Tuesday, 6 March 2018

Economics Was Invented to Refute Trump's Tariff Arguments

Adam Smith didn't write 'Wealth of Nations' to refute “godless socialists.” He wrote it to demolish the idiocy displayed by a 21st-century Republican president and his advisers. Because, says Tom Mullen in this guest post, we've known since Adam Smith's demolition that tariffs are a shitty destructive idea.

When Adam Smith wrote Wealth of Nations, it wasn’t to refute the “godless socialists” that 21st-century Republican voters believe are taking over the world. It was to refute the kinds of protectionist ideas championed by conservatives like Edmund Burke and Alexander Hamilton in Smith’s day, Abraham Lincoln eighty years later, and Trump today.

Cobden had protectionist ideas dumped in 1846 and, inspired, French writer Frederic Bastiat remade Cobden and Smith’s case in 1848. Henry Hazlitt did so again in 1946. Still, these economic fallacies persist because they offer the victims of other bad economic policies villains they can blame for largely self-inflicted wounds.

The Broken Window Fallacy

Every time a Trump supporter sees “Made in China” on a pair of sneakers, he throws up his hands and says, “Do you see that? They’re stealing our manufacturing jobs.” He then repeats a version of Bastiat’s broken window fallacy. It goes something like this:

 China puts tariffs on our products so our exports can’t compete in its markets. But we don’t put tariffs on China’s exports, making their sneakers cheaper than we can make them here. American sneaker manufacturing jobs go to China, but no Chinese manufacturing jobs come to the United States.

Not only do millions of Americans lose their jobs, say the protectionists, but all of the money they would have spent domestically is instead spent in China. This causes other American businesses to fail, cut production, or not expand as much as they otherwise would. The unemployed American factory worker doesn’t eat out at the local restaurant. The restaurant needs fewer wait staff and cooks, who in turn don’t have money to spend on new clothing, etc.

As Bastiat would say, this is “what is seen.” But their argument ignores what is unseen.

What is unseen is the money American consumers no longer have when the tariffs are put in place. For example, the tariff may result in them paying $200 for the same pair of sneakers they previously paid $100 for. That means they no longer have $100 they previously had after buying the sneakers, which they could spend on other products. Whatever jobs they were supporting with that $100 are now lost.

The Jobs

To this, the protectionist might say, “But the $100 savings on a pair of sneakers doesn’t replace the entire $50,000-per-year sneaker manufacturing job that has been lost.” This is just more of the same fallacy.

First, the entire $50,000 is not lost. All other things being equal, the unemployed sneaker factory employee goes to another job. The job may pay less, but that is only because the higher salary earned making sneakers when the tariff was in place was not the true market price for that job. It was artificially inflated by government intervention.

Regardless, what is lost is only the difference between the employee’s previous salary and his new one.

Second, one must compare the number of sneaker manufacturing jobs lost to the number of consumers of sneakers. While all of apparel manufacturing never employed more than about a million people in the U.S., sneaker consumers alone number in the tens or hundreds of millions.

When the ledger is balanced, Americans, in general, are far better off without the tariff on sneakers. They now have $100 for every pair consumed to improve their own quality of life and to create millions of jobs which wouldn’t exist if they didn’t have that extra $100 to spend.

The same goes for all manufacturing jobs “lost” to China and other countries. The lower prices Americans pay for automobiles, clothing, Apple iPhones, and Bobcats allow them to patronise those American industries which do operate more efficiently than their overseas competitors. That’s called “comparative advantage,” something else free market advocates since Adam Smith have been educating people about.

Tariffs Are Just Taxes

The principle applies equally to production as to consumption. The steel and aluminium tariffs proposed this week purport to create jobs in the domestic steel and aluminium industries. But what about the domestic manufacturers who currently buy steel and aluminium from less-expensive foreign exporters? They now must raise their prices to cover their increased costs, making them less competitive in foreign markets and their consumers poorer by the amount of the price increases of their products after the tariff is levied -- and in being so much the poorer they can spend so much the less on other goods and services, making the suppliers of all things (even red golfing caps) so much less well off.

The short-term gain of the very few who are seen is at the expense of the long-term gain of everyone. (And few, down the track, will even remember why they are now poorer.)

Conservatives like to point out that American taxpayers “don’t owe other people houses.” I completely agree, but that sword cuts both ways. Neither do American taxpayers owe manufacturing workers a higher-paying job. And in the end, that’s all tariffs do: make American taxpayers subsidise artificially higher wages.

President Trump says he is only levying the tariffs because other governments don’t treat American exporters fairly. “But those other countries aren’t lowering their tariffs! We need ‘fair trade!’”  he whines. Virtually every mercantilist who ever lived made the same excuse, and it doesn’t make any more sense now than it did then. Even if another country continues to levy tariffs on its imports, Americans are still better off paying $100 for a given pair of sneakers than paying $200 for them, for all the same reasons.

But what if the other country enters a “free trade deal,” then subsidises its manufacturers to give them an unfair advantage over our own? Bastiat eviscerated this fallacy 170 years ago with his “Petition of the Candlemakers.” Unless you’re in favour of a tariff on sunlight entering your country to protect local manufacturers of LED light bulbs, neither can you be in favour of responding with tariffs to (say) subsidised foreign cars when those vehicles hit your shores.

No matter what spurious arguments special interests make in favour of tariffs, they are, at the end of the day, just another tax. No matter what foreign governments may be doing to “protect” manufacturers in their own countries, it never helps us to respond by placing more taxes on ourselves.

Economics Applies to Everyone

And don’t forget that all the unseen, negative consequences of tariffs apply equally to foreigners. If they are taxing imports on automobiles too, then their citizens also have less money to spend on other products. Their businesses that use imported materials must also raise their own prices and become less competitive. Any advantage they appear to gain in one sector, they lose in another, with the same overall net loss as we experience. Thus, the ability of foreign governments to protect their industries has a natural limit.

None of this is news. Adam Smith pointed it all out 242 years ago. And it's worked out just the way he explained it every time and everywhere it's been tried.

In March 2002, for example,
President George W. Bush imposed a 30% tariff on Chinese steel. The results were chaotic. In a report put out by Consuming Industries Trade Action Coalition in February of that year, the coalition found the tariffs against China boosted the overall prices of steel and cost the U.S. 200,000 jobs in businesses that buy steel, representing $4 billion in lost wages.
That's just one of many examples. Fact is, tariffs are never beneficial to the economy. And they are least beneficial of all when an asset bubble is just about to pop. During the 1920s for example, the Federal Reserve augmented a natural economic boom with an inflationary monetary policy, turning the boom into a market bubble. When the Fed finally began to tighten and the market crashed, a recession followed -- to which Republican President Herbert Hoover responded by signing into law the Smoot-Hawley tariffs. This immediately made an already-bad situation worse. Not only did he further impoverish Americans, his action helped set off an international tariff war that helped export the Depression worldwide -- a depression that only ended when WWII ended and taxes and government spending were cut dramatically.

We’ve seen this movie before. The original wasn’t very good, and remakes are usually worse. Hopefully, Americans are finally getting wise. A FEE article on the Smoot-Hawley tariff is trending on Google. Let’s hope Cobden, Bastiat and Hazlitt start trending next.

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? and A Return to Common  Sense: Reawakening Liberty in the Inhabitants of America. For more information and more of Tom's writing, visit www.tommullen.net.
A version of this article previously appeared at FEE.


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