Economists, starting with Adam Smith, have argued that the ultimate goal of production is consumption. Far from being a counsel of sybaritic pleasure-seeking, this observation simply recognizes that production should be driven by consumer demands rather than the preferences of producers. Production that doesn’t satisfy as many consumer demands as possible isn’t really production; it’s waste. And wasteful production doesn’t do much for either producers or workers.
Scott Lincicome reports on “the sordid reality of modern U.S. trade policy.” Three slices:
Hang around the trade game long enough and you’ll frequently encounter examples of how bad law, policy, and politics hurt American businesses in infuriatingly dumb ways. What’s going on right now in the U.S. aluminum market ranks up there with some of the dumbest.
I found myself deep in this particular rabbit hole thanks to Magnitude 7 Metals, a Missouri-based primary aluminum smelter whose sudden closure last month pushed Missouri Sen. Josh Hawley to demand that President Joe Biden use the wartime Defense Production Act to magically save the factory. As Reason’s Eric Boehm patiently explained shortly thereafter, the senator’s demand—in somewhat typical fashion—never made much sense because the DPA isn’t some sort of magic “get out of economics free” card that can fix whatever market event politicians don’t like. For Hawley to pretend otherwise is pretty ridiculous stuff.
Dig a little deeper, however, and this is more than just another case of a politician screaming “DEFENSE PRODUCTION ACT” out a Capitol Hill window like Michael Scott declaring bankruptcy. Instead, it’s another teachable lesson regarding the sordid reality of modern U.S. tariff policy, and the high costs, unintended consequences, gratuitous system-gaming, and failed objectives that too often accompanies it.
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As we now know, none of this “cascading protectionism”—following tariffs on upstream inputs with tariffs on downstream products—saved M7. And that’s because, as is so often the case, the mill’s problems had little to do with allegedly “unfair” imports and almost everything to do with its own specific challenges.
As Reuters’ Home informs us, the plant suffered from two huge flaws. First, it “was built in 1971 and had the dubious distinction of producing the worst quality air in the United States in 2019.” As a result, the plant was under a state consent decree for sulfur dioxide pollution and had recently lost out on a state subsidy that would’ve financed a $7 million emissions reduction system to fix the problem. Second, the M7 factory was powered mostly by coal, which is not just dirtier than modern aluminum smelters but also more costly. Because energy is critical to primary aluminum production, the M7 facility just wasn’t competitive. Being dirtier and more expensive than the competition is not a recipe for success.
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Tariffs on upstream aluminum products spawned tariffs on downstream aluminum products which have now spawned requests for even more tariffs on aluminum products from a politically connected company that, naturally, wants tariff exemptions for itself. At least one downstream factory in the United States is closed, while several upstream plants are too. Judging from the thousands of desperate requests from U.S. manufacturers for tariff relief, surely others are in trouble too.
But instead of blaming the tariffs for this giant mess (and, heaven forbid, simply letting American companies buy aluminum from companies in Canada, the U.K., Japan, and other nations), the tariff-loving senior senator from Missouri wants the president to save his state’s factory by magical government fiat. It’s almost all too crazy to believe … unless, of course, you’ve actually been paying attention.
GMU Econ alum Caleb Fuller decries so many people’s ignorance – or rejection – of timeless economic truths. Two slices:
One concern with so much of the “new economic thinking” at both ends of the ideological spectrum is that it often fails to clear a minimal argumentative bar. At the very least, advocates for “new thinking” ought to acknowledge that the arguments for economically orthodox positions stood the test of time for a reason. At the very least, they should seek to establish that, for some reason, this time is different. Otherwise, new economic thinking collapses to little more than chronological snobbery.
It would take volumes to thoroughly answer every one of these old arguments in new garb. So, instead, I’d like to speak to the many well-meaning intellectual “fence-sitters” I’ve met who are conflicted about the arguments they’re hearing. These folks aren’t professional economists. Such fence-sitters have—thankfully because it means my standard of living is higher—specialized in endeavors other than scrutinizing arguments. But I want these earnest, genuine, and intelligent fence-sitters to know just how high the argumentative bar that advocates for new learning must clear.
Here are six recent instances where yesterday’s economic orthodoxy wasn’t accorded the hearing it deserves.
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This time is different [many people assert]: International trade is gutting the American heartland. It’s sending manufacturing overseas. It’s hurting blue-collar wages.
These claims are frequently repeated, though they’re not the sorts of sophisticated objections to free trade that academic economists—almost unanimously free traders—discuss. And for good reason: These claims have little theoretical or empirical support. See here and here for starters.
Trade still makes both parties better off after all these years. It still boosts output in both countries, which isn’t to deny that competition (whether foreign or domestic) can cause some people to lose their jobs. Other jobs come into existence, though these rarely get covered in the press. Welcome to life on a planet of change and innovation.
As economists have emphasized since Adam Smith, the elites do not benefit disproportionately from free international trade. Bill Gates couldn’t care less about price hikes for washing machines. The average American is hit hard, though, when big-ticket household appliances, like washers and dryers, increase by twelve percent each. That’s less money in the pockets of American households, which translates to less spending on other domestic producers and/or less savings with which to jumpstart new businesses. In other words, tariffs are still a tax on domestic consumers.
Why opt for a tissue of 17th-century Mercantilist fallacies when the intellectual case for enrichment-by-trade is still so viable? I’d even be willing to surmise that the idea that free trade enriches has been scrutinized more than any other social scientific claim. It’s still undefeated. We’d need a lot of evidence to reject the null hypothesis. This time isn’t different.
“Shrinkflation is real – and it’s largely Biden’s fault.”
Will Ruger and Jason Sorens have some excellent ideas for improving the economy of West Virginia.
Edward Conard’s letter in today’s Wall Street Journal is wise:
Regarding “Why Americans Are Down on a Strong Economy” (Page One, Feb. 8): America is on what Federal Reserve Chairman Jerome Powell calls “an unsustainable fiscal path.” Well into the business cycle, we are pumping fiscal stimulus equal to an unprecedented 6% of GDP and a quarter of all government spending into the economy, with no end in sight. Federal debt has risen from 70% of GDP after the financial crisis to nearly 100% today, following $5 trillion of pandemic spending to close what was likely a $1 trillion shortfall.
Tax revenues as a share of GDP are projected to remain above their 50-year average, but spending has grown to a historically high 23% of GDP from 19% before the financial crisis. Only half that increase is driven by retiring baby boomers, whose growth is expected to increase spending by another 2% of GDP over 10 years.
A political resolution doesn’t seem likely. Retirees have pitted Democrats against Republicans to avoid benefit cuts. Policy makers are unlikely to raise middle-class taxes—they are engineering cuts by expanding the child tax credit. Heavy tax increases on the highest earners are estimated to contribute less than 2% of GDP.
Without greatly accelerating productivity growth, this is reckless driving. Americans are wisely alarmed.
Edward Conard
American Enterprise Institute
