Shell-lacked

by Don Boudreaux on August 20, 2008

in History, Trade

Here’s a letter that I sent on Monday to the Washington Post:

Amity Shlaes rightly points out that in the 1930s "An irate Canada and
many other nations retaliated" against the Smoot-Hawley tariff ("Five
Ways to Wreck a Recovery
," August 18).  Take, for example, the case of
eggs.  Smoot-Hawley increased the tariff on eggs by 25 percent,
resulting in a 40 percent fall in egg imports from Canada.  Canada
responded by raising its tariff on U.S.-produced eggs by 233 percent -
causing U.S. egg exports to Canada to fall from 11 million annually to
a paltry 200,000.*

Such retaliation isn’t the only reason protectionism harms an economy, but it’s a predictable and important one.

Sincerely,
Donald J. Boudreaux

* See Jeffry A. Frieden, Global Capitalism (New York: W.W. Norton, 2006), p. 255.

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{ 41 comments }

Sam Grove August 20, 2008 at 2:03 pm

Humans are so reactive, emotive to the core.

Crusader August 20, 2008 at 2:47 pm

99% of humans are not able to tune out their emotions. They might have a few reasoning moments here and there, but on the whole they go through life from one emotion to the next. This is the voter pool. The 1% of that primarily reason our way through life vote for the Objectivist party.

BoscoH August 20, 2008 at 4:20 pm

Blame Canada! Blame Canada! With their hockey hullabaloo and that…

Methinks August 20, 2008 at 4:25 pm

Obviously, Canadians are heartless capitalist pigs and they were not following the rules of free trade – just like China.

Crusader August 20, 2008 at 6:05 pm

Methinks – you see in 1931 the Canadians decided not to take it up the keister like good Canadians. After all, all that matters is what's good for America right? I thought liberals were "citizens of the world"? I guess it depends on their mood.

Robert C - The Wholesale Products Guy August 20, 2008 at 6:19 pm

Obama, whether it is campaign bluster or not, would be stupid beyond belief if he rolled back any of the gains made with NAFTA. But, like Hoover and the GOP thinking in 1928, he probably won't care and craft a modern day Smoot – Hawley act as a part of his "fairness doctrine".

Additional acts of even handed thinking will also apply to capital gains taxes, going from the current 15% to 25%. I mean, if you make money in the stock market, it is only fair that we take more money from you! (LOL!). I hope he can explain that to the more then 100 million people who own stock, and some of that number receive dividends as retirement income.

He may think he is hurting Hedge fund managers, but he is also placing a burden on the investment class of people who are not Wall Street mavericks.

If "Barry" is elected, with the full faith and backing of the Democratic congress, as well as a filibuster proof majority in the senate, Carter's "Misery Index" could soon be woven into the lexicon of our economic landscape.

Global Trade is not the only casualty that the American public will suffer. The 110th Congress headed by Madame Pelosi is incredibly inept regarding the methods and practices of energy production.

It annoys and frustrates me that people who have no clue concerning the elements of what it takes to "find and refine" energy are the very people who have the power to regulate domestic drilling.

Over the past 30 years congress has called up oil company executives to their chambers only to endure the slings and arrows of their outrageous stupidity.

It was absolutely stunning and frightening to see the ignorance on display by these vaulted congressional geniuses of energy inquisition.

Energy prices go up because of demand. Speculators make money when the price goes up, or down. The market will determine where the price finally lands, or begins to tumble.

We now know that around 4.00 dollars a gallon US is about the breaking point for most of the general driving public to endure.

With cut backs in consumption and 12 billion less miles driven on the US highways this summer (2008) the price began to slide.

Domestic production of oil would be the logical step to not only help with future prices but national security as well.

You can't eliminate importing, but you need to depend on yourself in some capacity should your overseas supply becomes disrupted.

It would be nice to have coal, nukes, off shore drilling, ANWAR, all working together in perfect harmony.

But, what to we get from Congress? A knee jerk proposal of windfall profits tax, a cap on oil executive salaries, and new regulations for speculators.

And, to add to these pearls of wisdom, the glittering jewel of colossal ignorance that is Maxine Waters, a representative of California, said this..

Paraphrasing Ms. Waters..

"As a socialist, ah liberal, I would take over your companies and nationalize them."

I have to say that is one of the most frightening statements I have ever heard come out of the mouth of a representative of the United States Of America.

Other stellar economic solutions to energy independence and lower prices at the pump is to, as Barry sez, inflate your tires and change your spark plugs.

According to B. Obama, if you perform this type of routine maintenance on your car regularly, it will equal the amount of oil that we can pull from the ground and shores of these United States. Sorry Barry, we can't inflate our way to energy independence (LOL!).

Madame Pelosi had made the suggestion that she wants to put up about 700,000 barrels of lite sweet crude from the strategic reserve on the open market to lower pump prices.

700,000 barrels of oil on the global market to lower prices is like throwing a sugar cube into the ocean. It doesn't make it any sweeter! When the US uses 21 million barrels a day, and the price of oil is globally determined, the short term effects of lowering oil prices, at best, would be minimal.

I find it perplexing that on the one hand, Pelosi proclaims that we can't drill our way out of this energy crises and that more supply would not effect the price of oil. Yet, she wants to put supply from the reserves on the market to lower prices.

If you take it from the strategic oil reserves, it will lower prices, but if we drill for domestic supply, and put it on the market, it won't. I am confused. We need more supply and sources with a proven record of providing the energy we need.

