Tariffs: Protective and Revenue

by Don Boudreaux on March 27, 2011

in Budget Issues, Seen and Unseen, Trade

I normally do not reply to Muirgeo’s comments, except to correct his egregious blasphemies against worthy scholars (such as his frequent repeats of the misreadings of Adam Smith trumpeted by the likes of the fatuous William Greider) and when – as today – they present a teachable moment.

Muirgeo, in his effort to justify the alleged economic benefits of tariffs, asks:

Do you realize during the majority of this nations [sic] history most of its tax revenue came from tariffs?

Indeed, this claim is true.  But it does not make the case for government policy that Muirgeo assumes it to make.

Precisely because Uncle Sam, until WWI, depended for his revenues chiefly upon tariffs, these tariffs could not generally be so high as to choke off trade.  A truly protective tariff brings in little or no revenue: tariff revenues are not paid on goods and services not imported into the country.

So Uncle Sam had an incentive not to go full-bore in raising tariffs.

On the other hand, protectionist interests were generally politically powerful (for protectionists were a chief constituency of the GOP – which helps to explain why the GOP still has the reputation of being the party of “the rich,” because it was rich industrialists who were the principal beneficiaries of whatever protection was supplied by 19th-century tariffs).  So to the degree that Uncle Sam in the 19th century used tariffs to protect domestic industries from foreign competiton, Uncle Sam likely reduced the revenues he raked in.

Protective tariffs, therefore, likely kept Uncle Sam from bloating in size (thus reducing whatever temptation he would have had to involve himself in aspects of the economy that would have further reduced economic growth), while the need to rake in positive sums of revenue from tariffs likely kept protectionism in 19th-century America less restrictive than it would otherwise have been.

I say “likely” in the previous paragraph because it’s an empirical question which effect, if any, dominated the other.  Did the national government’s need for revenue in fact keep tariffs lower (and, hence, less ‘protective’) than otherwise?  If so, 19th-century U.S. tariff policy – in intent and in effect – might not have been as protectionist as it is portrayed.  Or did the forces of protectionism dominate?  If so, then while these resulting restrictions on imports (and – it follows – on exports) unquestionably reduced the rate of American economic growth from what it would have been with less-restrictive tariffs, the accompanying strict limits on Uncle Sam’s revenues at least partly offset the negative consequences of the protective tariffs by keeping the national government smaller and less intrusive than it might otherwise have been.

I wonder if empirical research has been done on this question.  I’ll ask Doug Irwin.

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{ 69 comments }

Jeff Neal March 27, 2011 at 2:09 pm

Thank you. Smaller central government financed by reasonable tariffs is a trade I’d make any day over the bloated government that will, to feed itself and its innumerable layers of dependents, tax and regulate any income or activity that doesn’t have the lobbying power to get an exemption.

The increase in ‘domestic’ economic growth would more than offset any damage done by increased tariffs. More importantly, the ‘need’ for more government programs and safety nets to help (a.k.a. ‘own’) the less fortunate would be eliminated by the huge creation of wealth that would be so enormous there would be no need to redistribute it. We’d experience wealth creation spiraling upward rather than the downward spiral of dependence and entitlement. Government would get smaller and smaller, allowing the tariffs to be reduced

Less government breeds less government. More breeds more. Insert “freedom” for “government” and the same rules apply. Pretty simple.

Tim March 27, 2011 at 4:42 pm

Actually, no, increased domestic economic growth can’t offset the cost of tariffs. Examine this diagram:
http://en.wikipedia.org/wiki/File:EffectOfTariff.svg

The area below the demand curve and above the world price represents the amount of benefit received by consumers by being allowed to purchase goods at the world price. A man may value a given widget at 100 dollars. If the domestic price is only 50 dollars, he obtains something he would buy at 100 dollars for only 50 dollars, saving 50 dollars. If the world price is 30 dollars still lower than that, if he is allowed to buy freely from overseas, he saves 30 more dollars that he would otherwise have to forfeit to buy his good. The area beneath the supply curve and above the world price represents the sum total of all the benefit consumers receive by being able to purchase goods at that price.

Likewise, the area above the demand curve but below the price represents the amount of benefit to domestic businesses. Some may be willing to manufacture a good and sell it for only 10 dollars, but because the market price is 50, they receive 40 extra dollars per object which they wouldn’t require to stay in business, but are more than happy to receive.

Now, if you examine the effects of a tariff as outlined on this diagram, when a tariff increases the price of a good it drastically reduces the size of the consumer benefit while only minimally increasing the size of the producer benefit. Because the government gets money from the tariff only on the number of goods actually imported, the benefit to government can be represented by the rectangle equal in size to the new number of goods imported multiplied by the amount of tariff placed on each object. You’ll notice that this doesn’t occupy the entire remainder of the loss to consumer surplus: two triangles represent losses to the consumer which aren’t picked up by either industry or government. These are simply lost, leaving society less wealthy on the net than it was before the tariff.

