Russell Roberts's Blog, page 445
February 24, 2020
A (Very) Short Primer on Trade and Protectionism
– To the extent that tariffs succeed in protecting jobs in some domestic firms, they destroy jobs elsewhere in the domestic economy.
Insofar as tariffs enable some domestic producers to raise the prices they charge – and, thus, prompt these protected firms to produce more output than they would produce absent the tariffs – consumers have less money to spend on other goods and services. Demand for other domestically produced goods and services is artificially lowered by the same tariffs that artificially raise demand for the output of protected firms. While output and employment in protected firms rise, output and employment elsewhere in the domestic economy fall.
Tariffs do not increase total domestic employment over the long run, and nor do tariffs decrease this employment. Tariffs shift employment. Tariffs shift employment away from unprotected industries to protected ones.
– In the absence of any home-country trade restrictions, workers and other domestic resources would tend to be employed in ways that produce the most value.
This happy outcome is ensured by competition. Workers employed to produce domestically what can be imported at lower costs are workers employed inefficiently. With free trade, these workers would lose their jobs. They would eventually find employment producing outputs that are produced most efficiently in the home country.
– Tariffs, therefore, by protecting workers employed inefficiently from losing their jobs, cause workers and other resources to be employed less productively than otherwise.
Because over the long run wage rates are determined by worker productivity, protectionism – by keeping workers in less-productive employments – keeps real wages lower than wages would otherwise be.
Some Links
Underneath Trump’s policies is a profound ignorance of the tight connection between imports and exports. Foreigners sell goods and services to U.S. buyers in order to acquire American dollars. They want these dollars, in part, to buy American exports. So when U.S. imports grow, so do U.S. exports. The reverse is also true: reducing American imports causes Americans to shrink.
More important, and often overlooked: Foreigners want dollars also to invest in America’s powerful economy. That includes (but of course isn’t limited to) buying U.S. Treasury bonds. In consequence, every dollar Americans spend on foreign goods and services comes back to us. As the U.S. trade deficit rises, investment flows into America increase by the same amount. As the nerds say, the current-account deficit is a mirror image of the capital-account surplus. This is why Mark Perry of the American Enterprise Institute describes imports as “job-generating foreign investment surpluses for a better America.”
Vincent Geloso understandably has had quite enough of the notion of “presidential greatness.”
Tom Nichols is appalled by Bernie Sanders’s bottomless gullibility for tyranny.
Also fearful of Bernie Sanders is Daniel Bennett.
Peter St. Onge isn’t impressed with Canada’s health-care system.
Steve Landsburg urges us to stop-and-think.
Partly because of a worldwide retreat from collectivism, extreme poverty has dramatically decreased. Massive new markets have opened to us. Despite the perception of many, medium household incomes are at an all-time high. The middle class is growing — especially the upper-middle class. In the past 50 years, spending on food and clothing as a share of family income has fallen from 42% to 17%. Your house is probably more expensive than the average house was in 1975, but it’s also more comfortable and safer.
Quotation of the Day…
… is from page 101 of Randy Holcombe’s insightful 2018 book, Political Capitalism: How Economic and Political Power is Made and Maintained (footnote deleted):
Tariffs create a trade barrier that raises the cost of imports and therefore allows domestic sellers to charge more – a transfer from buyers to the sellers of domestic goods who are protected by the tariff that raises the price of competing imports. Tariffs interfere with voluntary market exchanges, reducing productivity and lowering incomes. Standard economic analysis recognizes this welfare loss, but [Gordon] Tullock goes on to note that tariffs are a product of government, and that those protected by the tariffs use real resources to lobby to put them in place. Those resources used to engage in the political process to establish the tariffs – the Tullock costs – are also welfare losses.
DBx: Yes.
Unfortunately, this reality – one so undeniable and so well-known to sensible people – is completely lost on the likes of Daniel McCarthy, Julius Krein, Oren Cass, Marco Rubio and others who plead for government to be given more power over resource-allocation decisions.
McCarthy, Krein, et al., not only ignore the public-choice problems of empowering government in the ways that they wish government to be more empowered, they also completely fail to answer this question: how will government officials acquire the detailed, local, and ever-changing information necessary to override market processes in ways that improve upon those processes?