Moreover, if we don't have oil, we will have no tires, so there will be nothing to inflate! (LOL!). No cosmetics, no plastic bottles, and all of the sundry merchandise that we use in our daily lives.

Oil is not going away anytime soon. I can't strap a windmill to my car. The technology for solar has come along way, but it is still cost prohibitive for most new and existing housing structures.

Wind farms are nice, Boone Pickens, but they use a lot of land, and fossil fuel plants are used as back up for wind power when the turbines are not producing enough energy for the population at hand.

As much as I love alternative energy ideas, they have a limited capacity, and currently, cannot make us energy independent.

Drill here, drill now as they mantra goes. I can't see that happening with a total domination of the government staffed with liberal socialists..

Thats my rant..

Robert C. – The Wholesale Products Guy

Methinks August 20, 2008 at 6:50 pm

700,000 barrels of oil on the global market to lower prices is like throwing a sugar cube into the ocean. It doesn't make it any sweeter! When the US uses 21 million barrels a day, and the price of oil is globally determined, the short term effects of lowering oil prices, at best, would be minimal.

Well, uh, by the logic of Stimulas I, II, III, IV, V, VI, etc., releasing all the oil from the strategic petroleum reserves will fix everything. Plus, Drilling anywhere at all now will only produce oil in 10 years. This is what we said ten years ago. See how much better off we are ten years on? Great. Now, let's all get back to imagining that Canada is now more willing to let us have our way with its keister than it was in the last century.

Crusader August 21, 2008 at 12:36 am

Methinks – Ithinks I hear too much logic! For pure entertainment I recommend(heavily):

http://peakoil.com/forum1.html

Howard J. Harrison August 21, 2008 at 9:22 am

Fair enough, Dr. Boudreaux. You are right, as far as your letter goes. The egg story is a good one. However, it begs the question: what was it that Canada was retaliating against?

If U.S. tariffs had never been lowered from traditional levels in the first place, then presumably Canadians would have retained their habit of importing U.S. eggs when it suited them to do so. What Canada retaliated against was not high tariffs but rather the raising of tariffs. It was the "delta" that provoked, was it not?

No one disputes the proposition that sudden government intervention can cause severe underemployment of capital. However, Americans cannot be held responsible for Canadian policy. We did not attack Canada in the year of Smoot-Hawley. We decided to eat fewer of her eggs. If our trade relations with other nations are so brittle that they cannot tolerate any U.S. deviation from free-trade orthodoxy, then maybe it is time for the U.S. to seek another, sounder, more traditional trade-policy foundation that leaves Americans less economically vulnerable to political decisions taken in Ottawa and other foreign capitals.

John Dewey August 21, 2008 at 9:51 am

Howard J Harrison: "We did not attack Canada in the year of Smoot-Hawley. We decided to eat fewer of her eggs."

Congress decided to prevent Americans from eating Canadian eggs by making them prohibitively expensive. You can argue that Congress is an elected body and implemented the will of the majority. But they tread all over the rights of the minority to engage in free trade.

If Americans had all willingly decided to eat fewer Canadian eggs, then a tariff would have been unnecessary.

Howard J. Harrison: "maybe it is time for the U.S. to seek another, sounder, more traditional trade-policy foundation that leaves Americans less economically vulnerable to political decisions taken in Ottawa and other foreign capitals."

Maybe it is time for you to stop trying to take away my freedom, Mr, Harrison. I am sick and tired of being economically vulnerable to protectionists like you.

Howard J. Harrison August 21, 2008 at 1:02 pm

Thanks for the reply, Mr. Dewey. It is a good reply and I can find much in it to agree with. However, I have three questions.

1. Do you prefer income taxes to tariffs? If so, why?

2. Does an inordinate dependence on imports not in fact render Americans vulnerable to the adverse effects of internal developments within foreign countries, developments that would not otherwise especially concern us?

3. Do the national security implications of (a) relying on foreigners for essential supplies and (b) having such a large, uninspectable volume of cargo flowing daily through our ports not disturb you?

Regarding your point about the loss of liberty tariffs represent, I agree with you. However, your point concerns the loss of liberty to consume. What about the loss of liberty to produce? Does this not count for something, too?

Hans Luftner August 21, 2008 at 1:31 pm

I don't know if your questions were directed specifically at Mr. Dewey or open to all, Howard, but I'll have a crack at them.

1. I hate them both, but the income tax more.
2. It's unwise to put all your eggs in one basket, domestic or foreign.
3. Not a whit.

& your unnumbered fourth question: you still have the liberty to produce, you just might be outsold is all.

Sam Grove August 21, 2008 at 1:47 pm

The liberty to compete in the market is not a guarantee of success.

Nothing has reduced our ability to compete like government interventions into our markets and government spending.

Methinks August 21, 2008 at 1:57 pm

Hey, can I barge in too?

1. Do you prefer income taxes to tariffs? If so, why?

Why is this the choice? I'm not aware that we are bound by those two choices and I'm not aware of any legislation that promises to get rid of one in favour of the other.

2. Does an inordinate dependence on imports not in fact render Americans vulnerable to the adverse effects of internal developments within foreign countries, developments that would not otherwise especially concern us?

Not really. We import so many things from so many countries that a single country's troubles shouldn't be catastrophic for the united states – especially since the other countries are as dependent on our consumption of their exports as we are. By your logic, we can also argue that every household should be self-sustaining, without depending on the outside world for things like clothing and food.

3. Do the national security implications of (a) relying on foreigners for essential supplies and (b) having such a large, uninspectable volume of cargo flowing daily through our ports not disturb you?