Ryan Vann March 28, 2011 at 1:29 pm

Yawn.

vikingvista March 27, 2011 at 2:20 pm

Compared to tariffs, taxing the trade of domestic labor has the advantage for governments of a captive population. Foreign exporters have some escape by trading with lower tariff countries. When your labor is taxed, your only other choices are death, become a ward of the state (eg prison), or leave your home.

So yes, tariffs result in significantly less state violence against its subjects/victims than the income tax.

E.G. March 27, 2011 at 3:48 pm

Your hyperboles are flawless :\

vikingvista March 27, 2011 at 3:54 pm

Odd thing for you to say. It can’t be hyperbole if it doesn’t exist.

JohnK March 27, 2011 at 6:16 pm

Tariffs are not a tax on the captive population?

Who pays tariffs other than the consumer?

vikingvista March 27, 2011 at 7:05 pm

They are a tax on the captive population, but the tax itself is not captive. My point refers to Don’s. Because foreign exporters can escape it relatively easily, thus depriving the government of loot, the government is more restrained than they are with income taxes.

JohnK March 27, 2011 at 8:53 pm

yes

vikingvista March 27, 2011 at 9:20 pm

“Who pays tariffs other than the consumer?”

That being said, you bring up another point. Who pays tariffs other than the consumer? The seller. Any tax on trade is a tax on both parties, regardless of who it is directly levied upon, and regardless of what is being traded (gold, wheat, dollars, yen, smiles, etc.)

With a tax on domestic labor, both parties are captive. But with a tariff, one party–the foreign exporter–has the ability to switch trading partners. That ability benefits both parties, in that it restrains the government.

Don’t be caught in the fallacy that consumers pay all taxes on businesses. A tax on trade reduces the amount traded. Whichever parties you electively choose to place on the supply end receive a smaller after tax price on a lesser volume. Whichever parties you choose to place on the demand end pay a greater pre-tax price on a lesser quantity.

The difference in those prices at the after tax quantity is the government loot. The difference between the loot plus aftertax benefit to the traders, and the pretax total benefit, is the wealth that is vaporized–received by nobody–due to the tax.

DG Lesvic March 27, 2011 at 2:23 pm

Congratulations. One of your best.

kyle8 March 27, 2011 at 2:32 pm

I could actually get behind a low universal tariff if it was used to eliminate income taxes. Income taxes are the most destructive of all taxes and the least efficent, they cause individuals and firms to make economic descisions which are not market driven.

A low tariff coupled with a national sales tax, coupled with repeal of the income tax amendment would probably boost economic growth if the taxes were not too high.

muirgeo March 27, 2011 at 2:58 pm

I don’t consider a tariff protective if we are adjusting for the fact that we require tax, work and environmental standards of our stateside businesses and corporations because we feel that these standards are part of what makes us a civilized, clean and productive society. In fact to NOT have them is putative. Likewise, for countering illegitimate tariffs imposed on our products.

Ultimately I feel my position… the Fair Trade position is the one that is more supportive of true free trade than what we are calling free trade.

Don, I don’t see you as a supporter of free trade. I see you as a supporter of Protectionist Chinese trade.

And I think you need to address how manufacturing productivity is measured. And I’d also like to see you address my so-called Sherrod Brown one question knock out …. By what metric do you measure the success of the American Trade policy?

Jeff Neal March 27, 2011 at 3:53 pm

M,,

Your faith in government to correct the evils of the mere humans in private sector is remarkable. Are you that enthusiastic about government actions all the time – during G Bush’s presidency? During the reign of Mao Tse Tung? Gorbachev? Is there ever a time you would prefer to let free men and women make their own decisions, without the benefit of the, we suppose you believe, all-knowing, always well intended government? Can you tell us, say, 5 human activities you are willing to let be free of any government intervention.

muirgeo March 27, 2011 at 6:48 pm

Come on Jeff… good banking regulation would have protected us from the recent crisis, getting rid of leaded gas and paint has saved many developing brains…. yes I support good regulation.

Why? Would you like to allow the use of leaded gas and make catalytic converters optional?

“5 human activities you are willing to let be free of any government…”

- The rules of basketball
- hiking in the wilderness
- speech
- prostitution (make it legal but regulate it)
- all decisions between a doctor and his patients
- smoking pot
- I would allow for no rules on any bank as long as they were not backed by any government funding or insurance and were properly labeled an unregulated bank.
- I’d allow corporations not to pay corporate taxes if the un-incorporate.

Can you tell me 5 activities you’d like to do that the government is preventing you from doing?

CalgaryGuy March 27, 2011 at 7:35 pm

“- prostitution (make it legal but regulate it)”
You clearly don’t understand what the question was. It’s not free from government intervention if it’s regulated.

“- all decisions between a doctor and his patients”
Does that include how the bill gets paid?

