Iowans Grow Cars in Cornfields

by Don Boudreaux on November 6, 2011

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

Here’s a letter to FoxNews.com:

Peter Morici claims that a trade deficit is “lost purchasing power” (“What’s Holding Back Job Creation,” Nov. 4).  He’s hopelessly confused.

Evidence of this confusion abounds.  In the middle of his op-ed Prof. Morici rightly laments businesses’ “[i]nadequate investment in labor saving technology,” yet he ends his op-ed by complaining that foreigners (especially the Chinese) ship too many goods to us in exchange for what we ship to them.

Say what?  Because labor-saving technology is indeed good, then trading arrangements that enable us Americans to get more imports for fewer exports are also good.  If, say, American electronics producers would demand two hours of my economics lectures in exchange for one of their flat-screen TVs, while foreign producers demand only one hour of my lectures, I save labor by purchasing the foreign-made TV.  I’m made richer by buying my TV from abroad.  (And I’ll save even more labor – I’ll be made even richer – if tomorrow the foreign producer lowers the price of its TV to only 30 minutes of my lecturing.)

Trade itself is a labor-saving technology, to be applauded no less enthusiastically than we applaud mechanization and other labor-saving technologies.

Sincerely,
Donald J. Boudreaux

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{ 45 comments }

W.E.Heasley November 6, 2011 at 2:01 pm

“If, say, American electronics producers would demand two hours of my economics lectures in exchange for one of their flat-screen TVs, while foreign producers demand only one hour of my lectures, I’m made richer by buying my TV from abroad. (And I’ll be made even richer if tomorrow the foreign producer lowers the price of its TV to only 30 minutes of my lecturing.)”. – Don Boudreaux

Expounding on the above statement:

(a) one Boudreaux free trade lecture equals one flat screen TV. In the future a flat screen TV of same like-kind-quality [or better] might be acquired for ½ of one Boudreaux lecture. A clear gain,

(b) one Morici protectionism lecture equals a picture from a magazine of a flat screen TV. In the future, 1 1/2 Morici protectionism lectures will equal a picture from a magazine of a flat screen TV. This would be a clear loss at the beginning with the loss increasing at an increasing rate.

Hence the paper tiger of protectionism lectures come at an increasing cost.

Invisible Backhand November 6, 2011 at 2:26 pm

Cornfieldsve?

As always you forget about labor, and slave labor in particular.

‘‘Slavery is the natural enemy of every man who performs manual labour, of every working-man in the United States, whether he lives in a slave, or a free state.’’
–Thomas Sedgwick

Invisible Backhand November 6, 2011 at 8:16 pm

And as usual, you forget to mention the problem of wage-slavery.

“And what is it that makes a man a wage-slave? Why, wages, of course!”
– Grouch Marx (from “Coconuts”)

Darren November 7, 2011 at 11:05 am

I think you meant “Groucho Marx” (for those too young to know who he is and want to look the name up). Truly one of the great philosophers of our times.

Jon Murphy November 7, 2011 at 11:07 am

“I went to a German opera but I left before it was over. I missed the noun.”

Jon Murphy November 6, 2011 at 3:12 pm

One of the common fallacies that perpetuates economic misconceptions is that it is all about money. We teach opportunity cost in Econ 101, but it’s surprising how fast people forget that lesson.

Don Lloyd November 6, 2011 at 3:34 pm

An opportunity cost question -

You have an unpainted doghouse and a can of paint. Enumerate all the components of which the opportunity cost of painting the doghouse is comprised.

1. The benefit of the second best use of the can of paint.
2. The benefit of the second best use of the painting labor.
3. The subjective value of the unpainted doghouse sacrificed when it is painted.

Regards, Don

Jon Murphy November 6, 2011 at 3:48 pm

Well, just a few of the costs off the top of my mind:

1) The number of things you could have done with the time you are using painting the dog house (and their subsequent benefits)

2) The other things you could have painted with the can(s) of paint.

3) The other uses of the money you spent on the can(s) of paint.

Those are just ones that come to mind. I’m sure there are more.