I just bit into a cookie I special ordered from Canada and it had a nasty bit of blue plastic in it. What makes me certain that an American made cookie won't have a bit of nastiness baked in? What's to stop an American company from being infiltrated by those who would do harm?

Crusader August 21, 2008 at 3:04 pm

Mr. Dewey – since when has the rights of the minority to engage in their economic freedom ever been popular in America? 1840?

John Dewey August 21, 2008 at 3:08 pm

Howard J. Harrison,

First, let me apologize for the tone of my first reply. I was late getting my caffeine this morning.

Do you prefer income taxes to tariffs? If so, why?

I prefer sales taxes and user fees to both. But if your options are my only choices I would prefer personal income taxes (not corporate income taxes). Tariffs distort the workings of free markets to artificially raise prices for all in the importing country.

2. Does an inordinate dependence on imports not in fact render Americans vulnerable to the adverse effects of internal developments within foreign countries, developments that would not otherwise especially concern us?

Sure there is a risk. There's a larger risk that relying only on domestic goods would sharply increase our cost of living and leave us vulnerable to the whims and inefficiencies of far fewer producers.

Mercantilism was shown to be an uneconomical strategy centuries ago.

3. Do the national security implications of (a) relying on foreigners for essential supplies and (b) having such a large, uninspectable volume of cargo flowing daily through our ports not disturb you?

Not in the least. In fact, I feel much more secure when potential enemies of the U.S. are economically dependent on us.

What about the loss of liberty to produce? Does this not count for something, too?

Who is not free to produce? Environmental regulations have made it uneconomical for a few products to be produced here. I don't agree with all of those regulations, but our elected officials were well aware of the consequences when they made those rules.

Methinks August 21, 2008 at 3:35 pm

John Dewey,

Tariffs distort the workings of free markets to artificially raise prices for all in the importing country.

Inocme taxes artificially raise the hurdle rate for investment in this country. They distort the free market as much as tariffs. Why do you prefer them (given the choice of one or the other)?

John Dewey August 21, 2008 at 4:11 pm

Methinks: "Inocme taxes artificially raise the hurdle rate for investment in this country. They distort the free market as much as tariffs."

As I see it, tariffs are designed to inhibit consumers from choosing the lowest cost, most efficient producer. Income and property taxes may or may not do so, depending on one nation's tax rates relative to that of other nations.

Remember that I prefer sales taxes and user fees to either tariffs or income taxes.

Methinks August 21, 2008 at 4:27 pm

Remember that I prefer sales taxes and user fees to either tariffs or income taxes.

Not only did I not forget, but I agree with you.

It seems to me that Tariffs distort not only consumption but investment choices, but income taxes do the same – perhaps less directly and less visibly. No?

Howard J. Harrison August 21, 2008 at 5:46 pm

John Dewey:

The open, on-line discussion format regrettably discourages politeness between strangers, does it not? Every written word is subject to misinterpretation and, besides, the Net is overrun by yahoos bellowing ill formed opinions. If you took me for a yahoo, then who can blame you? Such conversations as this were better carried on face-to-face, but the Net is the medium we've got. No hard feelings.

Luftner, Grove and Methinks:

All right. You have me outnumbered here, fair and square (this is a libertarian economics blog, after all). To try to reply to all your points at once would be a mistake, so let me take just one: the liberty to produce.

[Y]ou still have the liberty to produce, you just might be outsold is all.

The liberty to compete in the market is not a guarantee of success.

This of course is right, but is not what I meant. It is certainly true that I am free to try to produce, say, flat-screen display panels or athletic shoes in my garage. No one is stopping me. However, I wasn't talking about hobbies. The liberty to buy goods on the global market does me no good if I lack a sufficient income to buy such goods. To obtain such an income, I shall have to do something serious for a living. I shall have to work in an industry my country happens to specialize in.

Even in theory, the unimpeded operation of Ricardo's law of comparative advantage acts to specialize a nation's production. In so doing, it gravely restricts the citizen's practical choice, not as to what to do in his spare time, but rather as to what to do for a living. The theoretical freedom to produce flat screen panels for a living does one little good without practical market access. It does one little more good than does the theoretical freedom to vacation on the moon.

Such a restriction on the liberty to produce may be a cost worth paying, as you seem to believe, but it is nevertheless a real cost which ought not to be discounted. Yet the economist's utility function typically overlooks this cost. Futhermore, the cost is no small effect. It is the principal, intended effect of Ricardo's law.

The foregoing by the way is only one reason to be skeptical of international free trade (please notice that I did not say "skeptical of international trade," which I am not).

John Dewey:

Mercantilism was shown to be an uneconomical strategy centuries ago.

I am inclined to agree with you on this point, though admittedly I've not studied the actual, empirical history of mercantilism sufficiently to be sure. Adam Smith had studied the history, though. He would agree with you. I shall side with you and Smith.

However, a tariff is not mercantilism. What I want is the restoration of a traditional U.S. tariff in partial substitution for the income tax.

All respondents:

I would be happy to debate price distortions or any other aspect of tariff policy, but if I tried to fit it all into one reply I do not suppose that anyone would read it, so perhaps I had better let it rest there. If more debate is wanted, by all means, hit me with whatever you've got!

Regards,

Howard

Methinks August 21, 2008 at 6:13 pm

Howard,

Thank you for your thorough response. I want to respond to your right to produce response, but the others can usually do so more eloquently than I can, so I'll leave it to them.

I just have a question. Why do you favour tariffs over income tax? Since tarrifs are nothing more than subsidies for uncompetitive domestic industries (and by definition, encourage inefficient allocation of resources) why do you not favour eliminating both?

