything, but everyone is in the same boat, so that is not to be.

*”Trade deficits” are not bad. Who cares if in the aggregate the individuals who comprise Group A buy more from the individuals who comprise Group B than the individuals in Group B buy in the aggregate from the individuals Group A? A “trade deficit” will simply be the counterpart to a capital-investment account surplus. Foreigners can’t spend dollars at home, so exporters have essentially two choices about how to use their dollars: buy American-made goods or invest in the United States. (Trump and his team of restrictionists want foreigners to both buy American exports and invest in the United States, but you can’t spend a dollar more than once.) Here is where the typical trade restrictionist shows his lack of discernment: he will start talking about government budget deficits. Now it is true that government debt is one of the things foreign holders of dollars can invest in. But here’s the thing: they couldn’t do it if the U.S. government weren’t running deficits! Balance the budget (after at least drastically shrinking it) and that problem disappears. It’s completely under the politicians’ control. Let’s stop scapegoating China for buying federal debt instruments.

*Finally, you cannot advocate trade restrictions without also advocating state-bestowed privilege. So if you are offended by privilege, you must oppose all trade restrictions. Restricting trade on behalf of a relatively few steelworkers and firms must — must — privilege them over the vast majority of American workers and firms and all consumers. It cannot be otherwise. A few jobs are saved — and in this age of robotics, I do mean a few — at the expense of the many. Why should those few get special government treatment? That question has to be answered before anything else.

When I raise this point with interlocutors, I often hear this comeback: So protect everyone! In other words, since restrictions (taxes) on steel and aluminum imports harm makers and exporters of, for example, autos, airplanes, and spare parts, all we have to do is protect them against their competition. The logic is that all firms and workers should have their foreign competitors hobbled. Then all will be fine. Will it?

Um, no, it won’t be. To see why, imagine that the government built an effective real wall against all foreign goods with summary execution of smugglers. No producer would have to worry about foreign competition. Would we all really be better off? Of course not; we’d all be poorer. Specialization and the division of labor — let’s call it social cooperation — make everyone richer. But, as Adam Smith famously noted, “the division of labor is limited by the extent of the market.” The smaller the market, the less refined the division, the result being fewer goods, more expensive goods, and inferior goods compared to what we’d otherwise in a larger trading area. You can see this by envisioning life in a city that did not permit any outside products (imports): the residents could buy only what someone in that city could make. Sound good to you?

Any constriction of the market area is a move toward literal self-sufficiency, and nothing would guarantee poverty like self-sufficiency. (See Bastiat’s Economic Harmonies for details.) And don’t forget: every producer is also a consumer.

Money buys more under free trade, dammit, and that means new opportunities for people in their role as producers.

The “protect everyone” solution, which should appall anyone who opposes big government, also overlooks what the price system does: it guides (not allocates) resources and labor toward what consumers want most. Remember, at any given time, we can’t have it all (although in time, technology moves us in that direction). When the government restricts trade, it distorts prices and messes up this sensitive guidance system. Someone explain how such disruption and the resulting destruction of wealth make for national security. Moreover, trade wars can become shooting wars. Heaven save from a president emboldened by a belief that the country is economically self-sufficient. (For a debunking of the national-security argument for trade restriction, see this and this.)

And what makes anyone think politicians, bureaucrats, and their appointed “experts” know better how labor and resources should be used? Don’t say those public servants will seek to emulate the market. Why emulate it when we can have the real thing?

So trade restrictionists: stop telling yourself and others that your policies will benefit “the country” — that you’re putting “America First” — because all they would do is (temporarily) benefit a select, well-connected few at the expense of everyone else. The truth doesn’t sound nearly as noble.

How to Look at Tariffs

Trump: 'Trade Wars Are Good'

Yes, that’s apparently a real quote from President Trump.
This is likely the worst economic position he has staked out so far.
On the plus side, if he puts his trade war optimism to the test and thus sparks the next recession, perhaps we won’t have to hear contrived arguments about how tax cuts cause recessions…

How to Look at Tariffs

Trump: ‘Trade Wars Are Good’

Yes, that’s apparently a real quote from President Trump.