I’m not Jeff, but here are some things on my list:
- Board an aircraft without having to choose between getting fondled or have someone check out my kids private areas (seriously, when did that job turn into a child molesters dream job?)
- I’m Canadian, I would like to buy an equal amount of health care coverage that the government current forces me to do so. With those savings, I could get fondled even more (see above) and take my kids to Disneyland
- I would like to spend my summers at a nice cottage/cabin, but the high amount of taxes government takes prevents me from making the mortgage payments on it (actually, if I had back even half the taxes they’ve taken the past 5 years I could own it outright)
- I’d like to stop getting angry at the Starbucks barista when she asks for a tip and I have to bite my tongue instead of asking her how much of my tax dollars went towards her Master of Fine Arts degree
- I would like to be reassured that my savings aren’t going to be eaten away by the inflation that’s coming with all the money governments around the world are printing.

Jeff Neal March 27, 2011 at 10:33 pm

so, you really think lack of regulation was the cause of the 2008 financial ‘crisis?’ you have some studying to do. The unregulated portions of the financial markets suffered relatively little harm, except as they were involved with the regulated parts of their industry. where do you get such great confidenc in government over private actions of free men and women. Please tell me the historical examples that make you so confident that government is the answer. Really, I want to know what I’m missing.

your answers are, in order:

silly, done, debatable, a good idea, debatable, a good idea and indecipherable.

My answer – buy a house without an inspection for its energy efficiency, keep 100% of my money, own a gun in DC, practice my business without a license, lend money without applying for a license, get a haircut without paying for someone who has a license, prepare my tax return on a post-card, educate my child for less than $50,000 per year, ride a motorcycle without a helmet . . . and everything else that there is a law against.

muirgeo March 28, 2011 at 12:03 am

“Please tell me the historical examples that make you so confident that government is the answer. Really, I want to know what I’m missing.”

Who needs historical examples? The best countries to live in are the social democracies ( all welfare states to some degree).

Now you tell me where a libertarian society exist that makes you so confident that you have the answer. I am pretty sure the best real examples of a society that has all those unregulated activities that you wish for on your list is best exemplified by Somalia and Haiti… let me see that list again… yep looking through your list looks like you should be packing your bags for Somalia or maybe Djubuti… they fulfill ALL of your criteria. Bon voyage!

MWG March 28, 2011 at 2:35 am

“I am pretty sure the best real examples of a society that has all those unregulated activities that you wish for on your list is best exemplified by Somalia and Haiti…”

Pretty sure? Your knowledge of Somalia and Haiti is about as strong as your knowledge of the economic history of S. America. Both Somalia and Haiti and perfect examples of socialist dystopias… but you already knew that from past discussions here.

muirgeo March 28, 2011 at 9:30 am

Jeff Neal March 27, 2011 at 10:33 pm
“so, you really think lack of regulation was the cause of the 2008 financial ‘crisis..”

That you don’t is telling. The whole build up and collapse doesn’t happen with out unregulated financial derivatives. 1 trillion dollars of bad loans leveraged 100 times with unregulated WALL STREET created financial derivatives blew up the global economy… far worse an economic disaster than anything that has occurred from governmental bureaucratic malfeasance in the modern democracies. Same thing back in 1929. Nothing near so catastrophic in between.

Jeff Neal March 28, 2011 at 10:52 pm

M, my final words to you:

Your understanding of the financial markets is less than elementary. The derivatives that you decry are financial instruments with two sides. The conspiracy you postulate requires that one group took the UP side of the trade while the other group took the DOWN side AND BOTH sides knew that the DOWN side would pay off, so the UP side voluntarily lost money, dollar-for-dollar, while the DOWN side reaped the profit.

Not very likely, is it?

Furthermore, to suggest that all of that happened in some mythical “de-regulated” market place is ignorant. Show me the laws or rules that un-did some regulation that you think would have saved us from a large group of people over-investing in real estate. Show me that the number of pages in some regulatory manual decreased between the years 2000 and 2008. Or 1992 and 2008.

You can’t do it. Your hypothesis withstands not any level of actual knowledge or critical thinking. It is a script you’ve heard read over and over on MSNBC, I’m guessing. Get out and get some air – it’ll do you good.

Fare well. Keep thinking as you please, but I ask only one more time – don’t touch my money or try to pass a law that makes me agree with you. (Oh, and while I’m at it > I never said NO GOVERNMENT, I said less government. I didn’t say the government should not deliver the mail or build roads or any of the other things you suggested I would have to do without because I suggested that taxes are too high. Your way of debating is off-putting. Not even worth the effort to type the last lette .)

dan March 28, 2011 at 12:05 am

Did you actually follow the trail and see how the Housing Boom/Bust was created and the consequences of the Financial industry to falter? Do you really think that the Banks and lenders would ever make loans, that they know will fail, without Govt pressures and govt GSE’s purchasing those loans. The banks stand to lose their shirts on loans that will default. So long as GSE’s, backed by taxpayers (taxpayers were not given the option), were encouraging lenders to make sub-prime loans and to make loans to high-risk individuals, they did. Even, when backing off early in the housing boom, Govt threatened banks with prosecution and the full effects of govt persecution (Audits, increasing their borrowing rates, etc.,..) and the banks gave in. They are not angels in this, they took the quick buck and tried to get rid of the high risk loans bundled up with more secure loans. The banking industry was pushed into making loans on high-risk individuals for political reasons.