John Dewey August 21, 2008 at 6:29 pm

Howard J. Harrison: "However, a tariff is not mercantilism"

On the contrary, the use of tariffs to protect domestic industry from foreign competition – which is exactly what you are proposing – is a basic tenet of mercantilism.

From the entry on mercantilism at the Concise Encyclopedia of Economics

"In trade policy the government assisted local industry by imposing tariffs, quotas, and prohibitions on imports of goods that competed with local manufacturers."

You may refer to your proposal as "enabling the freedom to produce", but what you are proposing is mercantilist protectionism, Mr. Harrison.

Sam Grove August 21, 2008 at 6:40 pm

Our biggest problem is a government so big and expensive that funding it is a big problem for producers and consumer regardless of the revenue mechanism.

re tariffs: Any tariff should be uniform without to regard to the nature of a product or its origin.

I don't think tariffs would be much of a deal if the U.S. gov't were, say, one tenth its current cost.

The benefits of an income tax would be in keeping the tax payer involved and interested in what's going on.

Alas, the government is such a juggernaut that few feel able to do much about it.
The situation is serious, and seems hopeless.

John Dewey August 21, 2008 at 6:52 pm

methinks: "It seems to me that Tariffs distort not only consumption but investment choices, but income taxes do the same – perhaps less directly and less visibly. No?"

Of course, all taxes distort consumption in some way, but that's not what we are discussing.

My earlier response was not about income taxes vs no taxes. Or about income taxes vs sales taxes. It was confined to the comparison of income taxes vs tariffs.

Tariffs are designed and guaranteed to inhibit imports of goods and services, and thus distort free markets. Income and property taxes only inhibit capital investment when tax rates are higher than in competing nations.

That's why I prefer income taxes over tariffs. But that doesn't mean I like income taxes.

Methinks August 21, 2008 at 7:57 pm

Thanks, John.

Howard J. Harrison August 21, 2008 at 8:39 pm

Mr. Dewey's point about the definition of mercantilism is well taken. I accept it. I would further concur with Mr. Grove's analysis.

Methinks asks,

Why do you favour tariffs over income tax? Since tarrifs are nothing more than subsidies for uncompetitive domestic industries (and by definition, encourage inefficient allocation of resources) why do you not favour eliminating both?

Thanks for the question.

To clarify: In favor of a consumption tax? Or excise and property taxes? Or no tax? It seems to me in concept that a consumption tax would probably be preferable to an income tax, though a case can be made either way. However, inasmuch as we taxpayers must fill the Treasury by means of one tax or another, if there exists a tax that brings a salutary side effect, then we ought to consider deploying it.

Mr. Dewey is entirely correct that, according to theory, tariffs distort prices at a penalty to inflation-adjusted GDP (the theory has that tariffs actually increase income, but that the rise in prices they occasion leads to a small net utility loss). Even in theory, however, it is crucial to realize that the GDP penalty is a second-order effect.

And that's in theory. One doubts that a real economy, being robust, irregular, somewhat irrational and generally quite messy, tracks Ricardo's differential equation well enough to evince a second-order effect unless the second-order variable—in this case, the tariff rate—is quite large. Heavy tariffs are probably a bad idea, but for moderate tariffs in the real economy I personally tend to doubt that the GDP penalty even actually exists. If it does exist, it does not amount to much.

What is not in dispute is that tariffs have the first-order effect of making a country more self-reliant and her production more diverse. I happen to be a staunch supply-sider, but even from a purely demand-side point of view, a moderate tariff offers the best of both worlds: it keeps the wheels of otherwise marginally noncompetitive domestic industry turning while still affording the benefits of access to imports as an alternative to domestic supplies, while filling the Treasury in the process. Dr. Boudreaux has written wisely of the benefits of unimpeded access to international markets, as insurance against disruptions in domestic production. A large part of the benefit of Dr. Boudreaux's insurance however is lost when untariffed trade is allowed to kill the production of a needed good or service at home. The best insurance is to retain ready access to both foreign and domestic goods and services of as many kinds as feasible. In my estimation, it is extremely well worth paying a theoretical, second-order GDP penalty for the nation to obtain this benefit.

When Britain marched to war with the U.S. in Iraq, a Belgian firm (if memory serves) held the contract to supply the British army with rifle ammunition. Disagreeing with British policy, the Belgian goverment suddenly suspended deliveries of ammunition, forcing the British Army to scramble to find a new supplier. Had Britain a tariff she might not have found herself in this embarassing position in the first place. The 1941 sneak attack on Pearl Harbor seems to have ocurred because the U.S. had, for political reasons, cut off exports of crude oil and scrap steel to Japan. Had Japan never relied so heavily on U.S. trade in the first place, the Pacific War might have been averted. The U.S. herself got off to a very slow start in the War of 1812 because the war cut her off from British and European manufactures. Washington got burned, but we Americans learned our lesson: from 1816 through 1939 U.S. tariffs averaged about 40 percent, and we grew from an agrarian backwater to become the mightiest industrial power the world had ever seen.

Tariffs work, even if (as Mr. Dewey has taught me) they do fall under the general rubric of mercantilism.

HJH

Hans Luftner August 21, 2008 at 9:11 pm

It would appear from your examples that free trade without tariffs actually makes going to war more inconvenient. I see this as a good thing. Every conflict you list would have been better off averted, by all parties involved.

But mostly I take issue with your claim that if manufacturing is not local, then it's a restriction on your liberty to manufacture. Who, precisely, is restricting you? You're free to try, & free to fail. Who knows, you might even succeed, if you vary your product enough, or appeal to buy-local-only types.