Shelby November 6, 2011 at 3:45 pm

Jon -
If I had a chance to engage in force, I would require every man, woman, child, and gecko to take Econ 101. I’m not sure if the econ students forget, or if their voices are simply lost in the masses of uninformed.

Jon Murphy November 6, 2011 at 3:49 pm

Some do. That’s why you get some economists who advocate protectionism. But yes, those who make economic policy should take ECON 101-302

Nikolai Luzhin, Eastern Promises November 7, 2011 at 3:45 am

You wouldn’t need to use force, because force is what destroyed education to begin with. Just get government out of the education business by privatizing it, and the paying customers — parents — will begin to understand the need to have their children learn Econ 101. Once they begin to understand that, they will demand that it be offered in the curriculum. Once they demand it, producers of education will supply it.

The teaching materials are already available, free of charge:

1. “What is seen and what is not seen”
by Frederic Bastiat
Available on the Web at:
http://www.econlib.org/library/Bastiat/basEss1.html

2. Selected essays from “Economic Sophisms” (especially the one entitled “A Petition”)
by Frederic Bastiat
Available on the Web as a free PDF download

3. “Economics in One Lesson”
by Henry Hazlitt
Available on the Web as a free PDF download

kyle8 November 7, 2011 at 9:02 am

Nikolai, I wonder why you are an advocate for a free market in education, but not in anything else?

vikingvista November 6, 2011 at 4:08 pm

Much like the schools of journalism, most people entering the field of economic don’t really have any interest in their field. Political activists with an IQ simply have to decide between economics and law, while those without must fall back on women’s studies, polysci, or journalism.

muirgeo November 6, 2011 at 6:30 pm

Jon,

I think we have some 13 million additional unemployed out there who would love to hear you explain to them all the new opportunities they have now that they get to compete with communist Chinese laborers for jobs and wages and breathable air.

http://static.indianexpress.com/m-images/Sat%20Aug%2007%202010,%2016:53%20hrs/M_Id_166955_China_Smog.jpg

Jon Murphy November 6, 2011 at 6:43 pm

“13 additional unemployed?” So, you think if we did not trade with China, all 13 million would have jobs?

That would only be true if all jobs were static and all those people worked in the textile/plastic forming industries.

However, nether one of those assumptions are correct. The jobs market is dynamic. Yes, jobs are destroyed, but others are created. Sometimes in the same field, sometimes in different fields.

My advice to the unemployed is to work on skills (either change skills if they used to work in a now defunct industry or update current skills). This can be done through attending classes (if you have the excess cash), or by simply practicing current skills (there are, of course, other options available, but there is not the space here to elaborate).

Also, there is the issue of mobility. There are manufacturers who want to hire, but many workers are unwilling or unable to move.

To misdiagnose the problem is to make the wrong cure. It is incorrect to blame this problem on the Chinese. If we are going to blame the Chinese for taking jobs, we might as well blame New Hampshire for taking Massachusetts jobs. If we establish barriers to Chinese trade upon these grounds, we’d have to establish barriers on trade between states. Or counties. Or towns.

And then who wins?

muirgeo November 6, 2011 at 7:11 pm

There ARE barriers to trade with China… there are NOT barriers to trade between the states. If the barriers between China and the states were equivalent trade would be much more equal and our economy would be much more productive and many of the 13 million wouldn’t be out of jobs or filing for bankruptcy because they took your advice and invested in a degree and now are filing for bankruptcy unable to pay off their student loans.

But on this we have a point of agreement….”To misdiagnose the problem is to make the wrong cure.”

Jon Murphy November 6, 2011 at 7:14 pm

So we agree: eliminate barriers of trade with China.

muirgeo November 6, 2011 at 6:22 pm

Morici makes plenty of sense and the facts of the real world economy correlate well with his claims. Meanwhile the real world facts have a distinct anti-corrleation with Don’s position which is apparently beside the point for him….whatever…

muirgeo November 6, 2011 at 6:26 pm

“Trade itself is a labor-saving technology…”

So is buying on credit. At least with regards to the way our “trade” is set up. But it’s no way to run a household a business or a country… again I would reference you to this thing outside the window there know as the real world economy of the USA. I know you think even the real world is wrong and mired in confusion as well but it’s makes a good point.

