The Powerful Lens of Economics

by Don Boudreaux on December 5, 2016

in Economics, Seen and Unseen, Trade

Here’s a letter to a correspondent who is furious that I dare to criticize Donald Trump’s trade policies:

Mr. Mike Garrison

Mr. Garrison:

My support for free trade prompts you to accuse me of “living in [my] own world unconnected to real people’s concerns.”  With respect, I believe that you misunderstand the case for free trade.

By necessity, each and every one of us inhabits only his or her own small world, you no less than me.  The slice of reality that any one of us – from President to pauper – can survey with our own senses is a vanishingly tiny part of an immense, complex, multifaceted, and dynamic world.  And the slice of this world that any one of us directly experiences is also unique; it differs from the slice that any one else directly experiences.  So if all that I did were to assume that reality in total is nothing more than a scaled-up version of the unique slice of reality that I personally experience, then your accusation that I am out of touch would have merit.

But the great achievement of sound economics is to supply a lens that widens and lengthens – and sharpens – the vision of those who know how to use it.  Although a surprisingly powerful tool, this lens is not very complicated; no one needs a PhD in economics in order to use it properly.  But what this lens reveals to those who know how to use it is a vitally important, and immense, part of reality that others nearly always miss.

It’s easy without the lens of economics to see the jobs that remain in the U.S. because of the likes of Trump’s Carrier deal.  But with this lens you see also the jobs in the U.S. that are destroyed because of this deal or that would be, but will now never be, created.  It’s easy without the lens of economics to see the incomes retained by American workers whose jobs are protected by trade restrictions.  But with this lens you see also the incomes lost to American workers because of trade restrictions, as well as the reduction in the spending power of countless ordinary Americans.

Only by wearing the lens of economics can we see clearly the increase over time in living standards for nearly everyone that is possible only with free trade and with what my colleague Adam Thierer calls “permissionless innovation.”

In short, the lens of economics enables us to see that which otherwise remains unseen.  Yet that which remains unseen is real, sizeable, and important.  By making visible the suffering caused by protectionism, and the improvements unleashed by economic freedom, the lens of economics inspires those who use it to be a voice for the voiceless, the forgotten, the ignored, and the invisible.

My support for free trade, therefore, has nothing whatsoever to do with my own admittedly thin slice of reality.  Instead, it has everything to do with ensuring that the many realities that are unseen – that are unseen by you, by Mr. Trump, and by everyone else who supposes that freezing economic activity in place today generates only benefits and no costs for ordinary people – be made visible, and that those unseen people be given a voice along with yours in the public arena.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

…..

The lens of economics also brings into clear vision the reality and humanity of foreigners and the effects that they experience as a result of protectionism.  But my correspondent here cares only about his fellow Americans.  Sad but true.

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Alberto Mingardi writes wisely about the recent Italian referendum: first here, then here.

GMU Econ alum Liya Palagashvili has a splendid letter in today’s Wall Street Journal:  A slice:

[Adam] Smith continues: “A trade which is forced by means of bounties and monopolies may be and commonly is disadvantageous to the country in whose favour it is meant to be established.”

As reported by the Wall Street Journal, and others, the Russian-made jeep carrying dictator Fidel Castro’s ashes to their final resting place broke down en route.  (HT Morgan Frank)  The symbolism cannot have been more suitable!

Here’s John Cochrane on Trump’s cronyist Carrier deal.  A slice:

He [Pres. Kennedy, who jawboned steel producers to keep prices down] may have “thought” he was right. His Keynesian advisers had also forgotten lessons of two thousand years of history and thought jawboning an excellent idea. But this is precisely why we have a rule of law — so that leaders who “think” they are right about the proper level of steel prices cannot wreck the economy.

Just as Trump’s action is abjectly wrong on policy. For just as many thousands of years, leaders have been cutting Carrier-like deals, to just as contrary effect. It is our duty to say that, to undercut the political popularity that presidents can gain by counterproductive policies, especially when the means trample the rule of law.

James Pethokoukis puts in perspective the number of jobs ‘saved’ by Trump with his cronyist Carrier deal.

Shikha Dalmia has more on the massive theft, masquerading as anti-corruption policy, committed last month by India’s government.