Perhaps we don't share the same definition of "liberty" in this context. But I find this point far more important, fundamentally, than debating the efficiencies of which mechanisms to bring about the solutions. It's the moral claim you use to justify whatever government force you go on to propose.

vidyohs August 21, 2008 at 10:06 pm

John Dewey, oh John!

Tariffs are excise taxes and our founding fathers designed them to provide the income to finance the Federal Govt.

Our wise lovable founding fathers said no no to personal income taxes unless everyone in the nation could be taxed in the correct and exact perportion.

We may agree on many things, John, but on this I am in left field Yankee stadium and you are in Tierra Del Fuego in a dugout.

Now you and I may agree that government since the founding fathers have run amok on the insane application of tariffs, but the solution isn't personal income taxes, the solution is to kick ass and clean out government.

Ouch Ouch, be still my churning heart.

vidyohs August 21, 2008 at 10:08 pm

Ouch ouch again, that should read proportion not perportion, egads!

Methinks August 21, 2008 at 10:22 pm

Howard,

Thank you for your answer. However, it raises some more questions.

If you believe that a large tariff is required for a large negative GDP effect, then why do you believe that a small tariff would have a large positive effect? If tariffs aren't large enough to discourage a buyer to buy imported products over domestic ones, then it will have no effect in "protecting" American business. If the tariff is large enough to discourage the purchase of imported goods over domestically produced goods, then by definition it encouraged the inefficient allocation of resources. Thus, your claim of no negative consequences but vast positive consequences makes no sense to me.

When Britain marched to war with the U.S. in Iraq, a Belgian firm (if memory serves) held the contract to supply the British army with rifle ammunition.

This can be solved much more cheaply by buying from a wider variety of munitions manufacturers. Forcing domestic production may mean paying so much more for munitions that the benefit outweighs the cost. Further, domestic production does not guarantee supplies. Raw materials aren't always found domestically and plants are subject to hurricanes, strikes and many other disruptive elements.

The 1941 sneak attack on Pearl Harbor seems to have ocurred because the U.S. had, for political reasons, cut off exports of crude oil and scrap steel to Japan.

That may have been the most visible and immediate reason for Pearl Harbour. However, it's naive to think that cutting off exports is the only, let alone even the largest reason for that attack or wars in general. Before Pearl Harbour, there had long been a political war between Japan and the United States as Japan worked to expand its empire and the United States kept getting in the way. Ultimately, Japan would have had to surrender its empire or fight the U.S. The embargo was merely a tool in the fight against Japanese expansion.

from 1816 through 1939 U.S. tariffs averaged about 40 percent, and we grew from an agrarian backwater to become the mightiest industrial power the world had ever seen.

First of all, do you not think that you might be conflating causation and correlation? Secondly, I believe the U.S. did not become the mightiest industrial power the world had ever seen until after the second world war. You may disagree as "mightiest industrial power the world has ever seen" is not the clearest of definitions. Finally, during that period, the United States was a brand new country – an emerging market. Emerging markets are similar to growth stocks – they tend to be characterized by high growth rates even in the face of large inefficiencies. We can only speculate how much larger the growth rates might be without the inefficiencies.

Tariffs work, even if (as Mr. Dewey has taught me) they do fall under the general rubric of mercantilism.

Given that your only supporting evidence for this assertion is that a period of high economic growth coincided with a period of high tariffs, you'll forgive me if I don't believe that you've provided enough evidence to make that claim.

Howard J. Harrison August 21, 2008 at 10:23 pm

Mr. Luftner:

I think that you and I may suffer a basic conflict of visions. A conservative, Russel Kirk-style traditionalist not an Ayn Rand-style libertarian, I lack the power to persuade any libertarian true believer to my point of view. From Rand's point of view, I would be wrong, quite simply, and you would be right. One would have to attack the very philosophical underpinnings of libertarianism to have any hope of persuading you in that context—and I suspect that (quite rightly) you would soon find me too tiresome to bother with if I tried to do that.

So let me just say this.

I believe that market competition is a means to an end, not an end in itself. Market competition is better than anything we know at ridding us of the dead weight of incompetent producers. It is also an engine of innovation. However, desirable though competition is, it is not actually necessary to encourage maximum competition at all places and at all times to incur competition's salutary effects.

I am an economic nationalist, which, of course, is a species of nationalist. I am nation-oriented rather than world-oriented. I do not believe that foreigners deserve the same right to trade in domestic markets that my countrymen deserve. To me the questions are: what is good for my countrymen? what is good for my country?

Perhaps we don't share the same definition of "liberty" in this context. But I find this point far more important, fundamentally, than debating the efficiencies of which mechanisms to bring about the solutions. It's the moral claim you use to justify whatever government force you go on to propose.

Spoken like a true libertarian.

For my part, I probably would not choose the words "government force," but I do believe that society exists and functions under some set of social arrangements partially defined by laws that, if they are to mean anything, must be enforced. For the most part, the fewer laws, the better, but laws we shall have nevertheless. We shall have taxes, too.

If the state built a road I thought unnecessary and did not intend to use, then I still would not feel free to skip the tax that paid for the road. I would dutifully pay the tax. I would realize that my freedom to drive my automobile where I like is conditioned, as a practical matter, mostly on where the roads run, which is not something I as an individual am allowed to decide. (I could drive my car around on my own land but that's not much use.)