Jon Murphy November 6, 2011 at 6:30 pm

Do you know what trade is? Because based upon this comment, I don’t think you do, which may explain your arguments regarding trade.

muirgeo November 6, 2011 at 6:37 pm

I know what trade IS NOT. It is NOT trading paper IOU’s for something some one else actually produced. That’s NOT trade… it’s buying on credit and its not helpful to the wealth individuals or the wealth of a nation.

Trade is also NOT rebuilding American Factories in China and then shipping the Chinese produced things back to America…. it’s labor arbitrage. It’s trading workers for workers NOT products for products.

Jon Murphy November 6, 2011 at 6:50 pm

Yep. You have no idea.

Trade is the exchange of good/service or another and or a medium of exchange.

It’s misleading to say “this country trades with another one” because it’s really the consumers of one country buying from the producers of another. For example, when I go to the store and buy a foreign made pair of shoes, I am trading with that producer (let’s say he’s in Vietnam). So, it’s not the US buying from Vietnam. It’s me buying from a Vietnamese producer.

I can only assume that you think we are in debt to China because of our trade with them. This is incorrect. China owns US debt because they bought US Treasury bonds, an action unrelated to trade. Treasury bonds are sold to China to finance our governmental spending.

Trade statistics are misleadingly listed under our “National Accounts”, which makes it seem as though it’s the US buying from China. But this is incorrect.

So, the TL;DR version of this is it’s individual consumption that drives trade, not countries.

muirgeo November 6, 2011 at 7:19 pm

“China owns US debt because they bought US Treasury bonds, an action unrelated to trade. ”

And if there were no treasury bonds? Would they still trade with us? Who ultimately is liable for those treasury bonds.

http://www.npr.org/blogs/money/2011/10/21/141510617/what-if-we-paid-off-the-debt-the-secret-government-report

Jon Murphy November 6, 2011 at 7:28 pm

Yes they would because the action is unrelated to trade. I thought I made that quite clear

Vanuatu doesn’t own any US bonds, but we still trade with them.

Venezuala holds no bonds but we trade with them..

I’m not sure how much clearer I can make it: the purchase of treasury bonds is unrelated to the issue of trade. No matter how much you want it, it just isn’t.

nailheadtom November 6, 2011 at 7:56 pm

And the Treasury bonds aren’t sold exclusively to the Chinese, they are bought by citizens of other countries as well, including the US itself.

Jon Murphy November 6, 2011 at 8:03 pm

Right. In fact, something like 90% of T-Bonds are owned by private US citizens

vikingvista November 6, 2011 at 8:17 pm

Treasuries compete with private investment, not US exports.

Without new Treasury issuances, the current accounts would unlikely be significantly affected. What would be affected is increased private investment with the productivity and economic growth that typically follows. Additionally there would be fewer economic distortions from adverse government spending and taxes.

vikingvista November 6, 2011 at 8:19 pm

Hell, the Federal Reserve alone holds more Treasuries than the Chinese.

Jon Murphy November 6, 2011 at 8:22 pm

Social Security is funded by T-Bonds

Rasping Bard November 6, 2011 at 9:47 pm

Whenever you argue with muirgeo, there are two fools involved.

Jon Murphy November 6, 2011 at 9:48 pm

Yeah, but it’s Sunday night and I got nothing better to do while watching football.

Greg Webb November 6, 2011 at 9:53 pm

Au contraire. Arguing with muirgeo can be quite entertaining.

Craig November 6, 2011 at 6:30 pm

I agree with everything that Don writes about so-called trade deficits. But I still have the nagging thought that ours wouldn’t exist (or wouldn’t, at least, be as high) were it not for the distorting factors of the Fed’s inflationary monetary policy.

The inflation as well as our status as the world’s reserve currency provider have probably, I think, caused American manufacturing to grow more slowly than it would have (due to prices and wages being higher) and the financial sector to have grown way out of proportion to what would have made sense.