steve March 28, 2011 at 9:39 am

“Do you really think that the Banks and lenders would ever make loans, that they know will fail, without Govt pressures and govt GSE’s purchasing those loans. ”

I think that incentives matter. The banks were making loads of money. That was, and is, their prime incentive. I think it pretty clear from writings on these banks that most either believed their models or did not understand them. They really thought that they were going to keep making money.

This still amazes me about libertarians. The one group that ought to understand incentives, but resort to conspiracy theory rather than just look at good old fashioned money making so they can blame government.

Steve

dan March 30, 2011 at 12:06 am

No conspiracy theory. It is factual. The banks do, as any other institution, need incentives. Banks had little incentive, or none, to make loans to high-risk individuals (those who were likely to default) and without money down. The disincentive was more prevalent. The individual defaults and the bank is stuck with a home and making interest payments themselves to the govt. For every month that a home remains empty, it loses value.
Nonetheless, you can go back to the nineties and find the congressional hearings on Banks (lenders) and the chastizing and threats from Govt about not making enough loans to Low and Moderate Income (LMI) borrowers. Govt officials, including Janet Reno and Barney Frank, were presented with a statistic to perverse and use as a means of political manuevering. The stats were 44% and 22%. The numbers represent the percentage of applicants rejected for loan approvals in the overall system. The first was of African-Americans and the second of Whites. What else is there for a far left winger to conclude from that disparity but ‘DISCRIMINATION’ or ‘RACISM’, the common liberal ‘remember the Alamo’ call. And they did. Janet Reno accused the Banks of just that. She proclaimed that charges would be brought up should this disparity not be rectified. ACORN ran to the rescue, picketing out front of BofA in NY.
In 1995, The regulators created new rules for determining whether a bank was meeting Community Reinvestment Act (CRA) standards. Banks who attempted to prove that they were activley looking for LMI individuals, were met with a stiff hand. Not enough. The banks actually had to show that they made a requisite number of loans LMI individuals. Banks were required to use “innovative and/or flexible” lending practices to get LMI individuals loans. Quotas!!!!! Banks ……..Are federally regulated businesses. They have to get permission to diversify their practices or expand. Bill Clintons White House stated that banks who failed to get good ratings according to the CRI would be prohibited from getting permission to much of anything or to diversify. Sources: WSJ, Thomas Sowell, Walter E. Williams, CATO, CNN, CATO, Heritage Foundation, AEI, Youtube
There are your incentives……… But, most important of all incentives……………… Fannie and Freddie Mac……….Fannie and Freddie………TAKE A BOW……. without you backed by taxpayers…………without you relieving the banks of those high-risk loans………without you actively pursuing those loans……without you telling banks that you are buying up those kinds of loans…. None of this could have happened.
NO CONSPIRACY THEORY……FACT!!!! there is more to the story, but this is the meat and potatoes.
I UNDERSTAND IF YOU DONT WANT TO SPEND THE TIME STUDYING THE MATTER. BUT, PLEASE DO.
You can be a left winger, right winger, libertarian, etc.,……. and say all you want………..but this is true. Govt interventionism is to blame…….Banks played along…….and then the people seeing ‘green’ jumped into the ‘Titanic’ of mortgages.

robert_o March 28, 2011 at 2:32 am

|> - all decisions between a doctor and his patients

Liberty for me, and none for thee! Glorious irony!

Ron H. March 28, 2011 at 3:26 pm

In reply to Steve:

Do you understand the sentence you quoted? Do you even understand the meaning of the word “incentive”?

Don’t you believe that government pressure to make risky loans and government then buying those loans, thus eliminating risk to the banks, are in fact, incentives? Perhaps you would prefer to call it removing incentives to make good loans.

It appears to be you who doesn’t understand incentives. The banks acted in a perfectly rational and predictable manner.

dan March 30, 2011 at 12:13 am

Thanks, Ron. This is what happened. Please do some homework. The more people who do their due dilligence, the better off we all are at recognizing another Govt scheme and piece of corruption.
NYT, 1999: ” In a move that could help increase the home ownership rates among minorities and low-income consumers, the FAnnie Mae Corp is easing the credit requirements on loans that it will purchase from banks and other lenders…”
FAnnie did so under pressure from Govt.

dan March 30, 2011 at 12:55 am

By the way, on the aforementioned post…….another statistic…12%…..percentage of Asian-American applicants denied loans….So, did banks discriminate against whites in favor of asians? Where is the ACLU? I want a cash payout.