The rules of the national economy are like the rules of the road. Either we will submit to the absolute discipline of foreign competition or we will submit to the relative discipline of a tariff along with a partial discipline of foreign competition. Ricardo has taught us that free trade undiversifies a national economy. If, as a people, we want an undiversified national economy then that is one choice, but for my part I prefer the diversity. That is another choice.

Now, I realize: the libertarian reply is that I should not be forcing my choices on anyone else, but respectfully I think that this is the wrong way to look at it. The tariff is just a tax. You must be forced to pay one tax or another, as must I. If you prefer that I pay a different tax and are prepared to let the state enforce that preference on me, then how does my preference differ morally from yours? A tariff does not deny you the right to import what you wish; it merely prescribes a particular mode of assessing taxes.

All taxes are restraints on liberty. If we value liberty enough to secure it with a properly limited government, then we shall have to decide together as a people how this government is to be funded. I prefer to fund it by means of a tariff, for all the reasons previously described.

Also, I realize that you and I disagree, but I am very concerned with the national-security implications of free trade. To me, this is the most important point.

HJH

Hans Luftner August 22, 2008 at 12:02 am

Yes, I suspect neither one of us will change the other's mind on this point. It's nice to know that early on, though, don't you think?

If I may rephrase my chief objection: Do you feel a business is entitled to an environment free of competition, or it's a violation of its rights if such an environment is not encouraged?

…an Ayn Rand-style libertarian…

Side note: Ayn Rand would hate me! I'm probably more Rothbardian than anything, but even that's a box I don't quite fit in.

If you prefer that I pay a different tax and are prepared to let the state enforce that preference on me, then how does my preference differ morally from yours?

It doesn't, if that were my position. I haven't advocated any such tax be implemented, & I especially haven't justified any tax on moral grounds.

I am very concerned with the national-security implications of free trade.

I can't put it more succinctly than Frederick Bastiat: "When goods don't cross borders, armies will."

brotio August 22, 2008 at 2:07 am

What a great thread! And I'm sure most of us know why.

I am firmly in the camp opposed to income taxes. I believe the Sixteenth Amendment was the single most evil the people of the United States ever legislated upon themselves.

I also agree with Sam's comment about tariffs.

John Dewey August 22, 2008 at 3:44 am

vidyohs: "Tariffs are excise taxes and our founding fathers designed them to provide the income to finance the Federal Govt."

Just because our founding fathers designed tariffs does not mean such tariffs are desirable. Tariffs are selective excise taxes, applied to some producers and not to others, and that is exactly the problem with them.

vidyohs: "Our wise lovable founding fathers said no no to personal income taxes unless everyone in the nation could be taxed in the correct and exact perportion. "

I would agree with them. If government services must be financed, I would much prefer those services be financed with user fees and sales taxes.

vidyohs: "but the solution isn't personal income taxes"

When Mr. Harrison asked me if I preferred tariffs or income taxes, I made it very clear that I prefer neither. But if that choice were forced on me, I would take income taxes over tariffs.

I agree that personal income taxes are not the solution.

Vidyohs, do you prefer tariffs to user fees or to sales taxes?

Mr. Econotarian August 22, 2008 at 5:07 am

Howard J. Harrison says: " I am very concerned with the national-security implications of free trade. To me, this is the most important point."

If you like national security, then you should support more trade:

"Crosssectional evidence using various data on political interactions confirms that trading nations cooperate more and fight less. A doubling of trade leads to a 20% diminution of belligerence. This result is robust under various specifications, and it is upheld when adjusting for causality using cross-section and time-series techniques. "

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=915360

Solomon W. Polachek , Carlos Seiglie, "Trade, Peace and Democracy: An Analysis of Dyadic Dispute"

Howard J. Harrison August 22, 2008 at 6:48 am

Will the discussion thread cool too much if my reply to the latest points is delayed as long as 36 hours? If not, maybe this will give Dr. Boudreaux a chance to weigh in if he chooses, or another economic nationalist (if any is reading) a chance to carry the debate.

vidyohs August 22, 2008 at 7:14 am

John Dewey,

First things first: Let's recognize that this, "But if that choice were forced on me, I would take income taxes over tariffs.", is your choice of income tax over tariffs and tells me that you view income taxes as less destructive to the economy than tariffs.

I know the choice was predicated on an "if", but it still reveals the mind set behind it.

When our founding fathers decided to finance government with excise taxes (yes it opened the door to tariffs) I don't believe that they had the protectionist tariff in mind. I believe they had the taxes on manufacture, sale, use, and activity in mind.

In my mind the protectionist tariff (we only have import tariffs, no export) entered the picture when businessmen discovered that public servants could be bought to perform in protection of home town industry. Which be what time after the government set up shop…..maybe a nanosecond? Now, this speaks to the corruption of government as the source and the perpetuation of the evils of tariffs or income taxes.

Our problem is not tariffs or income taxes, our problem is government run amok and totally unaccountable to the people (See my previous posts on Art 1, sec 5, para 2 of the Constitution "Congress may determine its rules…")

Now to my choice and why. I believe that the sales tax is horrible any level, but deadly at the national level. States ae somewhat limited in their ability to run amok with a sales tax, though it is possible I doubt a state sales tax would ever evolve into a VAT. A national sales tax, on the other hand, will definitely evolve into a VAT and that is a crippling system. The VAT has crippled every country that has initiated a National Sales Tax, and I do not believe for one minute that our home grown congressional hogs would pass up a VAT.

User fees are excise taxes that I could live with, as a matter of fact they are the only taxes I see as legal and equal.

Since I am a simple guy who learned his economics on the street in practice,
observation and analytical thought I tend to think at the basic level.