Matt Ridley, as usual, is correct: like all other products of innovation, artificial intelligence will not cause mass unemployment.  A slice:

Yet we have been automating work for two centuries and so far the effect is to create more jobs, not fewer. Farming once employed more than 90% of people, and without them we would have starved. Today, it’s just a few percent. The followers of the mysterious “Captain Swing” who destroyed threshing machines in 1830 were convinced that machines stole work. Instead of which, farm labourers became factory workers; factory workers later became call-centre workers. In both transitions, pay rose and work became safer, less physically demanding and less exposed to the elements.

In 1949, the cybernetics pioneer Norbert Wiener warned that computers in factories could usher in “an industrial revolution of unmitigated cruelty”. In 1964, a panel of the great and the good, including the Nobel prize winners Linus Pauling and Gunnar Myrdal, warned that automation would mean “potentially unlimited output by systems of machines which will require little cooperation from human beings”. This hoary old myth just keeps coming round again and again.

I didn’t realize how awesome is the Chiquita-banana song until I read this wonderful essay by Sarah Skwire.

Randy Holcombe’s new book is an advanced introduction to public-choice theory.  To say that I’m eager to read it is a magnificent understatement!

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… is from page 205 of the 1992 collection of some of William Graham Sumner’s best essays, On Liberty, Society, and Politics (Roger C. Bannister, ed.); specifically, this quotation is from Sumner’s famous 1883 essay, “The Forgotten Man“:

a_185_sumner200It is true that, until this time, the proletariat, the mass of mankind, have rarely had the power and they have not made such a record as kings and nobles and priests have made of the abuses they would perpetrate against their fellow-men when they could and dared.  But what folly it is to think that vice and passion are limited by classes, that liberty consists only in taking power away from nobles and priests and giving it to artisans and peasants and that these latter will never abuse it!  They will abuse it just as all others have done unless they are put under checks and guarantees, and there can be no civil liberty anywhere unless rights are guaranteed against all abuses, as well from proletarians as from generals, aristocrats, and ecclesiastics.

DBx: Those who embrace populism in the hope that it will bestow upon ordinary people more freedom or greater prosperity (or both) will be deeply disappointed.  Not only will power still, in practice, be exercised chiefly by a small cadre of individuals – who by this very reality will be, or will inevitably become, elite – the fact that the power that is exercised by the state will be no less, and perhaps more, than is the power that is exercised under the system displaced by populism means that the the poison remains.  The poison is state power.  And this poison is fatal regardless of who exercises it and for what particular purposes.  State power exercised by the mob or by “the People” or by those who are conventionally regarded as “elite” remains poisonous.

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Mr. Scott Adams

Mr. Adams:

Commenting on Pres.-elect Trump’s threats to punitively tax American consumers who purchase imports from U.S. companies that offshore some or all of their production, Rep. Justin Amash (R-MI) Tweeted “American consumers are taxed even if no companies move.  Tariff increases production costs & limits competition.  This is basic economics.”

In response to Rep. Amash, you disagree, Tweeting “No, the whole point is that no company would move with that risk hanging over them.  So no tax is triggered.”*

Rep. Amash is right and you are wrong.  Although no formal tax collection is triggered if Mr. Trump’s threats prevent all offshoring, Trump’s tariff – by restricting competition – would artificially reduce outputs and raise prices.  American consumers would pay unnecessarily higher prices, an outcome inseparable from the very purpose of the tariff.  That consumers pay these extra, unnecessary amounts to domestic producers rather than to domestic customs agents is irrelevant: the tariff forces all consumers of these products to pay extra, unnecessary amounts to some small group of fellow Americans who, rather than earn these higher payments, extract them using threats of state coercion.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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Yet Another Open Letter to Donald Trump

by Don Boudreaux on December 4, 2016

in Seen and Unseen, Trade

Donald Trump
Trump Tower
New York, NY

Mr. Trump:

In your Tweets today you make inconsistent boasts.  First you boast that, as president, you’ll “substantialy [sic] reduce taxes and regulations on businesses.”  You then boast that, as president, you’ll raise taxes – in the form of higher tariffs – on businesses that offshore the production of goods for sale in America.  Which is it?  Will you increase or decrease the tax and regulatory burdens borne by entrepreneurs and businesses in America?  You can’t simultaneously do both.