These ‘men of system’ don’t bother even really to ask the question, much less to answer it adequately. When they address the question at all, they think it sufficient to say something along the lines of ‘Because we’re not calling for maximum-possible intervention, we can ignore the annoying question of just how government officials will get the knowledge necessary to improve on market processes by overriding these processes.’ That is, when they appear to offer answers to the question, their answers amount to nothing more than veiled confessions that they have no answer to the question. They merely assume the knowledge problem away by insisting that it doesn’t apply to their particular proposals, and accusing anyone who argues otherwise of being trapped by an obsession with “simplistic absolutisms.”
Having no answer to this question about how a handful of government officials spending other people’s money will acquire and process detailed knowledge used in markets daily by hundreds of millions of on-the-spot individuals each spending his and her own money, these ‘men of system’ naively assume that such knowledge is accessible to government official and will be processed and applied apolitically rather than politically.
The move made by McCarthy, Cass, and other proponents of protectionism and industrial policy is the intellectual equivalent of a person insisting that it is perfectly reasonable and scientific to predict the future by using Tarot cards. Sadly, that is the intellectual level at which these people operate when they call for protectionism and industrial policy.
February 23, 2020
Thinking Soundly About Trade
Here’s another letter to my incessant correspondent, “proud Trump man” Nolan McKinney; in it, I repeat a point that I’ve made in the past:
Mr. McKinney:
Writing that I’m “dogmatic” in my support for free trade, you accuse me of failing to see the “nuance” in Oren Cass’s protectionism. “He does not oppose free trade,” you claim, “he only is opposed to the extreme radical position that free trade is always beneficial and should be followed always.”
In other words, Oren Cass wants government officials to superintend Americans’ commerce with foreigners, and to obstruct it whenever these officials divine that this commerce might be harmful. This stance, Mr. McKinney, is that of a classic protectionist – of someone who is indeed hostile to free trade.
Endorsing the complete and unconditional freedom (save, perhaps, for national-security concerns) of Americans to trade with non-Americans is no more dogmatic and radical than endorsing the complete and unconditional freedom of men to trade with women – or of tall people to trade with short people – or of Catholics to trade with non-Catholics – or of Cubs fans to trade with Cardinals fans.
Just as economics and ethics make clear that there is nothing whatsoever extreme or radical about unconditional opposition to entrusting government with any discretion to impose tariffs on men’s purchases of goods and services offered for sale by women, economics and ethics make clear – again with the possible exception of national-security reasons – that there is nothing whatsoever extreme or radical about unconditional opposition to entrusting government with any discretion to impose tariffs on Americans’ purchases of goods and services offered for sale by non-Americans.
Don’t point me to textbook demonstrations of theoretical possibilities of how government can restrict Americans’ trade with foreigners in ways that enrich Americans as a whole. Like any competent economist, I’m well-aware of these demonstrations. But give me this morning the services of a clever graduate student and I’ll give you this afternoon a large notebook full of theoretical demonstrations of how government can restrict men’s trade with women in ways that enrich men as a whole. (Indeed, I can promise demonstrations of how such restrictions on men’s trade with women will enrich both men as a whole and women as a whole.)
And give me a wise graduate student and I’ll give you economically air-tight arguments that such theoretical demonstrations are useless in reality.
Theoretical demonstrations of how government’s use of discretion to restrict trade might possibly enrich some select sub-group of people, or enrich even all people, are easy to concoct. Economically, however, these demonstrations are utterly unrealistic. And attempts to apply them in reality are ethically abhorrent.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
Some Links
David Henderson is correct: capital is so far from being a homogenous glob – a “K” – that there is no analytical advantage, and far too much analytical confusion, to be had by treating it as such. (And, I add, much the same holds true for labor – or, if you prefer, for “human capital.”)
Dan Hugger recommends three good books as introductions to sound economics.
Vincent Geloso writes about an under-appreciated trend in mortality and inequality. Here’s his conclusion:
What used to be a major source of inequality is now a minor source of inequality in human development. The unhealthy focus on income inequality makes us blind to these great developments in human well-being. This is not to say that analysis of income (or wealth) inequality should be abandoned. However, it ought to be complemented with other indicators of inequality. A great number of indicators would constitute a dashboard for sober analysis. At the very least, it would give us the capacity to appreciate how we are living in a more equal and richer world than we used to before.
