If It Reasons Like a Duck….

by Don Boudreaux on April 2, 2011

in Balance of Payments, Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to the Christian Science Monitor:

Ian Fletcher mixes economic ignorance with poor reasoning to peddle a horrible protectionist hash (“Cost of US ‘free’ trade: collapse of two centuries of broadly shared prosperity,” April 1).

No one should be taken seriously who writes, as Mr. Fletcher does for example, that the U.S. trade deficit “causes a huge slice of domestic demand to flow not into domestic jobs but foreign wages.  Our trade deficit helps Guangdong, Seoul, Yokohama, even Munich – but not Gary, Indiana, Fontana, California, and the other badlands of America’s industrial decline.”

Such a claim reveals its author to be unaware that another name for “U.S. trade deficit” is “U.S. capital-account surplus” – that is, inflows of investment funds into America that supply (directly or indirectly) financing for more capital creation in America.

Consider Ikea, a Swedish company.  When Ikea builds its stores in the U.S. it spends dollars.  Almost every dollar that Ikea spends building and operating its stores in America is a dollar added to America’s “trade deficit.”  But are the carpenters and electricians hired to build Ikea stores in America not employed domestically?  Are the managers and clerks in each Ikea store in the U.S. not employed domestically?

Mr. Fletcher’s claim about the trade deficit is akin to an assertion by a self-proclaimed medical doctor that the liver pumps blood.  Sensible people ignore such quacks.

Sincerely,

Donald J. Boudreaux

Be Sociable, Share!

Comments

comments

35 comments    Share Share    Print    Email

{ 35 comments }

DG Lesvic April 2, 2011 at 6:03 pm

It’s never been said better.

One of the great classics of economics, and in a few simple words, without any curves, angles, or tangents.

A great lesson not just in economics but in how to write it.

Matthew April 2, 2011 at 6:38 pm

I was hoping Fletcher was writing an April Fools joke.

Methinks1776 April 2, 2011 at 7:20 pm

Fletcher is the joke that keeps on giving.

Speaking of which, Blinder’s suggestion a few years ago that we should all become massage therapists, divorce lawyers and garbage collectors (‘coz ya can’t outsource those jobs to India!) is still the source of much giggling in our household. The Blinder you are the better you can see the future?

dan April 2, 2011 at 6:58 pm

Mr. Fletcher would do well to advocate for harvesting and production of national resources such as the billions of barrels oil under our lands and seas. Harvesting and production of the trillions of cubic feet of natural gas. This will create thousands upon thousands of jobs. A protectionist measure such as this, is something I can get behind. But, to create disincentives, such as higher costs, for importation of raw materials or finished products is likely to result in slower growth and less jobs overall. We need to be more competitive by removing obstacle, not creating new ones. The production of our own resources lowes our costs, giving consumers more dollars in their hands to use elsewhere, and the creation of more jobs. Also, the excess resources are sold to foriegn entities creating more wealth in the US.

steve April 2, 2011 at 7:22 pm

All depends on your time horizon doesnt it. I also think a more honest description of what is going on would acknowledge that there are winners and losers in free trade.

Steve

Methinks1776 April 2, 2011 at 7:50 pm

Time horizon? Ah, the unimaginable tragedy of a temporary disruption to employment is on par with war and death! Let us mourn and moan and rob.

Don Boudreaux April 2, 2011 at 8:00 pm

So Steve: Should we, then, also acknowledge that there are “winners and losers” from competition generally – from entrepreneurial innovation – from consumer choice? If so, what policy implications follow from that acknowledgment?

Steve April 3, 2011 at 7:15 am

I should change my name.

Sincerely,

The Original Steve

LowcountryJoe April 3, 2011 at 7:27 am

Yes! That is the honesty that Steve requested about what’s going on here; though I’m still not sure what Steve meant by time horizon. Now that he’s been provided the honesty, will he comment again and he be the one who acknowledges that this is really about competition amongst suppliers competing for the preferences of their current and their potential customers.