You’ll reply that your scheme cuts taxes and regulatory burdens only for business operations that occur in America.  But are you aware that, according to Dartmouth economist Douglas Irwin, “Over half of all imports are either intermediate components or raw materials”?  (This figure rises to nearly 100 percent if consumer-goods imports are reckoned, as perhaps they should be reckoned, as inputs for retailers.)  So to the extent that American producers themselves wish to shift some of their production offshore in order to better compete to supply these inputs to their own U.S.-based operations or to other American producers, your tariff will put these American efforts at an artificial disadvantage relative to foreign producers.  The likely outcome is that production of almost all of these inputs will be ceded to foreign firms.

The only way to avoid ceding the production of more (and perhaps all) of these inputs to foreign firms is to impose your 35 percent tariff on all inputs imported into America.  The result of such a tariff would be a vast and widespread artificial hike in the costs of producing goods and services in America, even for many firms that were never candidates to shift any of their production offshore.  This outcome would make a mockery of your promise to reduce the costs that American producers incur.  It would also result in a steep hike in the prices of consumer goods in America – hardly an outcome consistent with making Americans more prosperous and America “Great Again.”

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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Dean Baker

Mr. Baker:

Your criticism of Greg Mankiw’s argument that the U.S. trade deficit is nothing to worry about reveals faulty logic as well as a misunderstanding of basic economics (“Trade, Trump, and the Economy: What Does Greg Mankiw’s Textbook Say?” Dec. 4).

An example of your faulty logic is your claim that “Mankiw may have missed it, but we had a long stretch of very high unemployment following the collapse of the housing bubble in 2008.  The Fed purchased plenty of financial assets in this period, it had some effect on boosting output and employment, but did not come close to getting the economy back to full employment.”

Overlook here the significant reality that the Fed’s asset purchases were driven by political and monetary-policy considerations rather than by private entrepreneurial, market considerations.  Instead, focus on the fact that Prof. Mankiw’s argument is that foreigners’ purchases of dollar-denominated assets make the American economy stronger than it would otherwise be.  Contrary to your implication, the argument is not that such purchases alone are sufficient to guarantee full employment and high growth.  Therefore, the fact that America ran trade deficits during the Great Recession does not refute Prof. Mankiw’s argument.

If you insist on drawing conclusions about trade balances exclusively from the condition of the economy, then what is your explanation for the U.S. running a trade surplus in 102 of the 120 months of the Greatly Depressed decade of the 1930s?  Or how do you explain the fact that, as my Mercatus Center colleague Dan Griswold notes in a 2011 paper, “since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting”?

An example of your misunderstanding of economics is your assertion that, according to “textbook” economics, “capital is supposed to flow from rich countries where it is plentiful to poor countries where it is scare.”  This assertion is nonsense.  What economics predicts is that capital will flow to where its risk-adjusted rates of return are highest.  Therefore, textbook economics predicts, accurately, that in practice rich countries will receive disproportionate inflows of capital because rich countries generally have institutions, policies, and cultures that ensure that the expected returns on capital invested there are higher than are the expected returns on capital invested in poor countries.

There’s a reason that poor countries are poor, and a big part of that reason is that investment climates in those countries are unfavorable.  So economics no more predicts that capital “is supposed to flow” from rich countries to poor countries than it predicts that capital “is supposed to flow” from thriving, well-managed, highly capitalized companies with triple-A credit ratings to struggling, poorly managed, capital-poor companies on the verge of bankruptcy.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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Two More Bits On Trade

by Don Boudreaux on December 4, 2016

in Books, Creative destruction, Crony Capitalism, History, Trade

My son, Thomas, reminded me this morning of this great clip from The West Wing in which Pres. Jed Bartlet (who is a Nobel laureate in Economics) does an excellent job making the case for free trade and creative destruction.  Pres. Bartlet even mentions, by name, Joseph Schumpeter.  It’s distressing that Aaron Sorkin (or whoever wrote the script for this episode) has a better understanding of trade than does the current real president of the United States and the bloviating ignoramus who will soon succeed him in (the Oval) Office.

Relatedly, here’s a superb blog post by Pierre Lemieux on Frank Taussig‘s The Tariff History of the United States.  A slice:

For all the talks about liberty and individual rights, America was far from being the least protectionist country in the world. Britain, where a powerful free-trade movement had developed, declared unilateral free trade (if only for a few decades) at the time when nearly unquestioned protectionism thrived in her former colony.

