No Distinction Necessary

On this excellent post by Mark Perry at Carpe Diem, commentator Scott asks:

If trade deficits “don’t matter,” why does every country in the world try to erase their own trade deficit by doing everything they can, no matter how allegedly harmful (like currency manipulation), to boost exports and thus decrease their trade deficit? Are all you guys “just right” and everyone is else is “just wrong?”

Scott’s question, if a bit snarky, is important but contains a major fallacy from which nearly all protectionism is derived: namely, he assumes that governments, not people, trade.

There’s an important distinction that’s necessary here: it’s not “every country” that is doing everything in its power to reduce trade deficits. It’s every government. Countries do not trade; individuals do (this is why it’s fallacious to argue that international trade is inherently different).

Once we remember that, the question becomes clearer: why are governments doing everything they can, no matter how allegedly harmful (like currency manipulation), to boost exports and thus decrease their trade deficit?

This question has an answer (one which won Jim Buchanan, among others, his Nobel Prize. One which Adam Smith first proposed way back in 1776): concentrated interests and defused costs. In other words, those who benefit from protectionism are concentrated (the steel industry, the auto industry, etc) whereas those who are harmed are defused (consumers). When you transfer wealth from a large group to a small group, it is easy to see the gains to the small group, but much harder to see the losses to the large group. From a simple Public Choice perspective, this makes the political choice easy: help those who it can be seen and push the costs onto those who cannot be seen.

Of course, the above analysis only holds if we assume that politicians, like other people, are rational, self-interested actors. If we assume that politicians are omnipotent, incorruptible, and pure angels, then yes the argument that protectionism is good because every government is doing it becomes more likely. However, I feel the second assumption is weaker than the first. Thus I’ll use Public Choice Theory.

5 thoughts on “No Distinction Necessary

  1. “concentrated interests and defused costs”

    That explains much of the problem with allowing government too get too powerful or to spend too much of other people’s money. Of course, the counter-argument is that why shouldn’t consumers and taxpayers give up a dime if it means auto workers make a dollar. And, on the surface, that makes sense. It is when you think about it that you realize that such is morally and ethically wrong.

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  2. Nice post Jon. Very concisely and well argued. It’s fun to watch you become a better writer as well as a better economist.

    This reminds me of your post where you pointed out that we don’t worry about trade deficits between the different states within the USA. If the U.S. Constitution had been defeated (which it nearly was) the different states probably would effectively be different countries by now and the same people would be arguing that trade deficits between the different states/countries was a problem.

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