What Steve does not want to seem to acknowledge is that the so-called losers from free trade had poorer SWOT analysis and execution than those suppliers who hold on and/or thrive. Most people who supposedly lose due to free trade don’t curl up in the fetal position and begin to suck their thumbs either. Nearly everyone affected negatively by newer trade patterns finds another economic activity to engage themselves in. Hell, even the thumbsuckers uncurl from the floor and seek government relief for such disruptions to their ability to earn an income.

Is that honest enough for you, Steve?

LowcountryJoe April 3, 2011 at 7:33 am

For the steve who does not capitalize the first letter of his name.

steve April 3, 2011 at 8:23 am

Yes, we should acknowledge that there are always winners and losers in market economies. Who wins and loses matters a lot, especially to the losers. So, while on sum we might all be better off with lower prices (assuming a lack of currency manipulation), there are groups that may bear the brunt of that improvement. In the short term that disruption can even lead to a suboptimal (in the Pareto sense) balance. In the long term, free trade will certainly improve the lot of the general population, but then, in the long run we are all dead.

steve

gregworrel April 3, 2011 at 9:12 am

Steve,
The “long run” is already here. All you have to do is look back at history.

I have friends and family who have faced unemployment in the last couple years in the Detroit area. They have all managed to get by with the help of spouses and family. I cannot imagine the devastation they would face if prices were dramatically higher due to protectionism. If you are going to blame the market economy in general, then you really are digging an argumentative hole.

It is also clear that current unemployment has nothing to do with free trade since employment was higher when imports were higher.

Methinks1776 April 3, 2011 at 9:13 am

Right. Stop all progress then, steve? As we all know, Homo Sapiens survived these tens of thousands of years by not being able to adjust to a changing environment. We’re such a fragile species.

W.E. Heasley April 2, 2011 at 8:12 pm

“Ian Fletcher mixes economic ignorance with poor reasoning to peddle a horrible protectionist hash (“Cost of US ‘free’ trade: collapse of two centuries of broadly shared prosperity,” April 1).” – Don Boudreaux

Protectionist hash -or- purposely populist protectionist hash?

You see, during times of economic distress there becomes a populist demand to blame exogenous events/entities/peoples for the economic distress. Protectionism isn’t economics. Protectionism is a “blame supply” reaction to the “demand for blame“.

Hence Fletcher has absolutely no interest in economics. Not in the least. Economics can not make Fletcher’s case hence economics is straight out. Fletcher’s quest is to meet a demand for protectionist blame rhetoric. He must supply that which is demanded.

Fletcher’s ideas are not new by any means. He merely reaches into a historic grab bag of protectionist arguments, dusts them off, and presents the arguments as “new”. Fletcher’s old-new arguments then create a supply of blame which earns him a profit by bring to market a supply of blame to meet the demand for blame.

Fletcher by no means attempts to add insight as insight is not demanded. Only blame is demanded hence only blame is supplied. The blame doesn’t need logical, philosophical, nor economic foundations. Blame generated through fallacy then neatly laid at the feet of exogenous events/entities/peoples so that the reason for economic distress can be moved from the internal to the external. Therefore a profit is gained from meeting a demand for blame with a supply of blame.

Finally, its very likely Fletcher knows exactly what he is doing. In other words, Fletcher seeks a profit, realizes his arguments are fallacious, but fallacy is the input needed for blame supply and hence profit. Fletcher has all three shift working overtime at the fallacy factory as he must have input for his final product of “blame”.

kyle8 April 3, 2011 at 8:37 am

Good insight, This is like Donald Trump’s opportunistic China Bashing. And all the screams against “big oil” by politicians that you hear whenever prices are up.

America has a long tradition of this brand of ugly economic populism.

Fortunately it does not seem to resonate with the electorate like it used to.

