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In this EconLog post, David Henderson rightly wrote [2]
It’s facts like these [the complexity of global supply chains] that make me very concerned when I read about Trump trade advisor Peter Navarro saying [3] “We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”
As I complained here [4], people such as Navarro mistakenly suppose that the world is a lot simpler than it really is. But it’s worse than this over-simplification. Just as many “Progressives” suppose that market prices and wages are arbitrarily determined (and, hence, can be disrupted by government without affecting the quantities and qualities of economic activities), many populists, such as Navarro, suppose that trade patterns are arbitrarily determined (and, hence, can be disrupted by government without affecting the quantities and qualities of economics activities).
For Navarro, two implicit assumptions lurk. First, there’s just “labor” and “capital” – and “us” and “them.” And “our labor” is pretty much the same as “their labor.” Ditto for capital. Second – and even more bizarrely – labor and capital in the U.S. are practically superabundant. And so the fact that lots of production takes place in, say, Mexico is due either to pure random chance directly, or to the random chance that somehow allows producers to pay lower prices in Mexico, but lower prices that reflect no genuinely lower costs. Navarro must have these assumptions in mind, otherwise how can he suggest with a straight face that if much of the economic activity that is now done outside of the U.S. is transferred to the U.S. there would be no significant change in the well-being of American consumers? If production process X is pretty much the same as is production process Y, then switching one for the other won’t matter much in the end.
I’d like to test Navarro’s assumptions about economic reality – his assumption that existing patterns of specialization and trade are largely arbitrary and, hence, can be altered by the government with only the good effects that he fancies and none of the ill effects that most economists fear.
Suppose that Navarro is diagnosed with a serious illness, one that, without good treatment, will likely soon kill him. Fortunately, good medical treatments are available. But none of the medical specialists who are best able to treat his disease live within a 25-mile radius of his home. How would Navarro respond if he were refused access to the medical specialists of his choice – refused solely because those specialists live at a distance from his house that I, a self-proclaimed ‘expert,’ deem too far?
I’m quite sure that Navarro would be furious. And I’ll bet that his fury would not be a bit calmed if I told him “We need to have a robust local market for such medical talent that will spur job and wage growth locally, nearby to your home, Professor Navarro.”
In this case Navarro would correctly understand that equally good sources of supply closer to home don’t miraculously appear simply because consumers are denied access to sources of supply farther from home. Navarro would correctly understand that my obstruction of his affairs would likely lead to his unnecessary early demise. Yet he is blind to the larger reality. He supposes that by shutting off one source of supply, another one, equally good and at no higher cost, will arise domestically.
What a simpleton this Navarro is.