Here’s the abstract of this new paper by Jonathan Rothwell (emphasis added):  (HT Bryan Riley)

In any dynamic economy, there is a risk of job loss. Job loss resulting from foreign rather than domestic competition has come under intense scrutiny recently with Britain’s exit from the European Union and the election of Donald Trump as president of the United States. While economists generally conclude that trade is broadly enriching, recent works have brought attention to the costs of trade to workers and communities. At the individual level, I find that the risk of layoff and unemployment to workers in trade-exposed sectors is comparable — or even lower — than the risk to workers in non-traded sectors and that these risks have not increased during the period of more intense competition with Chinese imports. At the community level, Autor, Dorn and Hanson (2013) find that local areas have experienced slower job and wage growth and higher unemployment because of import competition with China. Upon analyzing their data, I conclude that their results are biased by the weaker macroeconomic performance of 2000-2007 relative to the 1990s. When I analyze inter-local area economic changes — rather analyzing changes within and across areas — I fail to reject the null hypotheses that import competition has no effect on wage or employment growth, except within the manufacturing sector during the most recent period, or that it has no effect on many other outcomes, including labor force participation, intergenerational mobility, and mortality. During each period, import competition actually predicts an increase in average wages for manufacturing workers, as well as non-manufacturing during the 1990s period, and import competition predicts a shift toward college educated non-manufacturing jobs in the second period. I conclude that foreign competition does not appear to elevate the risk of job loss to a greater extent than domestic competition, and people living in the communities most exposed to foreign competition are no worse off on average.

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Quotation of the Day…

by Don Boudreaux on February 28, 2017

in Myths and Fallacies, Subsidies, Trade

… is from page 218 of the 2015 Fourth Edition of Douglas A. Irwin’s important volume, Free Trade Under Fire; Doug is here discussing Japan’s Ministry of International Trade and Industry (“MITI“) (footnote deleted; link added):

Unknown-2But the actual evidence of MITI’s contributions to Japan’s [economic] success is weak.  The two industries that achieved the most notable success on world markets – automobiles and consumer electronics – did not benefit from extensive government support, unlike some other heavy industries such as chemicals and steel.  MITI also had notable failures in promoting its biotechnology and computer industries.  In fact, one statistical study of Japanese industrial targeting found that a disproportionate amount of support went to low-growth sectors and sectors with decreasing returns to scale.  This study failed to find evidence that productivity was enhanced as a result of industrial policy measures.

DBx: Industrial policy – that is, governmental attempts to ‘pick’ or promote industrial winners – has a poor historical track record of fueling economic growth and raising living standards compared to the trial-and-error discovery process of competitive, entrepreneurial markets.  (Perhaps the best single-volume explanation of why remains my late colleague Don Lavoie’s remarkable 1985 book National Economic Planning: What Is Left?)  Nevertheless, myths of such successes remain alive, in large part because such myths serve the goal of crony capitalists to get tariffs, subsidies, and other special privileges from the state.

A couple of notes on the quotation above from Doug.  First (for most non-economist readers): Do not infer from Doug’s quotation that there is something inherently wrong with, or inefficient about, sectors or industries with decreasing returns to scale.  There isn’t.  Doug’s point is rather that it is a myth to believe that industrial policy is either especially effective at enabling industries or sectors to achieve increasing returns to scale, or is generally directed toward industries and sectors that have as-yet-untapped economies of scale to capture.

Second, in a footnote to the above quotation Doug cites this paper (published in a 2005 issue of the Journal of International Economics) by Hiroshi Ohashi which, as described by Doug in the footnote, “finds that there were few intra-industry knowledge spillovers in the case of Japan’s steel industry and that export subsidies did not help the industry’s growth.”

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Walter Williams Asks a Probing Question

by Don Boudreaux on February 27, 2017

in Crony Capitalism, Trade

Being a world-class economist, my colleague Walter Williams spends much of his time asking probing questions.  Here’s one that he posed to me recently by e-mail:

Don:

I don’t think there are tariffs on coffee and I know of no organization calling for coffee tariffs. I wonder why.