DMXRoid April 3, 2011 at 3:01 am

I’ve always found this to be one of the weaker pro-free trade arguments. Even if the entirety of US international trade consisted of US customers buying goods and services from overseas firms with no business presence in the US (all goods just get shipped directly to the consumers, for example), and all purchases were made in foreign currency, trade would still be beneficial to everyone. If a foreign company attracts US customers, it does so because it’s supplying its goods and services at a higher quality:cost ratio than domestic suppliers, which results in either better goods, which is good, or lower prices for existing goods, which is also good. Either way, we’re spending less for goods and services, which leaves more capital available for investment and savings, and the law of comparative advantage will guarantee that people will move into more specialized fields as trade continues.

It’s not that I’m disagreeing that a benefit to trade is capital surplus, I just think it’s not the best response to “buying things from foreigners kills jobs!”

DG Lesvic April 3, 2011 at 3:15 am

Roid,

Great comment.

You are an economist for sure!

DG Lesvic April 3, 2011 at 6:22 pm

I need to modify that slightly.

Roid’s economics was great, but so was Don’s. They each described slightly different ways in which the job producing effect of free trade played itself out. In Don’s scenario, it was through investment by foreigners, in Roid’s, through investment by the Americans themselves, made possible by the money the cheap foreign goods saved them, and, in Don’s, through the actual investment by the foreigners, and, in Roid’s, through the potential investment by the Americans themselves.

Both are right, both are great, and it really isn’t necessary to say that one was better than the other.

There’s another scenario too.

While America’s labor policies price its labor out of the market, cheap foreign imports, reducing the cost of doing business in America, price it back in.

Just another way it happens. They’re all right, all good.

But the one thing we must never forget: free trade cannot cause a net loss of jobs in the US. That’s impossible. Only America’s own anit-labor, supposedly pro-labor policies, could do that.

kyle8 April 3, 2011 at 8:43 am

What seems like a simple economic argument to us, is actually quite difficult for many untrained people to understand. My own father, who was an engineer and not a stupid fellow, cannot seem to grasp it.

To him, if we buy all of our cheap consumer goods and textiles from China and India, then they have all of our money and we are poor. I have tried to explain that our manufacturing is going great, but we manufacture high price- high quality goods and machinery, not cheap consumer goods since those have very low profit margins.

He vaguely understands that trade generates wealth through comparative advantage, but does not think it is enough to offset the harm done by trade dislocations.

jg bennet April 3, 2011 at 10:19 am

Free trade is actually…..

From Wiki
Free trade in America is the policy of economics developed by American slave holding states and protectionism is a northern, manufacturing issue. Although not as animating an issue as slavery, differences in trade between the two regions contributed to the Civil War and remain a point of national difference even today.

Historically, southern slave holding states, because of their low cost manual labor, had little perceived need for mechanization, and supported having the right to purchase manufactured goods from any nation. Thus they called themselves free traders.

Northern states, on the other hand, sought to develop a manufacturing capacity, and successfully raised tariffs to allow nascent Northern manufacturers to compete with British competitors. Beginning with 1st U.S. Secretary of the Treasury Alexander Hamilton’s “Report on Manufactures”, in which he advocated tariffs to help protect infant industries, including bounties (subsidies) derived in part from those tariffs, the United States was the leading nation opposed to “free trade” theory. Throughout the 19th century, leading U.S. statesmen, including Senator Henry Clay, continued Hamilton’s themes within the Whig Party under the name “American System.”

Support for Northern industry was ultimately successful. By President Lincoln’s term, the northern manufacturing states had ten times the GDP of the South. Armed with this economic advantage, the North was easily able to defeat the South by starving the South of weapons through a near total blockade, while at the same time was able to supply its own army with everything from heavy artillery to repeating Henry rifles.

With the North winning the Civil War, Republican dominance was assured over the Democrats. Republicans continued to dominate American politics until around the early 20th century.

