In the July 2000 Freeman I reviewed Thomas Sowell’s 1999 book, The Quest for Cosmic Justice.  My review is below the fold.

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… is from Douglas Irwin’s January 31, 2009, New York Times op-ed, “If We Buy American, No One Else Will”:

Buy American provisions can raise the cost and diminish the effect of a spending package.  In rebuilding the San Francisco-Oakland Bay Bridge in the 1990s, the California transit authority complied with state rules mandating the use of domestic steel unless it was at least 25 percent more expensive than imported steel.  A domestic bid came in at 23 percent above the foreign bid, and so the more expensive American steel had to be used.  Because of the large amount of steel used in the project, California taxpayers had to pay a whopping $400 million more for the bridge.  While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers.

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Trump Confused

by Don Boudreaux on January 18, 2018

in Balance of Payments, Myths and Fallacies, Trade

Responding on Facebook to this letter of mine, Dennis Foster writes:

All good points except we have run a current accounts deficit (goods and services) with Mexico since 1995, I believe that is what the President’s tweet was referring to… not Mexico’s overall trade imbalance.

The confusion is understandable, for my letter is distressingly unclear, but the point of my letter remains valid.  Here’s my (slightly edited) reply, on Facebook, to Mr. Foster:

Yes, but Trump’s tweet implies that Mexico’s bilateral trade surplus with the U.S. is a source of net profits for Mexico. Especially in a world with more than two countries, this implication is simply mistaken. It makes no more sense than, say, Trump observing that McDonald’s has a trade surplus with Trump and then concluding from this fact that McDonald’s trade either with Trump, or in general, is necessarily profitable.

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18 January 2018

Mr. Donald Trump
1600 Pennsylvania Ave., NW
Washington, DC  20500

Mr. Trump:

This morning you tweeted the following: “The Wall will be paid for, directly or indirectly, or through longer term reimbursement, by Mexico, which has a ridiculous $71 billion dollar trade surplus with the U.S. The $20 billion dollar Wall is ‘peanuts’ compared to what Mexico makes from the U.S.”

Let’s look at only two of the many ways in which your tweet reveals your misunderstanding of trade.

First, a bilateral trade account in a world of more than two countries is utterly meaningless.  Many of the dollars that Mexicans earn on their exports to us Americans are spent by Mexicans buying goods and services from, and investing in, other countries.  Those dollars then return to the U.S. from countries other than Mexico as either demand for American exports or as investments in America.  To conclude, as you do, from Mexico’s ‘trade surplus’ with America that Mexico has an overall trade or current-account surplus is simply mistaken.  In fact, Mexico has run a current-account deficit each year since at least 1993.  So even if – contrary to fact – your assumption were correct that a country with a trade surplus is sitting on ready cash, Mexico – contrary to your conclusion – is not one of those countries.

Second and more fundamentally, even if Mexico did have an overall trade (or current-account) surplus, this surplus would not mean that Mexico has ready cash at hand to pay for a border wall.  When a country has a current-account surplus its citizens have much of that surplus invested in other countries, including in the U.S.  In 2015 (the most recent year for which this datum is available) the value of Mexican direct investment in the U.S. was $16.6 billion.  And as of November 2017, Mexicans held nearly $41 billion worth of U.S. treasury securities.  Add to these holdings the value of Mexican-owned real-estate in the U.S. and of Mexicans’ equity investments here other than direct investments, and it becomes clear that if you somehow did compel Mexicans to pay for your wall, they would do so by liquidating many of their existing investments in the U.S.

The fact that you likely suppose that such liquidation would improve the well-being of ordinary American reflects economic fallacies beyond the scope of this letter.  Here I content myself to point out your failure to understand that if Mexicans do pay for your wall out of their ‘trade surplus,’ that payment will not come from ready cash in Mexico but from the disruptive liquidation of Mexican investments, many of which are in the United States.

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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This July 2000 Freeman column was inspired by a John Stossel t.v. special.  My column is below the fold.

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George Will is not much impressed by the new book by historian David Goldfield.  A slice:

Goldfield’s grasp of contemporary America can be gauged by his regret that the income tax, under which the top 10 percent of earners pay more than 70 percent of the tax and the bottom 50 percent pay about 3 percent, is not “genuinely progressive.” He idealizes government as an “umpire,” a disinterested arbiter ensuring fair play. Has no liberal stumbled upon public choice theory, which demystifies politics, puncturing sentimentality about politicians and government officials being more nobly and unselfishly motivated than lesser mortals? Has no liberal noticed that no government is ever neutral in society’s allocation of wealth and opportunity? And that the bigger government becomes, the more it is manipulated by those who are sufficiently confident, articulate and sophisticated to understand government’s complexities, and wealthy enough to hire skillful agents to navigate those complexities on their behalf? This is why big government is invariably regressive, transferring wealth upward.

