Here’s a letter to a reader of Cafe Hayek:

Mr. Josh Henderson

Mr. Henderson:

Thanks for your e-mail. You ask which government – the U.S. or the Chinese – I believe to be most responsible for today’s trade tensions.

My answer is both. Both governments obstruct with tariffs and subsidies their citizens’ freedom to trade peacefully with people outside of their countries. Without these obstructions, each resident of America would be free to peacefully accept or to reject offers made to him by individuals in China, and each resident of China would be free to peacefully accept or to reject offers made to her by individuals in America. Without these obstructions there would be no more trade tension between Americans and the Chinese than there is now between Minnesotans and Floridians.

Skeptics balk. They insist that Beijing’s obstructions of its citizens’ freedom to trade require that Uncle Sam similarly obstruct Americans’ freedom to trade.

These skeptics miss the crucial fact that the fundamental and chief tensions created in this case by Beijing are among only the people of China. Beijing’s tariffs and subsidies, in effect, seize the property of some Chinese citizens in order to transfer it to other Chinese citizens. But because these Beijing-engineered seizures take from no American anything to which an American has a property right, what ethical justification is there for Uncle Sam to create identical tensions in the U.S. by seizing the property of some Americans in order to transfer it to other Americans?

In what moral universe does A’s forcible transfer of B’s property to C justify X’s forcible transfer of Y’s property to Z? How is justice served if, in response to A’s wrongful creation of tensions between B and C, X creates like tensions between Y and Z?

Although Beijing certainly does enable some Chinese individuals to prey upon other Chinese individuals, this reality does not make right that which is wrong – namely, Uncle Sam enabling some Americans to prey upon other Americans.

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

Add a Comment    Share Share    Print    Email

Quotation of the Day…

by Don Boudreaux on July 18, 2018

in Politics, Virginia Political Economy

… is from page 115 of my colleague Bryan Caplan’s great 2007 book, The Myth of the Rational Voter:

Although initially jarring, it is coherent to assert that people are rational in some areas but not others. Irrational beliefs probably play a role in all human activities, but politics makes the “short list” of areas where irrationality is exceptionally pronounced. Furthermore, basic economic theory – properly interpreted – helps define the boundaries of rationality. Political irrationality is not an ad hoc anomaly, but a predictable response to unusual incentives.

Add a Comment    Share Share    Print    Email

Costs are Not Benefits

by Don Boudreaux on July 17, 2018

in Myths and Fallacies, Trade

Here’s another letter to my arch-protectionist correspondent Nolan McKinney:

Like you, I read in the Wall Street Journal that Trump’s tariffs on washing machines are prompting Samsung and LG to consider opening factories here in the U.S. Unlike you, I do not regard the jobs that will be created in those factories as a “benefit” of Trump’s tariffs. These jobs, in fact, are among the tariffs’ costs.

The reason begins with the fact that workers diverted by the tariffs into the production of washing machines in the U.S. are diverted away from producing goods and services that they would otherwise have produced. The reason concludes with the reality that without the tariffs we Americans would have been able to acquire the same number of washing machines by expending less labor and fewer resources. Therefore, any and all washing machines produced in America only because of those tariffs will be produced wastefully. The costs of producing them will be artificially and unnecessarily high.

To count as benefits the jobs that are created only in response to tariffs is akin to counting as benefits the extra work and expense that homeowners, seeking to protect their homes from being robbed, put forward in response to an increase in neighborhood burglaries.

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

…..

It’s strange that Mr. McKinney finds in this WSJ report support for protectionism, as its main point is that Trump’s tariffs are backfiring.

Add a Comment    Share Share    Print    Email

Quotation of the Day…

by Don Boudreaux on July 17, 2018

in Inequality, Myths and Fallacies

… is from page 4 of Alan Reynolds’s excellent 2006 book, Income and Wealth (original emphasis):

The two young founders of Google, Larry Page and Sergey Brin, quickly made something like $12 billion each by greatly facilitating our information, education, and shopping efficiency. Why should anyone care how much money the founders of Google, Apple, or Microsoft made? Some might object that they earned a larger share of income, but in what sense can we regard their income as shared? Google is something new – without Google there could be no income from Google. The Google founders have their income and you have yours. What they earn has nothing to do with how much or how little you can earn, except that their invention may help you earn more (personally, I feel as though I owe them a really big check).

DBx: Indeed so.

People who obsess over differences in monetary incomes – people who leap from observing large differences in monetary incomes to the conclusion that something is thereby amiss and requires ‘correction’ (always by giving a relatively small handful of people an enormously unequal share of power over others) – typically operate with the mistaken presumption that the amount of material wealth in the world is fixed. The very same mistaken presumption is at the core of most arguments against free trade. Neither the redistributionist nor the protectionist understands economic processes or economic growth.

Add a Comment    Share Share    Print    Email

Bonus Quotation of the Day…

by Don Boudreaux on July 16, 2018

in Curious Task, Economics, Trade

… is from pages 555-556 of  Francis Ysidro Edgeworth‘s December 1908 article in the Economic Journal titled  “Appreciations of Mathematical Theories” (footnote deleted; original emphasis); the Bickerdike who Edgeworth refers to is Charles F. Bickerdike, who refined, in early 20th-century papers, the formal theory of the optimal tariff:

Thus the direct use of the theory [of optimal tariffs] is likely to be small. But it is to be feared that its abuse will be considerable. It affords to unscrupulous advocates of vulgar Protection a particularly specious pretext for introducing the thin edge of the fiscal wedge. Mr. Bickerdike may be compared to a scientist who, by a new analysis, has discovered that strychnine may be administered in small doses with prospect of advantage in one or two more cases than was previously known; the result of this discovery may be to render the drug more easily procurable by those whose intention, or at least whose practice is not medicinal. It was thus that the “drama of poison” perpetrated in the reign of Louis XIV. was initiated by one whose baleful receipt was obtained from Glaser, a chemist of eminence, the discoverer of a new substance. Let us admire the skill of the analyst, but label the subject of his investigation POISON.

DBx: Yes.

Close readers of Cafe Hayek might notice that I often write of the case for a policy of free trade – indeed, for a policy of unilateral free trade. I regard such a case as being related to, but distinct from, a theoretical case for unilateral free trade.

In theory, all sorts of things are possible in reality. In reality, very few of the set of things that are possible in theory will ever occur. Therefore, the countless things that are merely possible but not plausible are rightly ignored when discussions turn to choosing the rules under which we imperfect human beings live and govern our interrelationships with each other. Any policy that deserves the name is a set of rules. And no policy can be concerned with mere theoretical possibilities, most of which are nothing more than curiosa that are good for little beyond giving puzzle-solving-like entertainment to assistant professors and graduate students.

The theory of the optimal tariff is such a curiosa. It is widely and not unjustifiably regarded as supplying one of only two theoretically coherent exceptions to economists’ demonstration that the wealth of the nation is maximized with a policy of unilateral free trade. (The other exception – which is related – is the theoretical possibility that the government of country A can use tariffs to persuade other governments to lower their tariffs, all toward the ultimate goal of a multinational reduction of tariffs. And perhaps a third such theoretical ‘justification’ is “strategic trade theory.”) But as Edgeworth wisely and eloquently implies above, the theory of the optimal tariff supplies no good basis for a policy of protectionism – or, from the other side, for abandoning a policy of free trade. And had Edgeworth lived to see the work done by public-choice scholars – as well as that done by Austrian and some Chicago economists on the dynamic and rivalrous nature of market competition – he undoubtedly would only have reinforced his description of the theory of the optimal tariff as poisonous.

Contrary to what some commenters in their ignorance assert – at this and other blogs – the theory of the optimal tariff was never regarded by any but the smallest number of economists as a serious argument against a policy of free trade.

Add a Comment    Share Share    Print    Email

In my latest AIER column, I summarize just some of the many reasons to be skeptical of the so-called “national-security exception” to the case for a policy of free trade. Here are my concluding paragraphs:

Here’s a fourth reason to reject the national-security exception to the case for free trade. It’s the reason most important of all: trade itself promotes peace by weaving the peoples of different countries into one international economy.

Every trade restriction disunites the peoples of different countries. It makes them less invested in each other’s welfare than they would otherwise be. As trade restrictions multiply, the people of one country come to depend less on the people of another country as suppliers and as customers. The bonds of understanding created and strengthened by peaceful commerce weaken. The lost trade opportunities from a shooting war between the two countries fall while the risks of misunderstanding between the two countries rise.

The very best system of national defense, therefore, is one that reduces the prospect of war. It is one that diminishes the need to actually send into battle war machines and manpower. So anyone sincerely committed to a program of using trade policy as a means of strengthening national defense supports as an indispensable cornerstone of that policy free trade.

Add a Comment    Share Share    Print    Email

… is from pages 294-295 of Herbert Spencer’s insightful July 1853 Westminster Review essay, “Over-Legislation,” as this essay is reprinted in Liberty Fund’s 1981 collection of some of Spencer’s writings, The Man Versus the State, with Six Essays on Government, Society, and Freedom:

Given a race of men having a certain proclivity to misconduct, and the question is, whether a society of these men shall be so organized that ill-conduct directly brings punishment, or whether it shall be so organized that punishment is but remotely contingent on ill-conduct? Which will be the most healthful community—that in which agents who perform their functions badly, immediately suffer by the withdrawal of public patronage; or that in which such agents can be made to suffer only through an apparatus of meetings, petitions, polling-booths, parliamentary divisions, cabinet-councils, and red-tape documents? Is it not an absurdly utopian hope that men will behave better when correction is far removed and uncertain than when it is near at hand and inevitable? Yet this is the hope which most political schemers unconsciously cherish. Listen to their plans, and you find that just what they propose to have done, they assume the appointed agents will do. That functionaries are trustworthy is their first postulate. Doubtless could good officers be ensured, much might be said for officialism; just as despotism would have its advantages could we ensure a good despot.

Add a Comment    Share Share    Print    Email

Suboptimal Understanding

by Don Boudreaux on July 15, 2018

in Myths and Fallacies, Trade

Commenting on Scott Sumner’s recent, excellent EconLog post on trade theory and policy advocacy, Warren Platts writes like a man who knows just enough economics to get economics wrong while giving the erroneous impression that he knows what he’s writing about..

Here’s part of Mr. Platts’s comment in response to Scott:

Interesting article, sir, but it ignores the main 19th century argument that was deployed against unilateral free trade. And that is the dirty little secret of trade theory: tariffs improve a country’s net welfare. That is probably why countries are reluctant to remove them, especially if they are not matched by reciprocal reductions in trade barriers.

Mr. Platts then goes on to reference Robert Torrens’s theory of the very special case of the optimal tariff, which Mr. Platts mistakenly presents in his comment as a general demonstration that (as he says without qualification) “tariffs improve a country’s net welfare.”

Here’s the comment that I left at EconLog in response to Mr. Platts’s poor understanding of both of the history of economic thought and of the theory of the optimal tariff:

Warren Platts:

You do not adequately grasp the theory of optimal tariffs. Although John Stuart Mill developed the theory earlier but published it only later, Robert Torrens is indeed the first person who explained in print that under certain circumstances the use by country A of tariffs set just right on particular goods can improve country A’s terms of trade – meaning that country A ends up receiving more imports in exchange for a given amount of its exports. (Note, by the way, that this outcome is quite the opposite of that which typical protectionists think to be desirable.) And such an improvement in country A’s terms of trade only improves net welfare in country A if the size of the benefits from the improved terms of trade are greater than the losses that necessarily occur because of the fall in total trade volume and reduced international specialization that are caused by the imposition of the optimal tariff.

Mr. Platts, you are mistaken about the policy implications of the demonstration of the theoretical existence of an optimal tariff. That demonstration, contrary to your portrayal of it, emphatically did not establish a case for a policy of free trade. The assumptions – including especially the ones used by Torrens – for the optimal tariff to improve the net welfare of a country are many and extreme. These assumptions are far too extreme to apply in reality. Therefore, most economists have wisely understood this fact as one that relegates the optimal tariff to the ranks of mere theoretical curiosa (although, apparently, Torrens himself wasn’t among this wise number).

All of the above (and more) is nicely explained in this 1987 article by the excellent historian of economic thought Tom Humphrey. Here’s Tom’s conclusion – one which is widely accepted among economists:

Except for Torrens and [C.F.] Bickerdike, these same economists also specified the basic shortcomings of optimum tariff theory. The theory, they noted, assumes unrealistically (1) that foreign countries will not retaliate with tariffs of their own, (2) that elasticities of supply and demand in foreign trade are not so large in the long run as to render the tariff ineffective, (3) that the optimum tariff rate can be precisely identified and skillfully administered, and (4) that politicians can resist pressures to raise tariff rates above the optimum level. None of these assumed conditions, they felt, were likely to be realized in practice. They further pointed out that a tariff can benefit no nation except at the cost of greater injury to others and is thus unacceptable from a cosmopolitan point of view. For these reasons they remained convinced that, despite the theoretical case that could be made for an optimum tariff, free trade was the best policy from a practical and moral standpoint.

……

One more point. Mr. Platts confesses to admiring Ian Fletcher’s arguments for protectionism. While I find Flether’s arguments to be weak and completely without merit, one of Fletcher’s least-objectionable positions is his endorsement of across-the-board tariffs (as opposed to selectively imposed tariffs, which Fletcher correctly understands fuel more rent-seeking than do across-the-board tariffs). But an optimal tariff by its nature is a selectively imposed tariff. Such a tariff is inconsistent with a policy of across-the-board tariffs.

Add a Comment    Share Share    Print    Email

Scott Sumner correctly argues that, because the case for freer trade over the past many decades has been made largely on mistaken grounds, popular understanding of free trade today is weaker than it would otherwise have been and, also, popular and political support for free trade is unduly fragile. A slice:

Over the past 200 years, debates about trade have occurred on two levels. Academics insist that unilateral free trade is the best options. However the “very serious people” (VSP) who conduct real world trade negotiations act as if open markets are a “concession”. They act as if we were doing other countries a favor by letting them export goods to our market. They view the academic perspective as hopelessly idealistic, even as the VSPs have worked hard to gradually move the world toward the same goal of freer trade, one agreement at a time.

Today it looks like the VSPs who believe in globalization made a big mistake, and that the idealistic approach of unilaterally moving toward freer trade was the better strategy. The VSP approach opened the door to protectionist populists, and Donald Trump walked through.  Protectionists are using the “concessions” myth as an excuse to impose higher tariffs. Other countries then face a difficult choice. If they give in to pressure from Trump, it would just encourage him to make even more demands.

Colin Grabow explains that Trump trade guru Peter Navarro misses the boat on the Jones Act.

GMU Econ alum Dan Mitchell writes – and speaks out – against Trump’s “dust-bowl economics.” A slice:

And now we’re seeing it when bad trade policy is leading to more bad farm subsidies.

I realize this is pure fantasy, but wouldn’t it be nice to have the reverse approach? How about we simultaneously eliminate trade barriers and get rid of the Department of Agriculture?

(See also this piece by Stephen Vukovits.)

Here’s Ilya Somin on Brett Kavanaugh.

Wall Street Journal columnist Holman Jenkins is correct that Uncle Sam’s antitrust challenge of the merger of AT&T with Time-Warner is farcical – a fact, sadly, that does not stop the Trump people from pressing forward with the farce. A slice:

Smart people know when to cut their losses. But in politics, blunders must be hugged all the closer to one’s breast.

Alberto Mingardi helps to protect Adam Smith’s reputation from being hijacked by a man of system.

Jeffrey Tucker reflects productively on labor-market regulations and tight labor markets. A slice:

In a real free market, labor and capital have equal “power,” if you want to call it that. They simply make a deal like any other. I will provide you services in exchange for which you give me money. If at any point this doesn’t benefit both parties, either party can bail on the deal. The right of the employer to fire is the other side of the coin of the right of the employee to leave the job. They go together. Servitude is forbidden on either side of the exchange.

This is why restrictions on firing are so insidious. They bind one side of the deal in ways that are contrary to the voluntarism of the market economy. We rarely hear politicians speak of restrictions on the right to quit. Those are taken for granted (with the one big exception of the military, which from the ancient world to the present presumes that the worker is in a position of servitude and cannot quit without facing serious repercussions).

Add a Comment    Share Share    Print    Email

Quotation of the Day…

by Don Boudreaux on July 15, 2018

in Balance of Payments, Myths and Fallacies, Trade

… is from the late Herbert Stein’s excellent contribution – “Balance of Payments” – to the Concise Encyclopedia of Economics (edited by David Henderson):

Because the current account and the capital account add up to the total account, which is necessarily balanced, a deficit in the current account is always accompanied by an equal surplus in the capital account, and vice versa. A deficit or surplus in the current account cannot be explained or evaluated without simultaneous explanation and evaluation of an equal surplus or deficit in the capital account.

DBx: All protectionists, nearly all politicians, most pundits, and even many professors continue to obsess over one of the two accounts in the so-called “balance of payments.” The obsession is with the current account. Ignored is the capital account.

The reasons for this obsession are several. They include, perhaps above all, the contribution such an obsession makes to demagoguery on behalf of politically powerful producer groups seeking relief from the need to compete vigorously.

But simple economic ignorance is also part of the story. The current account is the account on which the values of a country’s imports and exports are recorded. It’s true that on the current account are recorded the values of some transactions and monetary flows other than those of imports and exports, thus making the trade deficit not really synonymous with the current-account deficit. But the obsession in the popular – and, hence, in the political – mind with imports (mistakenly thought to be a cost of trade) and exports (mistakenly thought to be the ultimate benefit of trade) turns all attention to the current account.

The fact that (to use as an example the United States) the U.S. trade deficit rises in August over July is all most people (think they) need to know in order to conclude that Americans’ commercial engagement with foreigners in August was worse for Americans than was Americans’ commercial engagement with foreigners in July. “Deficit,” after all, is a scary word.

Yet very few people pause to ask what foreigners did in August with the dollars that they did not spend that month on American exports. Did foreigners burn these dollars? (Of course not – and, by the way, too bad for us Americans, for that use by foreigners of dollars would be the best of all possible worlds, trade-wise, for Americans.) Did foreigners invest these dollars? Answer: yes.

Because dollars are eventually either spent or invested in the U.S., the increase in the U.S. trade deficit in August means that foreigners invested more in the U.S. during August than they invested in the U.S. during July (thus causing the U.S. capital-account surplus in August to rise above its July level – and rise by the exact amount as the rise in August of the U.S. current-account deficit).

Thus, fretting and moaning and screeching over the trade deficit (more precisely, the current-account deficit) amounts to fretting and moaning and screeching over the capital-account surplus. Yet why is an increase in foreign investment in the U.S. something to fret and moan and screech over? It’s true that one can spin tales of why such increased investment is evidence of economic problems in the U.S. But in reality the truth is that most of this increased foreign investment in the U.S. is evidence of U.S. economic strength, at least relative to other countries.

The big, real exception is foreign lending to Uncle Sam to help finance Uncle Sam’s chronic budget deficits. Yet if we Americans trust our government enough to allow it to restrict our peaceful trade with foreigners, why then should we distrust this same government’s fiscal decisions? People who trust Uncle Sam to restrict trade have no business pointing to that portion of the U.S. current-account deficit that consists of loans to Uncle Sam as evidence of U.S. economic problems.

In either case – whether foreign investment is done here in response to economic problems here or in response to economic promise here – it’s nearly impossible to tell a plausible story of how these investments themselves make us worse off. And yet all protectionists, nearly all politicians, most pundits, and even many professors stubbornly ignore all of the above points. They hear the term U.S. “trade deficit” and rush heedlessly to the wholly mistaken conclusion that American trade patterns and policy are deficient.

Add a Comment    Share Share    Print    Email