Great, probing question.

The answer is that there are very few coffee growers in the United States.  In the U.S. states, coffee is grown commercially only in Hawaii.  Coffee is also grown commercially also in Puerto Rico.  The result of this small number of American coffee growers is that these growers are too small in number to form a powerful-enough interest group.  But, of course, coffee is consumed massively throughout the U.S.  (I’m drinking some right now, by the way.  It’s from Guatemala.  Yum!)  The pain to consumers caused by restrictions on coffee imports would be too great relative to the gains to American coffee growers; politically it would be a bad move for most members of Congress to support protective tariffs on coffee.

Yet if Congress and U.S. presidential administrations really were, as their members often pretend, intent on apolitically using U.S. trade policy to “level the playing field” or to otherwise correct for distortions in global markets induced by other governments’ destructive policies, we likely should see U.S. tariffs on coffee imports.

I haven’t researched the matter, but I’d be shocked to discover that the governments of coffee-growing countries such as Colombia, Costa Rica, Guatemala, Ethiopia, Brazil, and Jamaica engage in none of the policies that are typically alleged to create “uneven playing fields” in global markets.  If Uncle Sam really were so self-sacrificingly and apolitically intent on using tariffs and other trade restrictions to improve global markets, why does Uncle Sam not use such tariffs and restrictions in the coffee market?

The bottom line, of course, is that every trade restriction is simultaneously justified publicly as a righteous intervention against some foreign evil-doing while, in fact, it is a monopoly-power privilege granted by an unethical government to a greedy and powerful domestic interest group.

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Should DIY Pursuits Be Punitively Tariffed?

by Don Boudreaux on February 27, 2017

in Myths and Fallacies, Trade

Here’s another letter to my new and vigorous correspondent, Nolan McKinney:

Mr. McKinney:

You justify tariffs and other trade restrictions by insisting that “our government is duty-bound to keep our assets and workers from becoming superfluous.”

I disagree for many reasons.  Here are two.

First: machines, inventories, workers, and other productive assets in the U.S. are not “ours”; they don’t belong to us collectively.  Each of these countless assets belongs to the specific individual or firm who created or bought it, or, in the case of labor, who hires it out to a willing employer.  And each of these assets operates both complementary to some other assets (as, for example, your family physician using syringes and other medical equipment) and – especially important here – in competition with yet other assets (as, for example, your family physician competing for patients with other physicians in town).

Second: each individual asset owner is entitled to whatever gains she reaps by using her assets in ways that satisfy consumer demands, but is not entitled to artificially raise the value of those assets by forcibly preventing consumers from employing options other than buying her outputs.

Recently I was in a Sherwin-Williams store to buy paint.  The customer ahead of me was a professional painter complaining about a slowdown in his work.  It occurred to me that, by doing the painting as a do-it-yourself household project, I denied this painter an opportunity to earn income from my household.  Do you believe that the state, to help keep some of this painter’s time and talent from becoming “superfluous,” should prevent me from doing my own painting?  Do you believe that this painter is entitled to have government impose punitive taxes on me and others whenever we do-it-yourselfers paint rooms in our own homes rather than hire professional painters to perform these jobs?

If you understand that government shouldn’t interfere with individuals’ decisions to save money by doing household projects themselves (rather than hire professionals), why do you suppose that government should interfere with individuals’ decisions to save money by buying foreign-assembled goods rather than domestically assembled goods?  Why are the money-saving efforts in the first case legitimate while those in the second case illegitimate?  In both cases, these economic decisions by individuals deny business to particular American workers and businesses and, in some instances, threaten to make their specific jobs and their specific assets superfluous.

So I ask again: Do you believe that government should punitively tax me, you, and other Americans whenever we perform do-it-yourself household painting jobs?