James Pethokoukis busts a myth about the number of Americans living paycheck-to-paycheck.
Robert Verbruggen looks carefully at Oren Cass’s Cost of Thriving Index and finds it wanting. A slice:
It’s undeniably true that housing, health care, and college are too expensive in this country, but because it [Cass’s index] exaggerates the cost of college and fails to include health benefits as compensation, the index overstates its case when it claims the four essentials to a good life are out of reach. And it completely ignores many other important expenses, from food to computers, whose prices have fallen. Also worth noting is that in treating male wages as the benchmark, it leaves out the upward trends in female work and pay, though these issues are discussed in the report itself (and get complicated because two-worker families take on new costs through daycare and the like).
And do not miss Scott Winship’s patient, step-by-step destruction of Cass’s index.
On trade, Clausing challenges the mercantilist fixation on exports and trade balances. She notes that imports benefit American families, especially lower-income households that spend a larger share of their budgets on tradable goods such as food, clothing, and shoes. As a consequence, tariffs are one of the federal government’s most regressive forms of taxation. “In the United States,” she writes, “tariffs take a bite out of the after-tax incomes of the poorest 20 percent of the population three times larger, in percentage terms, than they take from the top 20 percent.”
Quotation of the Day…
… is from page 102 of Bas Van Der Vossen’s and Jason Brennan’s excellent 2018 book, In Defense of Openness:
[T]he right to transfer and contract greatly increases the pool of resources people can enjoy. Most obviously, these rights give people the legal means to acquire resources they do not already possess, and allocate some of their own possessions to chosen others. This bolsters the flow of resources through the economy and helps guide them to their most valued uses. Slightly less obviously, the right to transfer offers people their most reliable method of acquiring that which they do not produce themselves. This enables the division of labor and thereby significant increases in productive efficiency.
DBx: The United States today has about 4.2 percent of the world’s population – which means that 95.8 percent of human beings alive today live outside of the U.S. And so for every one fellow American with whom each of us Americans can freely trade without the obstruction of protective tariffs, there are 23 non-Americans with whom each of us Americans cannot trade so freely.
Because human beings are the ultimate resource, each instance of the U.S. government obstructing Americans’ trade with non-Americans is an instance of the U.S. government obstructing Americans’ access to the gains for Americans that are possible from dealing economically with the ultimate resource.
Trade restrictions imposed by the U.S. government artificially shrink the range of opportunities open to us Americans to enrich ourselves materially. And not incidentally, such restrictions also make us poorer culturally, as well as less-civilized and more prone to shoot guns rather than to eat butter.
Protectionists are blind both to the full consequences of trade and to the full consequences of the protectionism – the “scarcityism” – that they endorse.
Protectionists of all ideological colors and hues, when they see the jobs ‘destroyed’ by trade, do not see the jobs created by trade.
Protectionists – nearly all of whom know much economic jargon but little of the economics from which this jargon springs – think it to be unfortunate for fellow citizens to become too costly to employ in particular jobs. Protectionists do not see that to be too costly to employ in particular jobs typically means to have better opportunities in other jobs. (Who among today’s many prominent peddlers of protectionism would think themselves to be made better off by being made no longer too costly to employ in whatever jobs they held at the age of 19?)
Protectionists miss the reality that whatever downsides there might be from free trade with foreigners exist for free trade with fellow citizens. Trade across political borders is no more prone to destroy jobs or businesses than is free trade across U.S. state borders and free trade across household borders. And protectionists miss also the reality that whatever upsides there might be from free trade with fellow citizens exist for free trade with foreigners.
Protectionists – at least the many of them who are sincere and not special pleaders for rent-seeking domestic producer groups – miss alot. To be such a protectionist requires economic ignorance and blindness. Anyone raised above this ignorance and, thus, cured of this blindness is no longer someone who sincerely believes that free trade poses a risk to domestic prosperity and that import tariffs and export subsidies will enrich fellow citizens as a group.
February 22, 2020
Oren Cass Differs Little from Bernie Sanders
It is, of course, certain that each of these scholars – Cass and Sanders – would reject the comparison. Cass surely doesn’t feel himself to be motivated by the same sentiments that he believes fuel Sen. Sanders’s fires. And Sen. Sanders surely doesn’t feel himself to be motivated by the same sentiments that he believes fuel Cass’s fires. Yet both of these social engineers believe that government officials should be entrusted with the discretionary power to coerce ordinary Americans to support particular American producers that don’t profit in markets.