My Mercatus Center colleagues Christine McDaniel and Eileen Norcross offer some sound advice.

Another of my Mercatus Center colleagues – the intrepid Veronique de Rugy – calls on real federalists to oppose Jeff Sessions’s “war on drugs” war on people who peacefully ingest products that Jeff Sessions disapproves of.

Jeff Jacoby wonders why the voluble Elizabeth Warren has been so quiet recently about the tax cut.

How informed is the typical American about corporate profits?  Not very.

Pierre Lemieux asks if size matters.

Getting educated about labor unions.

Colin Grabow correctly observes that ‘national-security concerns’ are a gateway drug to protectionism.

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… is from page 240 of the 2015 Fourth Edition of Douglas Irwin’s vital volume, Free Trade Under Fire:

During the 1928 election campaign, prior to the Great Depression, President Herbert Hoover called for increased tariffs on agricultural imports to help U.S. farmers.  Once Congress started considering higher duties, however, things began to spin out of control.  Logrolling coalitions pushed tariff rates higher and higher, resulting in the infamous Smoot-Hawley tariff of 1930.  Warning of the adverse economic consequences of the high tariffs, more than one thousand American economists signed a petition urging President Hoover not to sign the bill.  The warning was not heeded, and the Smoot-Hawley tariff helped push up the average tariff on dutiable imports to nearly 50 percent.  While economic historians do not believe that the Smoot-Hawley tariff caused the Depression, the high tariffs contributed to the downward spiral of trade as other countries retaliated against the United States.  The U.S. action made it easier for other countries to follow suit, thereby contributing to the worldwide rise in trade barriers.

DBx: Even if, contrary to fact, economic conditions are often such that protective tariffs can yield outcomes reasonably described as ‘on net beneficial,’ political conditions are never such as to make even a single occurrence of this outcome plausible.  The fact is that, while trade restrictions might be said to sometimes “work in theory” to improve the overall economic welfare of the people of the restricting country, there is no good reason to suppose that trade restrictions will ever work this way in practice.

For a much more complete history and analysis of the Smoot-Hawley tariff, see Doug Irwin’s excellent 2011 volume, Peddling Protectionism – which I reviewed here.

(Pictured above, in April 1929, are Rep. Willis Hawley [R-OR] and, to his left, Sen. Reed Smoot [R-UT].)

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Here’s an e-mail to a new – and very upset – correspondent:

Mr. Vernon Northrup

Mr. Northrup:

Pointing out that “conservatives always understood the economic dangers of communism” you conclude that “President Trump rightly fears trade with China given [that] it’s communist.”

Overlook the indisputable fact that the Chinese have become major players in the global economy only since, and only insofar as, markets there have been liberalized.  Maoist China – a far more ‘pure’ communist society than is today’s China – was an utter economic failure.

Instead, focus on the fact that what conservatives (and libertarians) have long recognized about the economics of communism is that it’s completely unworkable; it’s an economic system of institutionalized massive inefficiencies.  And the price for this calamitous system is paid by those who live under it.  Communism doesn’t harm, except in the most indirect and relatively minuscule way, those of us in market-oriented societies.  Therefore, for you to use what remains of China’s communism as justification for Trump to obstruct Americans’ freedom to trade with the Chinese people is for you unwittingly to hold an opinion of the economic consequences of communism that is exactly the opposite of the opinion held by the conservatives whom you presumably admire.

American conservatives (and libertarians) feared communism being adopted in America because they understood that it’s an unworkable economic system.  These conservatives (and libertarians) sensibly did not fear what you apparently fear – namely, that communism is such a remarkably efficient economic system that no American producers can possibly hope to compete successfully against communist rivals.

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

…..

Many are the people who today shout “They’re communists!” as justification for Uncle Sam to prevent Americans from trading freely with the Chinese, yet very few of these shouters bother to think seriously about just what it is they’re shouting.

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Bonus Quotation of the Day…

by Don Boudreaux on January 17, 2018

in Crony Capitalism, Trade

… is from page 226 of Douglas Irwin’s 2017 book, Clashing Over Commerce (citation deleted); the “Wells” referred to here is David A. Wells, Special Commissioner of the Revenue during part of the U.S. reconstruction era:

In his third report, published in January 1869, Wells bluntly observed that the matter of tariffs “involves more of prejudice and of opinion founded on private self-interest than almost any other policy issue facing the government.”

DBx: And it is as it has always been. You show me a tariff or other trade restriction and I’ll show you a greedy, politically powerful producer group, or groups, whose members successfully use the state to rob fellow citizens.

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Some of the most self-centered and selfish people are those who sincerely believe themselves to be especially applause-worthy altruistic promoters of the greater good.  I explain in this June 2000 Freeman column – which is below the fold.

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