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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Some Links

by Don Boudreaux on February 27, 2017

in History, Taxes, Technology, The Future, Trade, Truth-seeking & ideology

Shikha Dalmia rightly criticizes conservatives who truck with the vile Milo Yiannopoulous.

Jeffrey Tucker recounts some history of laissez faire.

Alberto Mingardi reflects on modern-day techno-pessimism (as embodied, for example, in some of the work of my colleague Tyler Cowen).

Thomas Knapp isn’t happy with the proposed border-adjustment tax.

Adam Ozimek correctly explains that “Socialism is bad and it is bad that socialism is becoming cool again.

George Leef highlights yet another bit of ivory-tower foolishness.

Warren Meyer reveals why he doesn’t like to listen to actors and sports stars talk politics.

David Henderson persuades on persuasion.

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Quotation of the Day…

by Don Boudreaux on February 27, 2017

in Adam Smith, Growth, Myths and Fallacies, Seen and Unseen, Trade

… is from page 348 of my late colleague Jim Buchanan‘s 1992 article “The Supply of Labor and the Extent of the Market,” as it is reprinted in volume 1 of The Collected Works of James M. Buchanan: The Logical Foundations of Constitutional Liberty:

Unknown-3The international trade theorist would not question the proposition that a shift from the production of non-tradeables to the production of tradeables would facilitate an extension of the trading network among nations and that such an extension would make possible increased international specialization, with consequent aggregate increases in economic value.  Indeed, Adam Smith’s central message might well be interpreted as a variant of this proposition.  To the extent that artificially maintained political restrictions reduce the effective set of potentially tradeable goods, a removal of such restrictions will enhance the wealth of citizens.

DBx: Indeed so.  Why would anyone think otherwise?  But of course, many (most?) people do think otherwise.  Political borders seem to work a mysterious black magic that distorts and deforms the thinking of otherwise thoughtful people, thus conditioning such people to fall for the many fallacies about trade trumpeted by the likes of Donald Trump.

Is Jones – who is a resident of, say, Kentucky – made better off if he hires a neighborhood teen to mow his lawn if the price that he pays the teen is less than the income (or the value of leisure) that Jones would forego if he, Jones, mowed his own lawn?  Of course.  Is Jones made better off if he hires a local barber to cut his hair rather than he, Jones, cutting his own hair?  If Jones does in fact use a local barber, the answer is an unambiguous ‘yes.’  Is Jones made better off if he buys pineapples for his dessert from a pineapple grower in Hawaii rather than Jones growing his own pineapples (which, with the right kind of hothouse, he could do) or going without pineapples for dessert?  Of course.  And do the lawn-care workers who Jones doesn’t hire to mow his lawn, the hair-stylists that Jones doesn’t hire to cut his hair, and the blueberry or apple farmers whose produce Jones foregoes in favor of pineapples have a right to complain about Jones’s spending decisions?  After all, on a very narrow reading of Jones’s actions, Jones has harmed these producers by spending his money on the outputs of others rather than on their outputs.

And who would be so pedantic to assert that we cannot say with sufficient certainty that allowing Jones to spend, or not to spend, his money in these ways is good for Jones as well as for the larger economy?  Who would dare insist that Jones’s freedom to spend his money in such ways within the U.S. – and his freedom to change the ways that he spends his money within the U.S. – might be so bad for the U.S. economy that the U.S. president and his team of trade advisors should superintend all such decisions by Jones (and all other Americans) and block these spending decisions if and when these government officials believe that they’ve determined that such expenditures by Jones and other Americans are likely to damage the U.S. economy?

Very few people – even Trump’s most ardent fans – would tolerate Uncle Sam imposing, purely for geographical reasons, internal tariffs and other barriers to commerce that prevent Americans from trading peacefully with one another.

And yet, let Jones choose to buy a pound of sugar from a farmer who produces in a Caribbean nation, a roll of steel from a steelmaker in China, a bolt of cloth from a factory owner in Indonesia, or a day’s worth of lettuce-picking services from Mexico, and suddenly people become frantic that Jones’s spending decisions are paving for Americans a highway to hell.