Frank33328 March 27, 2011 at 4:04 pm

While I don’t agree with your position on trade, your final question does point to why I believe it was legitimate for Senator Brown to insist that Dr. Boudreaux was not a worthy debater (from a thread in on a prior post). You ask, “By what METRIC do you measure the success of the American Trade policy?” Emphasis added.

Actually, this was / is my point exactly. As practitioners of different professions, the Senator and the Economist use intrinsically different metrics of: success, the good, etc.

Jeff Neal March 27, 2011 at 4:11 pm

Do you mean to suggest that only politicians are worthy of debating politicians on matters that affect the lives of their constituents?

Wow.

Frank33328 March 27, 2011 at 5:39 pm

“Do you mean to suggest that only politicians are worthy of debating politicians on matters that affect the lives of their constituents?”
As a practical matter, yes. And further this should not seem unusual. Political debates for office always (I would say without exception but I don’t know this for a fact) involve ONLY politicians. For debates to provide insight there must be by necessity, a basic agreement of terms, of rules, of basic understandings, on the goals. Etc. Political goals are: for one or more of the participants or the participants’ representative political organizations or parties to win an election. What is the common ground or the metric between politicians and doctors, engineers, chemist or even economist? The economist at best, can provide advice to say “to get x, you must do y” and this may indeed be true; however, this presupposes that the “to get x” is a value the politician has identified as worthy of achieving. Stated another way, would you like to debate a nutritionist, or just follow the advice of an expert in nutrition, on every meal you have? Isn’t true that sometimes, and for some more than others, what you value in a meal is not limited to nutritional value? Does everyone, at least sometimes, say “to maximize the enjoyment I get out of life I will have this meal for something OTHER than nutrition value?” Would it be correct to say you are a fool for having cake on your birthday? Hence the difference between a politician and a subject matter expert….
BTW, I am not saying that these disciplines cannot “advise” politicians or form part of councils that provide informed opinions to politicians. But debates of this type of pointless.

tkwelge March 27, 2011 at 8:34 pm

I don’t know. I would still like to here a debate about the philosophical differences between Brown and Boudreaux. You’re arguing that a politician’s only purpose is to extract as much value for his/her constituency as possible, no matter what the cost to other people. This may very well be true, but it sure doesn’t give me a better feeling about the government.

Jeff Neal March 27, 2011 at 10:24 pm

You’re just being silly. Of course an economist is worthy of a debate with a politician. Professor Boudreaux was not proposing to debate the senator about nutrition or brain surgery. The proposal was to debate trade policy. The senator is not claiming to know more about that topic, is he?

Frank33328 March 28, 2011 at 8:46 am

Responding to tkwelge and Jeff Neal, I think the differences between what we are saying is in tkwelge’s comment “I would still like to here a debate about the PHILOSOPHICAL differences between Brown and Boudreaux” (Emphasis added) The topics Philosophy, Politics and Economics I don’t believe are not interchangeable. Politics is a branch of philosophy but I don’t think Economics can be grouped into philosophy quiet so easily. Economics is a means to an end. It may explain how to accomplish a certain end (e.g. wealth) but cannot justify WHY wealth SHOULD BE the end or more importantly what trade-offs are justifiable to achieve that end versus other ends. Arguments against “completely” free trade are always shades of gray. Every politician who believes in some restriction on trade believes that trade is good but there is some OTHER good that ALSO needs to be accomplished and cannot be accomplished by having completely free trade. It is not the means that these people question; it is the ends and the balance between various opposing ends that needs to be challenged/debated. Wealth versus fairness? Freedom versus Environmental protection? Great wealth versus more equal distribution? Etc Maybe I’m wrong here but I don’t think that economics can answer those questions.

CalgaryGuy March 27, 2011 at 4:10 pm

So, when your own government implements a tariff it is for the good but when another government puts tariffs on your countries goods it’s an “illegitimate tariffs imposed on our products.” Doesn’t that just reek of hypocrisy.

muirgeo March 27, 2011 at 6:54 pm

There should be no tariffs if both countries are operating from similar rules. China doesn’t allow workers to organize, doesn’t have a minimum wages or enforce the same environmental standards.

No hypocrisy at all just your mis-intepretation of the issues. Don’t you agree the rules should be similar? There is no reason to let our companies skirt proper regulation to take advantage of countries with poor regulations and poor human rights.

CalgaryGuy March 27, 2011 at 7:12 pm

quoting Muirgeo, “There should be no tariffs if both countries are operating from similar rules.”

Great to have you on board, I absolutely agree that the rules should be the same everywhere, you know what the easiest way to make sure that happens, have no rules. “Proper” regulation is a fantasy because you will NEVER find unanimity among a large number of people. What you think is right, I may think is wrong, so what is “proper” in that situation?

kyle8 March 27, 2011 at 8:13 pm

I am a little sympathetic to your view, I don’t think it is wrong to use a few threats here an there to try and nudge China toward being a better trading partner, especially in regards to intellectual property rights.