This is likely the worst economic position he has staked out so far.

On the plus side, if he puts his trade war optimism to the test and thus sparks the next recession, perhaps we won’t have to hear contrived arguments about how tax cuts cause recessions…

TGIF: The Voice of American Workers Is a Charlatan

TGIF: The Voice of American Workers Is a Charlatan

Donald Trump, the self-proclaimed voice of American working people, has decreed that the prices of washing machines and solar panels shall rise.

So it is written. So it is done.

Trump’s decree, placing tariffs (taxes) on imported versions of those goods, will impose higher costs on consumers to help (in the short run) the minority of Americans who work in those industries. That’s how protectionism works — a favored group of firms and workers benefits at the expense of everyone else. Trump calls this “America First” and looking out for average Americans, making him either a demagogue or an ignoramus. In fact, it’s naked special-interest policymaking.

Trump acted on recommendations from his U.S. trade representative (USTR), Robert Lighthizer, who invoked the law that gives the government the power to impose tariffs when, in Lighthizer’s words, “increased foreign imports … are a substantial cause of serious injury to domestic manufacturers.” This particular law does not require the U.S. International Trade Commission (ITC) to identify any “unfair trade practice,” such as dumping or subsidies. All that is necessary is that a domestic firm (for example, in the washing-machine case, Whirlpool) or industry convinces the ITC and USTR that foreign competition has harmed it — that is, that American consumers prefer the imports to domestic alternatives.

Thus the American Firster Trump is coddling wimpy, whining firms that are better at lobbying than competing in the marketplace. This he calls “draining the swamp.”

Not that so-called dumping and subsidies would justify tariffs. They do not. Dumping, which is roughly defined as selling below cost, amounts to nonsense when you remember that costs are subjective. And while a foreign government subsidy constitutes an offense against the taxpayers of the foreign country, it cannot be construed as an offense against American firms (which, like solar-panel firms, often have their own subsidies) or American consumers. Moreover, subsidized firms are hardly efficient firms. It’s competition that keeps firms on their toes.

“The President’s action,” Lightheiser said, “makes clear again that the Trump Administration will always defend American workers, farmers, ranchers, and businesses in this regard.”

Balderdash. First, note for the record that the word consumers appears nowhere in that sentence. Next, you’ll see that while the word certain or favored belongs in the sentence to modify workers and businesses, it too is nowhere to be found. Trump and his protectionist team know they can get away with this bunk because most people are strangers to the economic way of thinking.

Obviously, protecting people who make their living in the washing-machine and solar-panel industries from competition cannot help all workers and businesses since protectionism by design raises prices. Because consumers will now have to pay more, they’ll have less money than they would have had with which to buy other products and services or to save and invest for the future. Their welfare, that is, will drop. Why don’t consumers and those other workers and businesses count? Because they are invisible. Moreover, if Americans buy fewer exports, foreign citizens will have fewer dollars with which to buy American-made goods or to invest in American enterprises. And if foreign governments retaliate against American products with their own protectionist measures, Americans who work in exporting industries will suffer. This will include farmers and ranchers.

Thus Lightheiser’s statement, like pretty much everything about the Trump administration, is sheer flapdoodle.

Trump can’t open his mouth about trade without sticking his foot in it. He loves to say he favors free trade — but then adds that it must be fair and reciprocal. Is he so stupid that he doesn’t know that trade is reciprocal by definition? Trade is exchange, and exchange is reciprocal. Each party gives something up to obtain something else. If only one party transfers a good, it’s a gift. There can no more be nonreciprocal trade than there can be square circles.