Why?  Do these people who fret about free trade not understand that foreigners who sell things to Americans do so because they also wish to buy things from Americans – either immediately or in the future?  Do these protectionist-minded people suppose that Jones accurately assesses his own economic well-being when trading with fellow citizens but somehow loses this ability when trading with foreigners?  What, exactly, do protectionists believe?  It’s mysterious.  But whatever it is, it is flawed through-and-through.  These beliefs reflect a stubborn refusal to think clearly and consistently.

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Bonus Quotation of the Day…

by Don Boudreaux on February 26, 2017

in Economics, Myths and Fallacies, Science, Trade

… is from pages 33-34 my great teacher Leland Yeager’s 1954 monograph, Free Trade: America’s Opportunity, which is now available free on-line from Liberty Fund (original emphasis):

Unknown-2The Protectionist actually takes pride in his narrow viewpoint.  He sticks to plain facts — clear examples of benefit from Protection or of damage from foreign competition.  He does not concern himself with remote, intangible, theoretical consequences.  Thank God, he is no impractical theorist who never met a payroll!  If he happens to be a watch lobbyist, he must struggle for patience with the poor understanding of Congressmen who never had practical experience in retailing watches.  If he is a fishing-tackle man, he pities the ignorance of trade-agreements negotiators who never had practical experience in manufacturing fishing tackle.  He scorns the theorist’s “over-all” view of the economic system and sticks to the down-to-earth case-by-case approach.  In so doing, he refuses to consider the decisive heart of the tariff controversy.

[Leland then quotes Norman Campbell, What is Science? (1952)]:

The plain man — I do not think that this is an overstatement — calls a “theory” anything he does not understand, especially if the conclusions it is used to support are distasteful to him….  It is only because he does not understand “theory” that the plain man is apt to compare it unfavorably with “practice,” by which he means what he can understand.

The practical man is apt to sneer at the theorist; but an examination of any of his most firmly-rooted prejudices would show at once that he himself is as much a theorist as the purest and most academic student; theory is a necessary instrument of thought in disentangling the amazingly complex relations of the external world.  But while his theories are false because he never tests them properly, the theories of science are continually under constant test and only survive if they are true.  It is the practical man and not the student of pure science who is guilty of relying on extravagant speculation, unchecked by comparison with solid fact.

For all his vaunted realism, the Protectionist theorizes without knowing it.  Furthermore, his haphazard theories are far less able to stand inspection than those of the trained theorists whom he scorns.  The Protectionist sees the economic system as ever-threatened by unfair competition, cheap foreign labor, dumping, spreading pools of unemployment, and stagnation. Shaky as his theories are, they are the ones that carry weight among self-styled “practical” men.

DBx: What Leland says.  And what Norman Campbell says.

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In a Facebook response to this cartoon showing – correctly – that tariffs inflict damage chiefly on the bulk of the population of the country whose government imposes tariffs, a Mr. Tom Moyers writes:

Probably one of the more stupid cartoons I’ve seen used to explain any situation. It is inferring that some sort of crash or derailment would happen as a result of tariffs. Since you like using stupid cartoons to explain things, you could also add another slide of the guy getting up and riding again, because the cartoon is not looking long term. It’s the same argument I keep hearing from academics every time free trade comes up, thankfully our leadership doesn’t buy into it.

Mr. Moyers obviously thinks himself to be clever, but he doesn’t realize that the argument he makes here is centuries old and has been refuted many times in many different ways by economists over many years.  Here’s my Facebook reply to this bit of economic error:

Mr. Moyers: Do you grow your own food? Weave your own cloth? Supply all of your own medical care? If not, you really should rethink your mistaken views about trade, for surely you would not want me to accuse you – you who buy food, clothing, and medical care from others – of failing to look at how well you would do for you and your family “in the long run” should you stop yourself from trading with grocers, department stores, and medical doctors.