However, even if they remain recalcitrant we are STILL better off with more trade and not less trade. And the figures prove it, for all your sob stories about trade inequities we are still (even counting the current recession) much, much richer as a nation, and as individuals than when we had lots of trade restrictions.

That is fact, not opinion. The number of jobs, the average wage, and the buying power of the average citizen are all way higher than they were in the 1960′s-70′s, the time when you hold up to be some sort of paragon.

muirgeo March 28, 2011 at 12:16 am

Kyle I don’t think the numbers support your claims. These last 10 years have been the slowest growing since the Great Depression.

steve March 28, 2011 at 9:43 am

The median wage has changed little. Most of the increases have gone to the top. Buying power has increased but has been offset, partially, by the increase in housing and medical costs.

Steve

John Dewey March 28, 2011 at 11:41 am

Steve,

Your assertion that “most of the increases have gone to the top” is a little misleading. Senior economist Terry Fitzgerald of the Federal Reserve Bank of Minneapolis explains that median wages need to be adjusted in two ways when comparing wage growth with that of national income growth:

1. a common inflation needs to be used, or else the comparison is apples and oranges;

2. benefits need to be added to wages in order to reflect total compensation.

Terry Fitzgerald has done so, and determined that median real compensation has actually risen by 28 percent since 1975. While that is still less than the 39 percent real growth in national income per hour, the difference is not all that large after all. It is true that returns to education have increased since 1975, and professional and managerial compensation has increased faster than compensation of lesser-skilled workers.

It is not true that all increases have “gone to the top”. Many professional and lower level managerial occupations have gained significantly over the past 35 years.

John Dewey March 28, 2011 at 11:42 am

My sentence in the post above should read:

“A common inflation index needs to be used …”

John Dewey March 28, 2011 at 2:20 pm

muirgeo’s assertion – that the last decade was the slowest growing in 70 years – is correct. But only because the last decade ended in a deep recession, something which hasn’t happened before during those 70 years. When one cherry-picks the data, one can “prove” almost anything.

Absolute real GDP per capita from 2000 to 2008 exceeded that of 1950 to 1960. But the deep recession since 2008 cancelled a fourth of that growth.

What’s interesting to me is that absolute inflation-adjusted GDP per capita grew more at the end of the 20th century than in the middle:

GDP per capita growth, adjusted for inflation

1990s +$8457
1980s +$6511
1970s +$4874
1960s +$5155
1950s +$2495

Please note that the greatest growth in per capita GDP occurred when labor unions were shrinking.

dan March 28, 2011 at 12:09 am

Hear, hear to no minimum wage……..

dan March 29, 2011 at 1:34 am

Absolutely, economics can answer the questions of ‘equal distribution’ forced by the hand of an authoritarian body, compared to the incentive of creating personal wealth. Economics can answer questions of decisions made throughout history, like the part of the decision for Europeans in America to encourage slaves to form family units and procreate, while Slave owners in Brazil discouraged families and kept the men and women separate while continually importing more and more slaves.
Beside, how is it fair to confiscate the rewards of my innovations or hard labors and then give it to another who has not or does not put forth equal labor or innovation? How is it fair to reward unproductiveness and penalize those that are productive? What is fair about creating an enviroment of dependency ?

Russell Nelson March 29, 2011 at 12:52 am

I don’t understand why people give muirgeo so much attention. The guy is obviously a flake; obviously an idiot; obviously insincere from the very start. First he was a girl, then he was a doctor, then he was really named George, now he’s somebody else. And his economics are complete trash. He’s a gormless fool, and the best way to handle gormless fools IS TO IGNORE THEM. Stop replying to muirgeo and he’ll go away. Continue to give this pathetic little worm attention, and he will continue to post his crap.

JUST IGNORE HIM. It’s hard (because he’s so obviously wrong and so easy to correct — except that he never ever ever learns), but we can do it.

Jeremy H. March 27, 2011 at 3:03 pm

Phillip Magness’s dissertation discusses this topic, and how the adoption of the Income Tax Amendment altered trade politics:

http://digilib.gmu.edu:8080/jspui/bitstream/1920/5642/1/Magness_Phillip.pdf

“Prior to this change, the revenue attributes of the tariff system acted as a mild constraint upon the extreme protectionist interest group politics that characterized the early 20th century. The removal of this constraint and its ensuing policy effects are illustrative of the complex and often overlooked role that revenue may play in trade and tariff politics.”

Speedmaster March 27, 2011 at 4:09 pm

I just had a thought, what if “Muirgeo” is simply Paul Krugman’s trolling nom de guerre? :-)

vikingvista March 27, 2011 at 4:14 pm

Then PK’s prolific writings are effectively the work of his editors.

vikingvista March 27, 2011 at 4:16 pm

Reply intended for Speedmaster.

Gdsm.