President William McKinley stated the United States’ stance under the Republican Party as thus:
“Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral…. Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefiting mankind everywhere. Well, they say, ‘Buy where you can buy the cheapest’…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: ‘Buy where you can pay the easiest.’ And that spot of earth is where labor wins its highest rewards.”

Southern Democrats gradually rebuilt their party, and allied themselves with Northern Progressives.

They had many differences but both were staunchly opposed to the great corporate trusts that had built up, and Republican corruption was endemic.

Northern Progressives sought free trade to undermine the power base of Republicans – Woodrow Wilson would admit as much in a speech to Congress. A brief resurgence by Republicans in the 1920s was disastrous for them. Woodrow Wilson’s ideological understudy, Franklin Roosevelt, would essentially blame the Great Depression upon the protectionist policies exemplified by the previous Republican President, Herbert Hoover……….

So if a “socialist” Democrat like FDR supported free trade and was against protectionism to undermine the Republicans why is it that Republicans so staunchly support it today? Look at CATO, Heritage et al…

Because they are either fools or bought that is why..

If you are for free trade you are for slave labor aka sweatshops. Them’s the facts and all FDI BS snake oil aside free trade immoral.

Methinks1776 April 3, 2011 at 10:36 am

So, I guess that means you’ll be growing your own food, making your own clothes (from growing the cotton to weaving the cloth to sewing it into high fashion garments), building your own house, making your own shoes, crafting your own computers, etc. God forbid you should be free to trade with anyone, right? Free trade is slavery, after all.

Oooooh, you’ll be so rich! Try it.

nailheadtom April 3, 2011 at 11:36 am

So voluntary exchanges between individuals are “immoral” but government regulation of those exchanges through force and coercion must be moral? That’s right out of Orwell.

W.E. Heasley April 3, 2011 at 12:04 pm

Methinks 1776 and Nailheadtom:

Excellent observations! Can we combine the two comments and name the phenomena: “Localized Orwellian“.

gregworrel April 3, 2011 at 12:25 pm

So those of us who believe in the freedom of all individuals to trade with whomever they wish without legal restrictions are somehow aligned with slaveholders? If Hitler and Charles Manson also favored free trade would that make us aligned with mass murder and genocide? What an incredibly offensive and stupid argument.

Of course it is just coincidental that those legal restrictions most often promoted are to the detriment of people of Asian descent. JG Bennet, it is your desire to restrict freedom that is akin to promoting slavery, regardless of any historical nonsense. You would have us all be slaves to totalitarian dominance by greedy special interests.

tkwelge April 3, 2011 at 1:15 pm

“So if a “socialist” Democrat like FDR supported free trade and was against protectionism to undermine the Republicans why is it that Republicans so staunchly support it today? Look at CATO, Heritage et al…”

Sooo, CATO and Heritage should change their position, simply because FDR agrees with them on something? What?

Notice how you don’t take 10 seconds to analyze the actual effects of these tariff policies. You don’t offer any links to any studies or any logical analysis either. You basically just blatantly stated things with a nod to oversimplified history.

I don’t deny that protectionism helped the north at the expense of the South. In fact, I believe that if you add up all of the positives for the north and subtract the negatives from the South, the net benefit for the US was zero or lower. The net benefit for the globe was certainly zero or lower too.

The low tariff period from 1846 to 1860 saw the greatest economic expansion that the US had seen up until that point in history. If you adjust for population growth, the period from 1846 to 1860 saw more growth than any other period of growth with the exception of any period including WW2, and the GDP growth statistics during WW2 aren’t that reliable. The second Industrial Revolution occurred after the UK moved towards a policy of free trade and started buying cheaper goods from abroad. Suddenly, countries that could only sit on the sidelines during the first IR were able to expand their own economies.

