Now that 30 days have passed since the publication in the Wall Street Journal of Phil Gramm’s and my August 13th, 2024, op-ed titled “We All Pay the Price for Protectionism,” I can share that op-ed here in full. I do so beneath the fold.
We All Pay the Price for Protectionism
Industrial policy intrudes on our sovereignty as consumers to protect politically favored jobs.By Phil Gramm and Donald J. Boudreaux
Aug. 12, 2024 at 5:11 pm ET
Since Adam Smith debunked mercantilism in “The Wealth of Nations” (1776), the political appeal of trade protectionism has centered on its ability to benefit a privileged few special interests while spreading costs across society. Yet as the global economy has become more integrated, the cost of granting special favors through such policies has exploded. Each job created by recent tariffs on washing machines and steel has cost the U.S. economy an estimated $820,000 and $900,000, respectively. Tariffs imposed in the name of revitalizing American manufacturing have, over six years, been followed by slightly decreased manufacturing output, reductions in the percentage of the nonfarm labor force employed in manufacturing, and significantly higher trade deficits.
Sidestepping the economic logic and evidence that trade and private markets fuel growth and higher living standards, protectionists and industrial planners are trying to change the terms of the debate. Disciples on the right and left argue for policies that promote not efficiency, consumer benefit and economic growth, but rather jobs as ends in themselves. American Compass’s Oren Cass expresses this new mantra when he states that economic policy should emphasize “a healthy labor market rather than merely rising consumption.” Former U.S. Trade Representative Robert Lighthizer adds that “Americans are producers first and consumers second.”
On the surface, their argument is appealing. Jobs are at least as important as consumption. But this raises an age-old question: Who decides which jobs to promote? In attempting to answer, it becomes clear that the new mantra is the same old siren song.
In a free society, consumers determine what is produced by choosing where to spend the incomes they’ve earned through hard work and thrift. Consumer sovereignty directs labor and capital to create the mix of goods and services that consumers want. Businesses either produce them efficiently or fail.
Politicians who advocate focusing on jobs propose that we allow government to direct how labor is employed, how capital is invested, and which goods and services are made available to consumers. That concept isn’t exactly novel: Allowing the “best and brightest” to choose such arrangements has been tried and rejected for eons. The idea of letting those who earn their incomes by the sweat of their brows decide how to spend their own money is relatively new and revolutionary.
It’s also proved fruitful. Five thousand years of experience has shown that politicians and bureaucrats don’t possess unique insight into what should be produced or how. Even if they were somehow to possess such knowledge, in time they would use their power to promote their own interests, at the expense of consumers and workers alike.
Would politicians in both parties be trying to outdo each other in vowing to save manufacturing jobs if industrial employees weren’t swing voters in the states that will decide the presidential election? When the bill for their protectionist policies arrives, it’s clear who will pay: consumers in the form of higher prices, and unprotected sectors of the economy in the form of lost jobs. When the cost of tariffs hits a politically powerful group, as it did when recent retaliation cost agriculture $28 billion, taxpayers pick up the tab in the form of additional subsidies.
When government tries to conceal the negative effects of tariffs and subsidies, the costs grow. Morris Chang, founding chairman of Taiwan Semiconductor Manufacturing Corp., which accepted billions of dollars in subsidies to build computer-chip manufacturing facilities in Arizona, mused in 2023 that “if you give up the competitive advantage in Taiwan and move to the U.S.—which has already happened—costs would be 50% higher than in Taiwan.”
If U.S.-subsidized computer chips cost 50% more than the world market price, how long will it be before Washington imposes tariffs on foreign-made chips? As chips play a significant role in modern manufactured goods, will domestic producers be able to compete in selling products made with more expensive inputs?
Protectionism and industrial policy misallocate resources and reduce economic efficiency. When firms in a free market produce outputs that consumers won’t buy, the money entrepreneurs and investors lose is their own. When protectionists and industrial-policy planners make mistakes, they often mask them with more subsidies and tariffs—at taxpayers’ expense. Think, in the first case, of Ford: When Americans didn’t buy the Edsel, the company lost money and stopped selling the model. Conversely, when Americans haven’t bought heavily subsidized electric vehicles, the government has imposed tariffs on EV imports—taxes that consumers pay.
Adam Smith was on to something when he wrote: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” The American people would be better served if we heeded that enduring wisdom rather than let Donald Trump or Kamala Harris decide which jobs should be created
Mr. Gramm, a former chairman of the Senate Banking Committee, is a nonresident senior fellow at the American Enterprise Institute. Mr. Boudreaux is a professor of economics at George Mason University and the Mercatus Center. Mike Solon contributed to this article.