Protectionists and other economically uninformed people such as this Mr. Moyers invariably respond to this point by insisting, in one way or another, that matters for a country differ from those of a household (or for some unit or region smaller than a nation-state).  Yet no one – and certainly not Mr. Moyers – has yet satisfactorily explained just how things are different in ways that refute the original point.  If Mr. Moyers improves his economic well-being by specializing in performing whatever work he does for a living and then uses the income from his work to buy food, clothing, and medical care (and countless other kinds of goods and services) from people outside of his household, the same logic dictates that the people in Mr. Moyers’s neighborhood improve their economic well-being by also each specializing and buying most of what they consume from other specialists outside of their neighborhood.

And what is true for Mr. Moyers’s neighborhood is true for Mr. Moyers’s county.  Mr. Moyers and the thousands (or millions) of others who reside in whatever county he resides in each specializes in performing a particular job and then using the incomes earned from these jobs to buy from others – mostly from strangers outside of the county – most of the goods and services that they consume.  Mr. Moyers would surely and correctly understand that he and his fellow ‘countymen’ would be made poorer, not richer, by a thumping county chief executive who restricted their abilities to by good and services from outside of the county.

And also, what is true for Mr. Moyers’s county is true for Mr. Moyers’s state.  I’m quite confident that he understands – correctly so – that restrictions on his and his fellow state residents’ abilities to buy goods and services from outside of his state would make him and his fellow state residents’ poorer and not richer.

Yet, Mr. Moyers (like Trump and many other economically uninformed people) mysteriously suppose that this logic stops at the borders of nation-states – and they continue to insist on this peculiar notion despite being aware that their fellow citizens voluntarily buy whatever imports from foreigners they choose to buy.  Again, though, no satisfactory explanation has ever been given for why saving resources by buying, say, clothing or bicycles made by people living in other countries is any less real or important than is saving resources by buying, say, broccoli or medical care from people living in other households.

I don’t expect Mr. Moyers (or most other committed protectionists) ever to concede this point.  They never do.  They are confident and secure in their economic (and historical) ignorance.  They’ll continue to wave their hands and offer up the uncountable number of ad hoc and mistaken justifications that have been offered up for centuries for why international trade differs fundamentally from intranational trade. (“Foreigners are paid lower wages!”  “Foreign governments subsidize their exports!”  “Foreign government impose tariffs on our exports!”  “Foreigners blah, blah, blah!”  The number of such bad arguments is vast.)   And because most of these people choose to be ignorant of the economics of trade (“Oh, that’s a bunch of academic mumbo-jumbo” they assert in their ignorance), they’ll never grasp just how weak, shallow, and familiar their mistaken assertions and arguments are; they’ll never encounter any of the many effective rebuttals of what they, in their intellectual blindness, wrongly believe to be profound refutations of the case for free trade.

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In light of Trump’s economic nationalism – and of many people’s embrace of this foolish and destructive notion – my vanity compels me to share here, in full, a Pittsburgh Tribune-Review column of mine from July 2007 in which I draw a relevant economic lesson from the New Yorker‘s weekly cartoon-caption contest.  Here’s the column:

Cartoon Lessons
Donald J. Boudreaux

Assets are not automatically productive. They must be made productive by human creativity and effort. And the greater the number of people free to apply their creativity to the use of natural resources and other assets, the more likely it is that available assets will be used as efficiently and as productively as possible.

A weekly contest in The New Yorker magazine makes this point nicely. Each week on the last page of this popular journal is published a single-frame cartoon containing no caption. People are invited to submit captions to accompany the cartoon. New Yorker editors then choose the three submitted captions that they judge to be the funniest.

Readers then vote on which one of these three captions is the best — that is, which caption makes the cartoon as funny as possible. The person submitting the winning caption receives a small prize, in addition to the distinction of having his or her name and place of residence published in this prestigious magazine.