When he goes on about reciprocity, Trump is likely thinking about trade agreements between governments. He rails against such agreements because he believes they benefit other countries more than America. But trade agreements are not trade; they are arrangements politicians make to set the terms on which people of different countries may trade. In other words, they are in some manner interferences with people who wish to trade unmolested.

When anyone says, “I’m for free trade, but it must be fair trade,” they are really saying: “I am not for free trade.” Trade is free when neither buyer nor seller has a gun to his head, that is, when either can walk away because he doesn’t like the terms.

Trump should not have the power to decree that the United States shall have a washing-machine, solar-panel, or any other kind of industry. That Whirlpool exists is no argument that it should continue to exist — especially considering that the company’s resources and workers could be making other things we would like along with our washing machines.

The conservative mindset (which many progressives also display) that leads Trump to save firms and industries that can’t compete is a call for stagnation and decline. Free people buying and selling in free markets should determine what is produced.

How to Look at Tariffs

Freedom, Protectionism, and Pipe Tobacco

One of my haunts is a local tobacco shop, where I regularly drop in to smoke a few bowls of fine pipe tobacco and talk to a fine group of friends and acquaintances. I go there to relax, which is what pipe smoking is all about, but part of yesterday’s visit was anything but relaxing.

I happened to bring up Trump’s new tariffs on washing-machine and solar-panel imports, pointing out, of course, that the tariffs are a tax on American consumers and a slap at all Americans who don’t make their living in the washing-machine and solar-panel industries. In other words, the special interests triumphed over individual and general welfare.

To my (naive) surprise, the small group of people sitting around what we affectionately call “the table of knowledge” couldn’t believe what I was saying. They favored the tariffs because they believed Trump’s action would help all Americans and punish the Chinese. That’s all they “knew” or needed to know.

When I tried to explain that their belief was mistaken, they would not hear it. It had apparently never occurred to them that the action would harm consumers and Americans who make things other than the targeted goods, that is, the vast majority of people in the country. (Some America First policy, right?) Indeed, they said we can avoid the tariff by buying American products! They said this even while acknowledging that the price of domestic products would rise because of the tariff, which is the point.

It also never occurred to them that we live in a world of scarcity. If Americans and resources are employed to make washing machines and solar panels, they can’t be employed to make other things. (That’s physics as well as economics.) So my friends did not see that if we buy washing machines and solar panels from somewhere other than America, we can have them plus the other things Americans would produce. But if the government raises the prices of the imports to keep domestic firms going — which is the point of tariffs — we won’t get those other things.

In other words, along with scarcity, my tobacco brotherhood had no appreciation of the division of labor.

They also did not see that if we have to spend more money on washing machines and solar panels, we’ll have less money to spend on other goods and services, harming us both as consumers and as producers of those other goods and services. Nor did they grasp that tariffs reduce the number of dollars foreigners have with which to buy American exports or that an ensuing trade war would also harm American exporters.

To use Paul Heyne’s expression, my friends were strangers to the economic way of thinking. Specifically, the habit of looking for the unobvious secondary effects of government policy — Bastiat’s “what is not seen” — was missing from their repertoire. They are hardly unusual in that respect. Most people have had no contact with the economic way of thinking when it comes to government policy, although they engage in it whenever they shop.

Think of what this means for the theory of representative democracy? Much of what the government does is interfere with our economic pursuits. Therefore, most of what “our” so-called representatives — I call them misrepresentatives — do is enact legislation consciously designed for such interference. That means candidates for office ought to be judged on what they know about basic economics and the consequences of interference. How can we expect people to be competent participants — informed voters — in this system if they don’t understand the most basic economic principles?

Needless to say, the matter of individual liberty made no difference in the discussion. All they saw was Trump helping “Americans” and slamming foreigners.

TGIF: Tribalism and Economic Nationalism – Cut from the Same Cloth

TGIF: Tribalism and Economic Nationalism – Cut from the Same Cloth

I have no idea what goes on in Donald Trump’s head, but I can imagine a connection between his refusal to renounce the support of alt-right white identitarians and his rejection of globalism — that is, the freedom of people to trade across national boundaries and to move, consistent with individual rights, as they see fit.