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The new President of the Institute for Humane Studies, Emily Chamlee-Wright (a GMU Econ alum, and a long-ago undergraduate student of mine) sat down last February with a former student of hers, my colleague Virgil Storr, for this interesting podcast.  (HT Mike Mertens)

Stuart Anderson spoke to Mark Perry and my Mercatus Center colleague Dan Griswold about Trump’s promised trade policies.  A slice from Dan:

Foreigners like American exports, but they love American assets. In a typical year, foreigners take about $500 billion of what they earn selling us imported goods and services and use those dollars to acquire U.S. assets. That’s another way of saying our $500 billion current account deficit is exactly offset by a $500 billion investment surplus. The net inflow of foreign capital allows our level of domestic investment to exceed our level of national savings, fueling productivity and growth. If politicians try to “fix” the trade deficit, they will only succeed in cutting off the net inflow of foreign investment, leading to higher interest rates and less investment in foreign-owned factories.

Greg Mankiw wisely advises that everyone stop worrying about the U.S. trade deficit.  A slice:

But it doesn’t matter much, anyway, because in reality, trade deficits are not a threat to robust growth and full employment. The United States had a large trade deficit in 2009, when the unemployment rate reached 10 percent, but it had an even larger trade deficit in 2006, when the unemployment rate fell to 4.4 percent.

Rather than reflecting the failure of American economic policy, the trade deficit may be better viewed as a sign of success. The relative vibrancy and safety of the American economy is why so many investors around the world want to move their assets here. (And similarly, it is why so many workers want to immigrate here.)

My colleague Tyler Cowen was interviewed on NPR on Trump’s recent Carrier deal.  A slice:

Cowen: Trump and Bernie Sanders, for all of their populist talk, their actual recipes in both case lead to crony capitalism … a system where businesses who are in bed with the government and who give the president positive press releases are rewarded and where companies who oppose or speak out against the president are in some way punished.

Arnold Kling sees what is perhaps a deeper point to Tyler’s remarks on NPR.

And here again is my Mercatus Center colleague, Dan Griswold – this time on Trump’s Carrier deal.

CEI’s Trey Kovacs reflects on the thankfully now-on-hold Obama overtime-pay diktat.

George Selgin asks if interest rates have been held down by the Fed.

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Quotation of the Day…

by Don Boudreaux on December 4, 2016

in Crony Capitalism, Trade

… is from page 222 of James Bovard’s 1991 book, The Fair Trade Fraud:

imagesThe ITC [U.S. International Trade Commission] acts as if American companies have a right not to be injured by foreign competition, regardless of how poorly they serve their American customers.

DBx:  Indeed.  And yet Generalissimo Trump and his fans imagine that, by some miracle, the provision by the state of even more protection of American producers from competition will make these firms better, make Americans more prosperous, and “Make America Great Again.”

It’s a crackpot notion, beloved by cronyists.

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Open Letter to Steve Moore

by Don Boudreaux on December 3, 2016

in Crony Capitalism, Seen and Unseen, Trade

Steve Moore
Economic Advisor to Donald Trump

Steve:

Reading your recent column, I was relieved to learn that you still believe that trade is “unambiguously good for the country” (“Welcome to the Party of Trump,” Nov. 30).  But my relief turned to confusion when I read that you condition your support for freer trade on it not being “shoved down our throats by the elites.”

What do you mean?  By its very nature free trade is the absence of any shoving.  Free trade is what occurs naturally and spontaneously without state interference.  Free trade is simply a condition under which each individual is free to spend his or her money as he or she deems best.  Free trade is the guarantee to everyone that his or her voluntary, commercial choices will be obstructed by no official or by no group, be they blue-blooded elites or slack-jawed brutes.

The shoving about which you complain occurs only under protectionism.  Indeed, protectionism’s essence is shoving: government agents officiously shoving fellow citizens away from those with whom these citizens wish to peacefully trade; politicians arrogantly shoving their diktats into the faces of ordinary men and women whose only offense is that they seek to stretch their incomes by purchasing goods assembled abroad; and politically organized producer groups greedily shoving their narrow material interests ahead of the interests of those countless consumers, firms, and workers who necessarily, if invisibly, have the bill for protectionism (to adapt your wording) shoved down their throats.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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