E.G. March 27, 2011 at 4:23 pm

What you are saying may be true on the revenue side of things, but why were tariffs considerably higher at the time when government relied on them for most of its revenue? They may have limited government growth, but this did not seem to limit government from imposing tariffs which were averaging 40% most of the time (unless there is some differences in what were dutiable goods then, vs now). I think 40% average tariffs are very heavy. So I’m not following your claim that this somehow “limited” the growth or burden of tariffs. I don’t know how much higher they could have gone than that…So unless we can get a better explanation of specific increases and decreases in the rates…which were probably very political in nature…as well as specifics of what % of trade was covered by these tariffs…I don’t think we can make such conclusions. (Muirgeo or Krugman et al only tell us average tariff rates, but not what they covered)

Not relying on tariffs for its income, may be the reason why tariffs are as low as they are today…despite the effect this may have on government growth or not. After all you are assuming that the incentive of the Federal Government in the 19th century was to maximize federal government expenditures. I doubt this was the incentive of politicians in the day.

And we are skirting the overall larger point which Muirgeo and Krugman et al are trying to make…that protectionism helped America grow. Well, this doesn’t really tell us what mechanisms allowed the US to grow as much as it did in the 19th century, specifically what was the contribution of international trade (which, even if we may not like it…was likely a very very small piece of the pie in the 19th century)

E.G. March 27, 2011 at 4:37 pm

I realize now some of my point may have been answered in that dissertation piece posted above. While I can’t read all 200+ pages of it, looking at the tables of what goods the tariffs of late 19th century covered, and their rates, it is plainly obvious the decisions are political and aimed at specific industries; cotton, glass, steel/iron, tobacco, whiskey, and wool. This doesn’t strike me as a government whose interests are in fact revenue maximization for itself…for that to be a sufficient deterrent at outrageous tariff rates.

But more importantly, this doesn’t tell us what % of trade these goods represent, and therefore can’t tell us what the effect overall on trade these tariffs had.

dan March 29, 2011 at 1:51 am

We can see that tariffs were a political tool , much like tax loop holes are used today. Flat taxes with only the reduction of a few percentage points for charitable donations are in order. It will be one form of corruption eliminated. Then a committe on ideas on how to formulate a rule on flat tariffs, so that a raise in tariffs will put all industries on notice. That is just an idea.

dan March 29, 2011 at 1:41 am

How do we know that growth would not have been tremendously higher with less protectionist tariffs? Many variables in play, here. The US had a lucrative fur trade market, followed by tremendous immigration, Gold rush, land rush….etc.,……….. Growth in the US occured despite the tariffs. The competition was Europe. Competition now consists of over 200 countries and every continent, save Antarctica. But, a source of revenue must be had to pay for the duties the Consitution bestowed upon the federal govt, which does not include entitlements.

NotHere March 27, 2011 at 6:56 pm

It is funny that there are muirgeos in every country in the world. All want to export more than they import, all want to set up barriers that will keep jobs within the country. These muirgeos clearly have never once considered if each of their countries followed their advice what would happen: all countries would be exporting more than they import, and they would all working at jobs that all other countries also would be doing because they are deemed by the muirgeos as strategic industries.

Don Boudreaux March 27, 2011 at 8:35 pm

These muirgeos have a older name: mercantilists.

vikingvista March 27, 2011 at 9:43 pm

They have an even older name: nti hati

W.E. Heasley March 27, 2011 at 8:29 pm

Dr. B.:

You mentioned in your post that the size of tariffs in the 19th century and the size and scope of government. From 1865 to 1900 federal government expendatures as a percent of GDP averaged 3%. Hence tariffs, as a major source of revenue for the federal government in the 19th century, would have been nominal to equate to a 3% of GDP expenditure.

dan March 28, 2011 at 12:26 am

Just how many costs should a Govt impose on a business? Corporate tax, personal income tax, costs of complying with the tens of thousands of regulations (that mostly keeps more businesses from being able to startup), costs added to imported materials (tariffs…. the foriegn entity may just produce a better product), Govt mandated labor compensations (a business pays a worker for their labors and must also pay them if they must let them go…..A business pays for hiring and then for letting them go)(SS, healthcare, minimum wages, etc.,…), licenses for setting up the business ,etc.,…… Why should I have to give govt thousands of dollars just to be allowed to sell homemade cookies? I must pay govt to be allowed to cut the lawns of neighbors for money?

steve March 28, 2011 at 9:47 am

We should do away with the federal corporate income tax. It now provides just 6.6% of federal revenue. For all of the corruption it begets, it is not worth it. Many businesses do generate negative externalities, even things as banal as traffic and sewer issues, but these should be handled at the local level.

Steve

Slappy McPhee March 28, 2011 at 10:58 am

While I agree that corporate taxation should be abolished, I don’t agree that it will result in less corruption. Those in power, be it politics or business, will seek to grow that power. Those that seek “public financing” of elections suffer from the same delusion.

dan March 29, 2011 at 1:54 am

Not abolishment, just a flat tax between 15% and 25% with room for reductions for charitable donations. I still think charitable donations should be incentivized, but if that deduction will ultimately bring us back to the tens of thousands of pages for the tax code, then no deductions at all.