When Steve Bannon says he hopes the Democrats will talk about nothing but racism and let the White House get on with its program of “economic nationalism,” he may be showing his clever side. Perhaps he sees the connection — and has a magician’s sense of misdirection.

For the record, globalism and government intervention have no necessary relationship, whatever the rest of the political universe believes. The most eloquent promoters of unencumbered world trade were Richard Cobden and John Bright, the 19th-century “Little Englander” anti-imperialists and peace advocates. No one has an excuse for conflating free worldwide commerce — including the movement of workers, that is, immigration — with either empire or elitist rule through multinational bureaucracies birthed by politicians. As Cobden said,

They who propose to influence by force the traffic of the world, forget that affairs of trade, like matters of conscience, change their very nature if touched by the hand of violence; for as faith, if forced, would no longer be religion, but hypocrisy, so commerce becomes robbery if coerced by warlike armaments.

Antiglobalism and anticosmopolitanism might flow purely from economic ignorance, but it is hard to believe that’s all it is for many people. Too often these attitudes suggest what Bryan Caplan calls “anti-foreign bias” combined with “antimarket bias.” Caplan defines antiforeign bias as “a tendency to underestimate the benefits of interacting with foreigners,” and he defines antimarket bias as a tendency to “underrate the social benefits of markets.” (His book The Myth of the Rational Voter: Why Democracies Choose Bad Policies has the details about these and other relevant, common biases.)

Why would anyone underestimate the benefits of interacting with foreigners? It might be because they are, well, foreign. Combine this bias with an ignorance of Adam Smith’s “invisible hand” (spontaneous order) and a suspicion that exchange is zero-sum rather than positive-sum, and you have the making of an economic nationalist. If you are already a committed economic nationalist, you will have an interest in spreading distrust of foreigners and markets to others in order to advance your program or be elected president of the United States. (Some apparent tribalists may “merely” be demagogues pandering to authentic tribalists.)

While I don’t think one has to embrace racism or tribalism to be an economic nationalist, an affinity exists between the two dispositions: “I can’t trust those people? Why would I want to trade with them?”

Moreover, the distrust of foreigners and markets could readily carry over to subgroups in the domestic population that seem foreign — that is, groups which don’t quite seem to embrace the “nation’s culture” with sufficient enthusiasm. Maybe some members of the suspect group have a primary language other than English, or practice a religion deemed weird, or don’t trust the police.

In other words, someone who starts with a bias against foreigners and the social cooperation embodied in what we call markets is a prime candidate for bigotry toward domestic “foreigners” too. And that person might well see kindred spirits in groups that exhibit more-pronounced versions of those biases, even when their members have a taste for violence. After all, danger lurks, so who could blame people for being tempted to defend their values directly?

Since social and economic change is inevitable — some of it introduced by The Other — those biases could also incline a person to lament the loss of a treasured past and harbor resentment against those who appear to be responsible for that loss. That person might, for example, see “the history and culture of our great country being ripped apart with the removal of our beautiful [Confederate] statues and monuments.” This could incline that person to be charitable toward groups trafficking in apocalyptic visions in which The Other threatens to destroy all that is held near and dear, “Western civilization” perhaps.

If Trump can believe that “the Chinese” are “raping” and “stealing” from us — by offering attractive consumer bargains — he could certainly believe that there are people among us who don’t really belong here and whose sheer presence jeopardizes our way of life. Maybe he’s not sure what he can do about this, but he might deep down be glad that someone is trying to do something.

I suggest that blood-and-soil-ism and economic nationalism are cut from the same cloth. Those who comprehend their destructiveness should teach others that the way to prosperity, social tranquility, and global peace is the original liberalism of Adam Smith, Frédéric Bastiat, Cobden, Bright, and their modern descendants.

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