Excise taxes are not destructive at the basic level the way personal income taxes are.

The personal income tax either reduces personal incentive at best, or kills it at worse. In my mind personal incentive equals personal initiative, without the personal initiative of each individual there is no capitalism. This is the root and the root nourishes everything above it.

Without the churning creation of capital there is nothing but poverty and degeneration in every facet of the individual life, because the root is strangled.

So, under no circumstance would I take a personal income tax over any of the other choices.

Sam Grove August 23, 2008 at 1:34 am

Why should we be so limited by history?

How about a voluntarily funded government?
Plus user fees for specific services such as deed and title registry.

A militia could be something that everyone participates in. Why do we need a government army?

Prisons could be funded by the slave labor of inmates.

…and so on.

vidyohs August 23, 2008 at 10:04 am

My thoughts as well, Sam.

Except for the chains and blinders of enculturation that do not permit people to see and do, it could be done.

User fees fit that notition, because if you don't want to pay the fee you don't use the service.

It is up to me to convince you to contract with me, why shouldn't government have to convince us (all of us) to contract with it?

Have a good weekend.

Unit August 23, 2008 at 12:07 pm

Mr. Economic Nationalist H J Harrison,

are you in favor of taxing exports as well?

Also Adam Smith is famous for the phrase "division of labor is limited by the extent of the market". So you're discounting enormous gains from progress.

Finally, assume that the US had no uranium and that nuclear power ends up being the only viable form of energy (this is an hypothetical statement). Would you still be against free-trade in this case?

Howard J. Harrison August 23, 2008 at 8:09 pm

Discussion participants have challenged me with so many good questions that I can give no brief reply. This reply is far too long, but here it is (and if anyone actually read the whole thing, it would be more than one had a right to expect).

Methinks:

If you believe that a large tariff is required for a large negative GDP effect, then why do you believe that a small tariff would have a large positive effect?

I do not know if I can give a much clearer answer than I have already given. However, I will say this. My previous answer was couched in terms of abstract economic theory because good experts like Dr. Boudreaux simply won't listen to you until you convince them that you actually comprehend Smith, Ricardo, Bastiat, etc., on an abstract level. However, when it comes right down to it I am not a big believer in economic abstractions. One has to look at what is actually, empirically going on in the real economy. Experience is what counts. In assessing experience, you have to look at the whole, messy, irrational picture.

To Dr. Boudreaux's credit, he does post a fair quantity of actual data here—and I dispute none of his facts—but there are data and then there are counterdata. The counterdata are reported by Paul Samuelson, Ralph Gomory, William Baumol, Pat Buchanan, Ha-Joon Chang and others.

It is slightly obnoxious to recommend a book, but let me just mention Pat Buchanan's highly readable 1998 book The Great Betrayal. If you did happen to read the book, then you would find a competent overview of the relevant counterdata there.

If tariffs aren't large enough to discourage a buyer to buy imported products over domestic ones, then it will have no effect in "protecting" American business. If the tariff is large enough to discourage the purchase of imported goods over domestically produced goods, then by definition it encouraged the inefficient allocation of resources. Thus, your claim of no negative consequences but vast positive consequences makes no sense to me.

You are right, but the positive consequence is a first-order effect, whereas the negative is second-order.

This can be solved much more cheaply by buying from a wider variety of munitions manufacturers. Forcing domestic production may mean paying so much more for munitions that the benefit outweighs the cost.

If the comparative advantage is large then you are probably right. However, relying on foreigners for munitions in an international crisis is such a heavy strategic risk that even thoroughgoing free-traders in the U.S. Congress have been loth to risk it.

Further, domestic production does not guarantee supplies. Raw materials aren't always found domestically and plants are subject to hurricanes, strikes and many other disruptive elements.

Right again. This is why one wants to maintain ready access to both foreign and domestic supplies when feasible, even when maintaining such diversity comes at a moderate cost.

Your point about Pearl Harbor is well taken.

First of all, do you not think that you might be conflating causation and correlation?

Sure. But that objection cuts both ways. Free-trade economists often credit free-trade policies for much of the U.S. economy's growth since World War II, even though technological advances seem a more plausible primary cause. I do understand that, statistically, one cannot prove causation except by experiment, which in such cases is impossible.

What we do know is that the Industrial Revolution got a century's head start in Britain under mercantile protection until Richard Cobden forced through the repeal of the protectionist, so-called "Corn Laws" in early Victorian times, whereupon Britain gradually lost her industrial pre-eminence to two very different protectionist powers: the U.S. and Germany. We also know that Japan and Korea rebuilt from WWII spectacularly under protection (though West Germany did the same under a relatively liberal trade regime to my knowledge). These are just facts. So, though the evidence for protection is circumstantial there is rather a lot of it to explain away, if one is so inclined.

Secondly, I believe the U.S. did not become the mightiest industrial power the world had ever seen until after the second world war.

You might want to re-examine this belief.

You may disagree as "mightiest industrial power the world has ever seen" is not the clearest of definitions.

Most steel production. Greatest tonnage of coal mined and burned. Largest ad valorem quantity of finished manufactured goods. Heaviest rail traffic. Best per-industrial-worker productivity as measured by wages paid. Relevant early twentieth-century measures like that. I am not sure that the U.S. led in every measure, but, basically, I think that you would find it difficult to show by any reasonable measure, aggregate or per capita, that the U.S. was not the world's leading major industrial power in the 1930s by a wide margin. If you asked me to provide specific figures then I admit that I would refer you to the source of your choice.