The financial sector has exploded because speculating in money and assets has become more profitable than investing in producer goods. A trade deficit may not, in and of itself be bad, but it’s a symptom of an economy that is, um, out of whack (I know, not terribly professorial).

When

muirgeo November 6, 2011 at 6:33 pm

No Craig… all the factory workers just need to retrain as brokers, bankers and masters of global finance… that will solve everything. Finance is clearly a growth industry. that will save humanity.

GAAPrulesIFRSdrools November 6, 2011 at 8:08 pm

How about we train them as activists and “community organizers”.

Jon Murphy November 6, 2011 at 6:33 pm

Craig,

Inflationary (aka expansionary) monetary policy would make foreign goods more expensive compared to US goods, therefore, we would buy less of imports and our exports would be cheaper and increase, thus decreasing the deficit. So this is not the problem.

But you’re thinking. I like that.

Jon Murphy November 6, 2011 at 9:15 pm

Interesting table in the WSJ: Unemployment rates by college major.

The highest unemployment rates? Psychology and the Liberal Arts and Architectural Science

The lowest? Businesses, Theology, and Engineering (which counts mfg jobs).

I hardly think we can blame that on the Chinese.

Source: http://graphicsweb.wsj.com/documents/NILF1111/#term=

GiT November 6, 2011 at 10:47 pm

Not really sure what the point is of misrepresenting data you place a link to, but your account of the highest and lowest rates does not correspond to, you know, the actual highest and lowest rates.

Jon Murphy November 7, 2011 at 7:20 am

Then you and I are looking at two different links. Not sure why it’s not working for you.

http://graphicsweb.wsj.com/documents/NILF1111/#term=

That better?

Darren November 7, 2011 at 11:47 am

Something is definitely not working with the first link. Maybe it’s our firewall. Top four in unemployement:

Clinical Psychology 19.5
Miscellaneous Fine Arts 16.2
United States History 15.1
Library Science 15.0

Jon Murphy November 7, 2011 at 11:51 am

Ok, then we are looking at the same link. I think we have a difference of opinion.

Jon Murphy November 7, 2011 at 11:52 am

I am talking broad, general categories here, btw. That should clear up the confusion.

GiT November 7, 2011 at 2:48 pm

The confusion proceeds from the fallacy of taking an example to be representative of a type.

Note that ‘history’ has a rate of 6.5
Note that ‘art’ runs the gamut from 4.2-16.2
Note that while clinical psych stands at 19.5, counseling psych stands at 5.2 and straight up psych at 6.1.

Engineering runs from 0 to 9.2

Theology/religion runs from 4.1-7

Education, which you omit, runs from 0-5, except for the outlier of educational psychology, which stands at 10.

Business, contrastingly, runs from 5-8, 0-8 if we throw in actuarial science. (Finance stands at 4.5). Add in management and you’re up to 9.5.

In other words your general categories don’t really reflect the details of the data very well.

The lowest rates really fall more along the lines of education, engineering, medicine, and agriculture.

As to the highest rates, the extreme rates are not really representative of much of anything and likely speak to rather particular factors (i.e. institutions which offer US History not as a subfield of History but as a separate discipline (the same for ‘miscellaneous’ fine arts) and the particular employment situation of library science, clinical psychology, architecture, and military science which are all rather specialized/atypical fields.

Sam November 8, 2011 at 2:40 pm

My first thought on reading this: I would not trade a TV for even 2 hours of Prof. Boudreaux’s lectures.

This is not because I do not value his insights, only that I can access them freely through numerous sources, such as here at Cafe Hayek.

Invisible Backhand November 8, 2011 at 2:52 pm

I am shocked, shocked to discover Krugman disagrees with you.

But then the question is, why do we find it so hard to achieve full employment even with saving somewhat low by historical standards. And the answer seems clear: it’s the trade deficit. America in the 70s and 80s could have high savings, not hugely strong investment, but still have full employment because trade deficits weren’t as large compared with the economy as they are now.

And this in turn means that the savings glut possibly making the natural real rate negative is actually originating abroad, not at home.

Do you sort of see why I’m a hawk on China policy?

http://krugman.blogs.nytimes.com/2011/11/08/the-return-of-secular-stagnation/

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