You also sort of imply that the North trounced the South during the Civil War thanks to their tremendous manufacturing advantages. True, the North did eventually win, but only after hard fought battles that allowed the Union to seize key points. The North was getting their asses handed to them in most battles up until a few strategic victories. If the North did have a tremendous advantage in terms of material, they certainly were shitty soldiers. It would be like the US going to war with Mexico and getting their asses kicked for 3 years until a few lucky victories slipped through the cracks. That would be pretty pathetic.

“If you are for free trade you are for slave labor aka sweatshops. Them’s the facts and all FDI BS snake oil aside free trade immoral.”

Is this the composition fallacy? I’m a little rusty on some of the terminology.

There’s gotta be some sort of fallacy in that line of thinking. “Hey, some slave holders who existed over a hundred years ago believed in free trade, therefore, if you believe in free trade, you believe in slavery!”

JohnK April 4, 2011 at 10:31 am

There’s gotta be some sort of fallacy in that line of thinking.

reductio ad servitium

Other arguments of that fallacy include:
“Any criticism of Lincoln means you support slavery!”
“Slavery was allowed in the original Constitution, so if you’re claim to be an originalist you support slavery!”
“Supporters of slavery argued states’ rights, therefor if you argue about states’ rights you support slavery!”

dan April 3, 2011 at 3:19 pm

And, Wiki is such a great source of ‘factual information’. Bennett proves Heasley correct.

steve April 3, 2011 at 11:34 am

“Right. Stop all progress then, steve? As we all know, Homo Sapiens survived these tens of thousands of years by not being able to adjust to a changing environment.”

I dont think I said that anywhere. As an avid reader of history I am aware, I hope you are also, of the many ups and downs on the way to the present. What I am noting is that there can be profound, even lengthy disruptions in the process. When one industry collapses there is no guarantee of an immediate replacement. Workers amy be ready to move on to that next area of employment, but it may not exist yet. Progress and innovation is not always on a smooth upward slope. So, over 100 years, even 50 years I am pretty sure that free trade is optimal. Over shorter time periods, I am less certain. I am certain that the gains and losses are not equally shared.

Steve

Methinks1776 April 3, 2011 at 12:10 pm

Excellent observation, Captain Obvious. We all understand that life is hard. Beyond that, do you have a point? I, for one, would like to know your answer do Don’s question.

dan April 3, 2011 at 3:24 pm

Short solutions for votes, aka sweeping the dust under the rug, to sacrifice the long term, the rug that looks like a dog is sleeping under it. The short term solving politicians know full well that they will no longer be around when the long term consequences occur. They have little incentive to solve long term. The avg. blue collar worker is not concerned with long term, either. Sure, they have children, but have a belief in things working out later.
I’ll gladly pay you Tuesday for a hamburger today………

steve April 3, 2011 at 9:06 pm

The policy implications? If we are in a period where the new industries are slow in development, we may be looking at a period of prolonged unemployment. It may take a while for the benefits of trade to pay off. If that is the case, we need to decide what to do about chronic unemployment.

Steve

Methinks1776 April 4, 2011 at 12:42 am

What? Are you running for office, steve? You keep talking without actually saying anything.

tkwelge April 3, 2011 at 1:20 pm

There has to be some sort of point where we have to acknowledge that the long run is here. We can’t keep pretending that there is some sort of “illusory” long run that is as a dream to individuals in the here and now, which we can ignore to satisfy our temporary desires. We’re living the long run of those who were alive just a few decades ago. Human beings now live long enough that you’ll probably experience a long run or two before you die. Sure, I’m being cute, but seriously, is “the long run” something that we can truly ignore forever and ever, amen?

S_M_V April 3, 2011 at 8:44 pm

“LIKE” button needed

vikingvista April 4, 2011 at 3:50 pm

“but seriously, is “the long run” something that we can truly ignore forever and ever, amen?”

No. It is just another glib keynesiac reply, like “animal spirits” that is used to avoid any real understanding or criticisms of keynesiac snake oil.

Previous post:

Next post: