AIER president – and GMU Econ alum – Ed Stringham explains the folly of fretting about so-called “trade deficits.”

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Quotation of the Day…

by Don Boudreaux on July 13, 2019

in Crony Capitalism, Trade

… is from Pres. Andrew Johnson’s February 22nd, 1869, message (available here) to the United States House of Representatives explaining his veto of a tariff on copper; this veto message was drafted by the American economist David Wells:

[I]t imposes an additional tax upon an already overburdened people, who should not be further impoverished that monopolies may be fostered and corporations enriched….

Legislation can neither be wise nor just which seeks the welfare of a single interest at the expense and to the injury of many and varied interests at least equally important and equally deserving the consideration of Congress.

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Here’s a letter to a commenter at AIER, one Mr. Robert Young:

Mr. Young:

Commenting on Jeffrey Tucker’s essay “Tariffs Have Not Been Paid by China; They Have Not Raised Revenue on Net,” you suggest that the level of wages in high-wage countries will fall if residents of those countries can trade freely with producers in low-wage countries.

You’re mistaken.

Wages in the U.S. and other high-wage countries are higher than are wages in low-wage countries not by chance. These wages are higher because workers in high-wage countries are more productive than are workers in low-wage countries. That is, compared to workers in low-wage countries, workers in high-wage countries on average produce more value per hour for their employers.

High-wage workers are more productive, in turn, because they are highly skilled and work with that which is not available to workers in low-wage countries – namely, lots of machines and other capital, as well as relatively advanced and abundant infrastructure. Also, workers in high-wage countries operate in societies with high trust. High trust – by reducing the costs of monitoring, thievery, and corruption – further increases the value of workers’ outputs.

In short, “high-wage workers” is simply another term for “high-productivity workers.” Because freer trade of high-wage countries with low-wage countries does nothing to reduce the productivity of workers in high-wage countries – quite the contrary, such trade increases that productivity – workers’ wages in high-wage countries will only generally rise as those countries trade more freely with other countries, including with low-wage countries.

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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Bonus Quotation of the Day…

by Don Boudreaux on July 12, 2019

in Adam Smith, Trade

… is from page 1 of the July 1961 edition of Harvard economist Gottfried Haberler’s A Survey of International Trade Theory (footnote deleted):

Strictly speaking, it is neither possible nor essential to draw a sharp distinction between the problems of foreign and domestic trade. If we examine the alleged peculiarities of foreign trade, we find that we are dealing with differences in degree rather than with such basic differences of a qualitative nature as would warrant sharp theoretical divisions.

DBx: Yep.

Trade is trade is trade. Any economic disadvantages that you can identify as arising from Americans’ trade with non-Americans, I can identify as arising also from some Americans’ trade with other Americans. Likewise, any economic advantages that you can identify as arising from some Americans’ trade with other Americans, I can identify as arising also from Americans’ trade with non-Americans.

If the key conclusion of the economic analysis of international trade – from the analyses of David Hume, Adam Smith, Jean-Baptiste Say, and David Ricardo through the likes of much more modern scholars such as Haberler, Fritz Machlup, Leland Yeager, Jagdish Bhagwati, and Doug Irwin – must be reduced to a sentence of no more than ten words, I propose this sentence: Political borders carry no natural economic significance; none – none whatsoever.

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Quotation of the Day…

by Don Boudreaux on July 12, 2019

in Doux Commerce, Myths and Fallacies

… is from page 5 of Tyler Cowen’s excellent 2019 book Big Business: A Love Letter to an American Anti-Hero:

Many features of contemporary America are wonderful, including high levels of trust in the corporate sector, but the weirdness in our government has been rising.

In contrast, the world of American business has never been more productive, more tolerant, and more cooperative. It is not just a sources of GDP and prosperity; it is a ray of normalcy and predictability in its steady focus on producing what can be profitably sold to customers. Successful businesses grow dynamically, but they also try to create oases of stability and tolerance in which they can perfect their production methods.

DBx: So true. And yet many on the political left are blind to this reality. These “progressives” cling to the antediluvian contempt for commerce. Improving one’s life by building better mousetraps that are peacefully offered for sale – mousetraps that no one is forced to buy – seems way less cool and emotionally stimulating than using force to order other people about in the hope of producing some fancied social ‘outcomes.’

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Bonus Quotation of the Day…

by Don Boudreaux on July 11, 2019

in Growth, Technology, Trade

… is from page 3 of the 1976 second edition of my late, great teacher Leland Yeager’s sweeping International Monetary Relations: Theory, History, and Policy (footnote deleted):

Like technological progress, trade widens the range of available ways of transforming labor and other resources into desired goods and services. Technological progress and geographic specialization both make this transformation more “efficient” (to us a loose but convenient word). The basis for specialization and trade among countries of the world is the same as for specialization and trade among states of the United States.

DBx: Yes.

Stealing the essential idea from David Friedman and Steven Landsburg, I often ask my students to imagine that a Ms. Edie Thomas invents a machine that in a matter of days converts bushels of ordinary corn – maize – into automobiles identical in quality to brand-new Honda Accords and worth in value far more than the corn from which these cars are produced. Pour bushels of corn into this machine, and within a few days it spits out high-quality automobiles.

This machine is also relatively easy and inexpensive to build and to operate. Making matters even better, Ms. Thomas – a most generous woman – refuses to patent her machine. Anyone who wishes to do so can produce one (or several) such machines.

How would society look upon Ms. Thomas and her marvelous machine? Apart from owners of, and workers at, companies such as General Motors, BMW, and Toyota, almost everyone would applaud Ms. Thomas both for her genius and her generosity. She would be hailed as one of humankind’s great benefactors. And rightly so.

Of course such a machine seems to be an impossibility – a device that even the most brilliant inventor could not possibly create. But this conclusion is mistaken. Such a machine in fact does exist. In fact, many such machines exist. To see a picture of one of these machines, look below the fold.

Read the full post →

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Here’s a letter to the Wall Street Journal:

Editor:

You make several important points in “Why Vietnam Loves Donald Trump” (July 11). Yet you there keep implicit one point that should be made explicit – namely, Pres. Trump’s trade policies are the opposite of those that would be pursued by someone with excellent business acumen.

For example, a good business executive understands that when a company sources inputs from abroad it does so not haphazardly but because those foreign sources are less costly than are domestic sources. This executive therefore also understands that disruptions caused by tariffs to a company’s global supply chain are very costly. And so unlike Mr. Trump, no skilled business person would blithely tell Apple that moving more of its operations to the U.S. to reduce the impact of these disruptions is an “easy solution.”

And then there’s Pres. Trump’s obsession with bilateral trade deficits. Every successful business runs continuous, and ever-growing, ‘trade deficits’ with each of its suppliers. A business that insisted on having no such ‘deficit’ with any of its suppliers would cast itself quickly into bankruptcy. Mr. Trump’s incessant inveighing against America’s trade deficit with China reveals that he is unaware of this basic reality.

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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My intrepid Mercatus Center colleague Veronique de Rugy reports on some of the baneful consequences of Trump’s trade war.

“In a world full of people looking to impose their concepts of justice on others, it’s refreshing to revisit Adam Smith’s thinking.” That’s the opening sentence of my emeritus GMU Econ colleague Vernon Smith’s essay in the Wall Street Journal on Adam Smith and justice. Here’s another slice:

Smith thought society improved itself by controlling certain hurtful actions, rather than by trying to achieve some utopian benefit through collective action. History is littered with examples of unintended consequences and grandiose failures stemming from the latter approach. Smith’s preferred approach relied on people’s natural impulses to better themselves, risking only their own resources to do so. He opposed slavery, colonialism, empire, mercantilism and taxation without representation at a time when such views were considered radical. These ideas inspired the American Experiment, launched the same year Smith’s second book was published.

Pierre Lemieux explains that the full range of consequences of protectionism are not revealed by anecdotes.

Benn Steil and Benjamin Della Rocca examine some of Trump’s claims about his tariffs punitive taxes on Americans who purchase imports and import-substitutes. They expose these claims as false. A slice:

Given that tariffs last year raised the import costs of Chinese goods roughly 6 percent on average, if Chinese firms had cut prices to offset Trump’s tariffs the index would have fallen 6 percent since last June — when the trade war started. Yet the index has fallen barely 1 percent, and at least some of that tiny decline can be explained by Chinese currency depreciation — which makes Chinese goods cheaper for U.S. importers. There is, therefore, no evidence supporting Navarro’s claim [that Trump’s tariffs are paid for by the Chinese]. Americans are, in fact, bearing the burden of Trump’s China tariffs.

Marian Tupy is correct: The living standards of ordinary Americans today are vastly higher than they were in the 1970s. A slice:

There are a lot of reasons for the rise of populism in the West, but one, almost trite, reason is often overlooked. Our schools and our media not only fail to educate the citizenry; they actively mis-educate the electorate. Instead of showing the unbelievable progress that humanity has made since the start of the Enlightenment some three centuries ago, history classes, to the extent that history is still taught, are used to whip up resentment and a sense of victimhood among different socio-economic, racial, ethnic, religious and gender groups. The media breathlessly repeat stories of (real and imagined) oppression and (supposed) economic retrenchment, even though people in the West currently enjoy a period of unprecedented peace and prosperity.

Although long, this post by George Selgin – in which he clears up misunderstanding about the gold standard – is well worth reading.

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Quotation of the Day…

by Don Boudreaux on July 11, 2019

in Myths and Fallacies, Trade

… is from pages 376-377 of the 1936 English-language edition (translated from German by Alfred Stonier and Frederic Benham) of Gottfried Haberler’s classic 1933 work, The Theory of International Trade With Its Application to Commercial Policy (original emphasis; footnote deleted):

The peculiarity of such an ‘exchange’ [as occurs when governments negotiate trade agreements with each other] is that the surrender of its own exchange-object – the reduction of its own duties – is in reality no sacrifice…. It is the increase and not the reduction of duties which is the real economic burden!

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No Sign of Intelligent Life

by Don Boudreaux on July 10, 2019

in Myths and Fallacies, Trade

Here’s another letter to Ricky Miller:

Mr. Miller:

Unlike you, I fervently hope that Pres. Trump proves to be, by his own standards, a complete flop at negotiating trade deals. The reason is that what Pres. Trump regards as American costs are, in fact, American benefits – and what he regards as American benefits are, in fact, American costs.

Negotiating for us to increase our exports as much as possible, and to increase ‘in exchange’ our imports as little as possible, the Trump trade team is unwittingly negotiating to enrich foreigners at our expense. ‘We insist on producing a lot more stuff for your enjoyment, and we demand that you produce as little as possible stuff for our enjoyment!’ is Trump’s message to foreigners.

Fortunately for us, foreign-government leaders are just as economically ignorant as is the Trump team. These foreigners are negotiating to enrich us with as many as possible of their citizens’ exports, and to receive from us as few as possible of our exports.

If a Martian eavesdropped on trade negotiations between Trump’s team and Chinese Pres. Xi’s team, that space traveler would initially conclude that Pres. Trump is a Chinese secret agent working to impoverish Americans and to enrich the Chinese, and that Pres. Xi is an American secret agent working to impoverish the Chinese and to enrich Americans.

And upon learning the truth of the matter, the Martian would quickly return to Mars and report that earth has no intelligent life.

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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