Importantly, you don’t have to subscribe to The New Yorker to submit captions. Anyone can submit. And people from all across the country do so. The result is an amazingly wide variety of hilariously funny captions.

Think of each uncaptioned cartoon as a capital good. It has the potential to create value (in this case, to make readers laugh). By itself, though, this capital good produces almost no value; without a caption, each cartoon is virtually worthless. The cartoon becomes valuable — it contributes to human satisfaction — only when a clever caption is added to it.

Suppose for a moment that The New Yorker allowed only residents of Manhattan to submit captions. No doubt many submitted captions, when added to the cartoons, would produce the intended humorous result. But editors of the magazine could not be certain that the best possible caption was submitted.

What if, for a particular cartoon, someone living in Brooklyn had an even better idea for a caption• By prohibiting non-Manhattanites from contributing their caption ideas to the cartoons, the caption that would have been submitted by the person in Brooklyn — the caption idea that would have added to the cartoon even more value than is added by the best caption from Manhattan — never is added. Thus, the cartoon — this particular capital good — fails to produce as much value as it would have produced had Brooklynites been among those who were permitted to submit captions.

Sadly, though, no one ever learns this fact. The winning caption submitted from Manhattan might be judged by everyone to be excellent. But because the even better caption from Brooklyn never materializes, no one ever discovers just how funny that cartoon could be.

If the goal is to ensure maximum value of this particular capital good (a weekly uncaptioned cartoon), clearly it is advisable to have larger, rather than smaller, numbers of people able to try their minds at devising clever captions. With everyone in the world free to contribute captions, each cartoon is joined with cleverer and more creative captions than would be the case if only Manhattanites — or only residents of New York state, or even only Americans — were allowed to submit captions.

The very same process is true of factories and machines and workers. It  might be that the entrepreneur with the best idea for how to use a particular factory and its machines and workers to produce maximum value is an American. But fewer than 5 percent of the world’s people live in America. So it is inevitable that the best and most creative ideas for how to use particular assets that are located in America will often be possessed by non-Americans.

One of America’s great features is its openness to foreign investors. This openness isn’t complete, as attested by the intense opposition last year to the attempted purchase by some Chinese of an American oil company. But foreigners, overwhelmingly, are free to invest in America even when such investments give them controlling interests in U.S.-based companies.

To anyone who frets about foreign ownership of American assets, I say that our openness to such ownership is an important source of creative ideas and effort.

Our openness to ideas and efforts from around the globe ensures that each asset in the U.S. — each factory, each plot of land, each retail space, each machine, each worker — is used as productively as possible.

To reduce this openness, therefore, would be to make our economy weaker and ourselves poorer.

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Stuart Anderson, writing in Forbes, explains why economic nationalism is economic nonsense.  A slice:

Economists have understood for centuries that trade deficits are not a good indicator of a country’s economic well-being. For example, the U.S. trade deficit has been lower in times of recession. Moreover, the U.S. “trade deficit” is “exactly offset” by America’s “investment surplus” that reflects our ability to attract foreign investment, notes Daniel Griswold, a Mercatus Center senior research fellow and co-director of the Program on the American Economy and Globalization. “If politicians try to ‘fix’ the trade deficit, they will only succeed in cutting off the net inflow of foreign investment.”

GMU Econ alum Ben Powell, now a professor at Texas Tech, argues cogently that higher tariffs on imports into the U.S. from Mexico will increase immigration into the U.S. of Mexicans.  (Such a result, in my opinion, would be a small silver lining for Americans around the huge dark cloud of higher tariffs.)

Steve Davies is always worth listening to.

Jason Kuznicki describes how authoritarianism is getting smarter – and, thereby, more pernicious.

More immigration does not mean more crime.

I recently – and happily – stumbled upon this 2012 review, by my former law-school classmate Stephen Smith, of the late William Stuntz’s book The Collapse of American Civil Justice.

Sad news: Russell Hardin has died.  (HT Roger Koppl)

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