Both Cass and Sanders fancy themselves to be much smarter than markets. (Such hubris is common among the intellectualatti.) Both Cass and Sanders arrogantly elevate, over the actual operation of markets, their own privately formed fancies of the details of how markets should operate – meaning that neither Cass nor Sanders appreciates the information-gathering-and-processing role of markets. Neither man begins to understand Hayek.
Both Cass and Sanders, in short, reveal with nearly every word that they write and with each syllable that they utter an utter ignorance of economics – and also, by the way, a shockingly careless ignorance of history.
Cass and Sanders are simply two of the current shooting stars (along with Warren, Buttigieg, Trump, Biden…) in the long, long, long, and sorry parade of arrogance-saturated and economically uninformed pundits and politicians who, finding reality as they perceive it to be not quite to their taste, think nothing of coercing ordinary men and women to behave in ways that these pundits and politicians imagine will result in a reality that is more to their taste.
This hubris is worse than breath-taking; it’s sickening and it’s scary.
Bonus Quotation of the Day…
… is from page 79 of my former professor Randy Holcombe’s 2018 book, Political Capitalism: How Economic and Political Power is Made and Maintained:
In the abstract, people can hope that the government always acts in the public interest, but even casual observation indicates that the elite who make public policy do so with their own interests in mind. Externalities exist when the activities of some impose costs on third parties. Because government can force some to bear the costs of policies that benefit others, government policies create externalities. Those who design policies can benefit by producing policies that impose costs on others.
DBx: Indisputably true. So why are people who endorse the likes of tariffs and industrial policy blind to this reality? Such people – represented by Bernie Sanders on the left and by Oren Cass on the right – see problems where none exist, and then propose to fix these problems that are imaginary with policies that create problems that are real.
It’s more than mildly mysterious that so many pundits and politicians make themselves frantic by conjuring up imaginary problems that allegedly arise from people voluntarily spending their own money, and then, in response to this fear, calm themselves by blithely assuming that the ‘solution’ to such imaginary problems lies in giving to government officials the power to spend other-people’s money as well as to coerce other people.
Such pundits and politicians apparently believe that a sufficient condition for ensuring that coercion will produce lovely outcomes is the ability of such pundits and politicians personally to imagine that coercion might work in this happy manner, and then to describe these lovely outcomes using words. How unreflective and very self-centered.
Quotation of the Day…
… is from page 524 of George Will’s marvelous 2019 book, The Conservative Sensibility:
The political class has prospered by hiding from the public the cost of the public’s appetites. By making vast deficit spending not an occasional counter-cyclical recourse but a constant governing strategy, it has made big government deceptively cheap, giving today’s public a dollar’s worth of goods and services and charging them only about 80 cents. By doing so, government deepens America’s infantilization. It is characteristic of children to will an end without willing the means to this end. This is now a national characteristic.
February 21, 2020
The U.S. Government’s Fiscal Incontinence
Here’s a letter that I sent on February 9th to the Washington Post:
Editor:
You report that “The White House is preparing to propose a budget that would fail to eliminate the federal deficit over the next 10 years” (“Trump budget plan would fail to eliminate deficit over 10 years, briefing document shows,” Feb. 9).
This fiscal incontinence is appalling. We’re in the midst of the longest economic expansion in American history, real U.S. GDP per capita is at an all-time high, and the unemployment rate is at a 50-year low. There is simply no good reason for the government now to borrow money, and yet Trump proposes that nearly one-fifth of spending over the next fiscal year be funded with debt.
In 1977 my late Nobel-laureate colleague James Buchanan wrote, with my current colleague Richard Wagner, Democracy in Deficit. In this book they predicted that Keynesian economics, by giving intellectual cover to budget deficits run during recessions, would so weaken norms of fiscal responsibility that politicians would find it impossible to balance budgets even during economic boom times.
I recall as a young student back then that many economists dismissed the Buchanan-Wagner thesis as mistaken, even unscientific. Fiscal reality, I submit, is proving Buchanan and Wagner to have been prescient.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
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