Finally, during that period, the United States was a brand new country – an emerging market. Emerging markets are similar to growth stocks – they tend to be characterized by high growth rates even in the face of large inefficiencies. We can only speculate how much larger the growth rates might be without the inefficiencies.

True enough.

[Y]ou'll forgive me if I don't believe that you've provided enough evidence to make that claim.

Ha ha! Done. Realistically, I do not expect to win over many if any Cafe Hayek readers today. There are after all sound reasons to support free trade.

Free trade however is not free; it comes at a cost. It is time that you and I counted the cost.

Vidyohs:

Now you and I may agree that government since the founding fathers have run amok on the insane application of tariffs, but the solution isn't personal income taxes, the solution is to kick ass and clean out government.

I think that this is a valid point. Tariffs, properly applied, are (a) to raise revenue and (b) to protect domestic manufacture and agriculture not specifically but generally. A Congress that enacts special tariffs to protect particular producers is usually abusing the tariff. This to my mind is one of the strongest arguments against tariffs.

Mr. Luftner:

If I may rephrase my chief objection: Do you feel a business is entitled to an environment free of competition, or it's a violation of its rights if such an environment is not encouraged?

No business is entitled to an environment free of competition in my view. A personal anecdote: the most unpleasant, least competent business I have to deal with in my local market happens to be my local telephone company, a business which, one suspects, could never survive in a competitive market. Would that real market forces could be unleashed on it.

Certainly it is no violation of a domestic business' rights that it face fierce and varied foreign competition. There can be no right to succeed in the marketplace.

Side note: Ayn Rand would hate me! I'm probably more Rothbardian than anything, but even that's a box I don't quite fit in.

I stand corrected.

I haven't advocated any such tax be implemented, & I especially haven't justified any tax on moral grounds.

Fair enough.

I can't put it more succinctly than Frederick Bastiat: "When goods don't cross borders, armies will."

Bastiat was the Chesterton to Ricardo's Belloc. There is much to admire about Bastiat but, quite simply, in this case, Bastiat was wrong. He should have said, "When armies cross borders, goods will not." Counterexamples to Bastiat's apothegm are not hard to come by. Operation Barbarossa, for instance.

Mr. Econotarian:

If you like national security, then you should support more trade:

"Crosssectional evidence using various data on political interactions confirms that trading nations cooperate more and fight less. A doubling of trade leads to a 20% diminution of belligerence. This result is robust under various specifications, and it is upheld when adjusting for causality using cross-section and time-series techniques."

Interesting. I'll have to check Polachek's and Seiglie's paper out that you quote. We shall see if their methodology actually supports their ambitious thesis. Thank you for the reference.

Vidyohs:

When our founding fathers decided to finance government with excise taxes (yes it opened the door to tariffs) I don't believe that they had the protectionist tariff in mind. I believe they had the taxes on manufacture, sale, use, and activity in mind.

In my mind the protectionist tariff (we only have import tariffs, no export) entered the picture when businessmen discovered that public servants could be bought to perform in protection of home town industry. Which be what time after the government set up shop…..maybe a nanosecond?

Maybe, but not much longer than that. The first act the First Congress sent to President Washington in 1789 regarded the administering of oaths. The second act was the Alexander Hamilton tariff.

Unit:

are you in favor of taxing exports as well?

No, I don't think so. Admittedly, I have never given the question much thought except maybe as a mathematical extrapolation. If there is a significant U.S. historical precedent for taxing exports, I am unaware of it. There is precedent for subsidizing exports, but I do not see why an export subsidy should be necessary if we want to fill the Treasury not to empty it. Import duties do the trick.

Are you in favor of taxing exports as well?

Also Adam Smith is famous for the phrase "division of labor is limited by the extent of the market". So you're discounting enormous gains from progress.

Smith is right, so you are right, too. However, "discount" is the right word. I do not wish to stop imports but to tax them moderately as Americans used, in lieu of levying certain other taxes. Even in theory, the discount does not amount to much in comparison with the solid benefits we know that tariffs bring. (Naturally, if one forgets to count the benefits and disregards the relevant history and experience, then tariffs do lose in analysis. Remarkably, almost no one in this fine thread has willfully forgotten or disregarded any relevant factors, but examples to the contrary are not elsewhere hard to find.)

Finally, assume that the US had no uranium and that nuclear power ends up being the only viable form of energy (this is an hypothetical statement). Would you still be against free-trade in this case?

Good hypothetical: it gets right to the core of the question. I like it.

If the U.S. had no uranium and there were no viable substitute for uranium as an energy source, then American power producers would import uranium whether there were a tariff or not. However, one could argue in that case that tariffs did nothing to bolster U.S. uranium production and served only to cause Americans to consume a nonoptimal amount of energy. In this extreme case, to exempt uranium from the tariff regime and to make up the tax revenue loss by other taxes might be a wise policy.

As genuinely instructive as your excellent hypothetical is—and I think your hypothetical perhaps the single best point in this entire, fine thread—I am not sure that it tells us much about the situation in which the United States actually finds herself. There are several goods the United States cannot practically produce, but as far as I know these either are nonessential, are amenable to substitution, or do not constitute large enough a fraction of the real economy to merit fine-tuning of the tariff policy. If you start making special exceptions for certain imports then you open the door to the kind of corruption Vidyohs correctly warns us about. If an extreme situation ever arose like your hypothetical, then the U.S. would be in deep strategical trouble in any case, but Congress could make a special exception for the good in question and, until Congress acted, the worst that would happen according to the economic theory would be an inefficient underconsumption of the special good.

Thanks.

Regards,

HJH

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