Lee Jamison March 28, 2011 at 9:18 am

This post brings a question to mind. Is it possible that tariffs tilted the balance of political power toward the GOP, while income taxes have tilted it toward the Democratic Party? Just looking at who dominated politics since the Income Tax versus those who dominated before would seem to indicate such a possibility.

Slappy McPhee March 28, 2011 at 11:01 am

Depends on if you can identify a difference between the two. There appears to be plenty of statism throughout either party. Regardless of which period of time you are looking at.

Joe Calhoun March 28, 2011 at 12:47 pm

The more things change….

The argument over tariffs as revenue or protective measures is a very old one indeed. John C. Calhoun, who started as a protectionist voting for the tariff of 1816, used Boudreaux’s exact argument in debating both the tariff of 1828 and 1842.

From a Senate speech, August 5, 1842

“No two things, Senators, are more different than duties for revenue and protection. They are as opposite as light and darkness. The one is friendly, and the other hostile, to the importation of the article on which they may be imposed. Revenue seeks not to exclude or diminish the amount imported; on the contrary, if that should be the result, it neither designed nor desired it. While it takes, it patronizes; and patronizes, that it may take more. It is the reverse, in every respect, with protection. It seeks, directly, exclusion or diminution. It is the desired result; and, if it fails in that, it fails in its object. But, although so hostile in character, they are intimately blended in practice. Every duty imposed on an article manufactured in the country, if it be not raised to the point of prohibition, will give some revenue; and every one laid for revenue, be it ever so low, must afford some protection, as it is called. But, notwithstanding they are so blended in practice, plain and intelligible rules may be laid down, by which the one may be so distinguished from the other, as never to be confounded. To make a duty a revenue, and not a protective duty, it is indispensable, in the first place, that it should be necessary to meet the expenditures of the Government; and, in the next, that the expenditures themselves should be necessary for the support of the Government, without the deficit being caused intentionally, to raise the duty, either by a surrender of other sources of revenue, or by neglect or waste. In neither case, as has been stated, would the duty be for revenue. It must, in addition, never be so high as to prohibit the importation of the article: that would be utterly incompatible with the object of revenue. But there are other less obvious, though not less important rules, by which they may be discriminated with equal certainty.

On all articles on which duties can be imposed, there is a point in the rate of duties which may be called the maximum point of revenue-that is, a point at which the greatest amount of revenue would be raised. If it be elevated above that, the importation of the article would fall off more rapidly than the duty would be raised; and, if depressed below it, the reverse effect would follow: that is, the duty would decrease more rapidly than the importation would increase. If the duty be raised above that point, it is manifest that all the intermediate space between the maximum point and that to which it may be raised, would be purely protective, and not at all for revenue. Another rule remains to be laid down, drawn from the facts just stated, still more important than the preceding, as far as the point under consideration is involved. It results from the facts stated, that any given amount of duty, other than the maximum, may be collected on any article, by two distinct rates of duty-the one above the maximum point, and the other below it. The lower is the revenue rate, and the higher the protective; and all the intermediate is purely protective, whatever it be called, and involves, to that extent, the principle of prohibition, as perfectly as if raised so high as to exclude importation totally. It follows, that all duties not laid strictly for revenue, are purely protective, whether called incidental or not; and hence the distinction taken by the Senator from Arkansas immediately on my left ( Mr. [Ambrose H.] Sevier, ) between incidental and accidental protection, is not less true and philosophical than striking. The latter is the only protection compatible with the principles on which duties for revenue are laid.”

Mr. Econotarian March 28, 2011 at 8:37 pm

“Precisely because Uncle Sam, until WWI, depended for his revenues chiefly upon tariffs, these tariffs could not generally be so high as to choke off trade. A truly protective tariff brings in little or no revenue: tariff revenues are not paid on goods and services not imported into the country.”

The truth is that the North forced a highly protective tariff on the South that lead to the “Nullification Crisis” of 1832 due to the Tariff of 1828 (a.k.a. Tariff of Abominations) that almost started the Civil war 30 years early.

Special interests played one part of the country against another. Mild (i.e. revenue raising) tariffs applied to basic goods coming into the North, huge tariffs (i.e. protectionist ones) applied to finished goods mainly going into the South.

Ron H. March 29, 2011 at 1:20 am

In fact, Lincoln, in his inaugural address, while claiming to have no interest in interfering with slavery, promised to enforce tariffs by military force, if necessary. A promise he eventually made good on.

Rudy March 28, 2011 at 8:58 pm

Is muirgeos a child playing with dad’s computer?? This guy cannot be serious!!

WFH Market March 31, 2011 at 5:18 am

Great to have you on board, I absolutely agree that the rules should be the same everywhere, you know what the easiest way to make sure that happens, have no rules. thanks for the blog..

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