Today’s Quote of the Day…

…comes from page 38 of Economic Sophisms by Frederic Bastiat (1964 Foundation for Economic Education ed., footnote omitted, original emphasis):

I confess that the wisdom and the beauty of these laws [of trade] evoke my admiration and respect.  In them I see Saint-Simonianism: To each according to his capacity; to each capacity according to its production.  In them I see communism, that is to say, the tendency of goods to become the common heritage of men; but a Saint-Simonianism, a communism, regulated by infinite foresight, and in no way abandoned to the frailty, the passions, and the tyranny of men.

JMM: I love this line because Bastiat is addressing two of his biggest critics in 1850’s France: the Saint-Simonianists (socialists) and the communists.  Is Bastiat saying the goals of the socialists or the communists are ignoble?  No.  What he objects to are their methods (central planning, or leaving economic decisions “abandoned to the frailty, the passions, and the tyranny of men”).

Those of us who argue for freedom, of markets and of people, are often accused by our critics of not caring.  Because we are not socialists, we do not care about the poor.  Because we are not communists, we don’t care about the working man.  Because we are not speech restrictions, we do not care about corruption in politics.  Etc Etc.  But nothing could be further from the truth!  We care about these things; that’s why we argue for freedom.  As Bastiat says, it is in these laws of trade and exchange (the economic laws) do we see the noble goals of communism and socialism accomplished without the ignoble aspects of frailty, passions, and tyranny that comes with socialism or communism.

Destroy the City to Save the City

Commenting on this blog post, a “Daniel DiMicco” says:

Your commentary couldn’t be more misleading and dead wrong. Rather than the picture you paint, the Steel Industry is the “canary in the coal mine”. It is the case study for the Massive trade Mercantilism and cheating that China is perpetrating on the USA’s entire Manufacturing sector. Your propaganda doesn’t pass the smell test!

Below is my response:

Daniel Dimicco:

You say that the steel industry is the “case study for the Massive [sic] trade Mercantilism [sic] and cheating that China is perpetrating on the USA’s entire Manufacturing sector.”

Presumably, this means China’s low steel prices are harmful to the American manufacturing sector.

However…what would happen to the US manufacturing sectors that are dependent on steel? Like auto-making, construction materials, and the like? They’d face higher price pressures from any resulting tariffs you demand. Assuming they can’t adjust prices, this would mean they’d need to cut adjust costs elsewhere…perhaps lay off workers, perhaps cut hours, all kinds of things. They’d be negatively impacted by your steel tariffs.

Even if they could adjust their prices, now you’re looking at the effects on the consumers of these steel products. They’d start looking for more cheap substitutes or simply cut back on the amount they purchase. This would weigh on the manufacturing sector as well (as well as the consumers).

In short, your effort to save one canary will kill off several others.

On a related note, I found a picture of protectionists celebrating a tariff hike:

tumblr_nfpwfhaavl1thuvsao1_500

Today’s Quote of the Day…

…is from page 35 of Economic Sophisms by Frederic Bastiat (1964 Foundation for Economic Education edition):

Moreover, free trade also equalizes the conditions of enjoyment, of satisfaction-in short, of consumption.  People seem never to take this aspect of the matter into consideration; yet it is the crux of the whole discussion, since, after all, consumption is the ultimate goal of all our productive efforts.  Under a system of free trade, we should enjoy the benefits of the Portuguese sun just as Portugal itself does; and the inhabitants of Le Harve would have just as much access to the advantages that Nature has conferred upon Newcastle in the form of mineral resources, and under the same conditions, as the people of London do.

JMM: Free trade is the ultimate sharing of the wealth.  Despite living in Virginia, I can enjoy the same goods as people all over the country and the world.  I needn’t live in Florida to get oranges, or India to get curry, or England to get tea.  I can enjoy these things just as equally as if I lived in Miami, or Bombay, or London (and likewise they can enjoy tobacco, dairy, and soybeans just as they lived in Richmond).

The Ricardian Insight on Trade

Is it possible for a nation to become impoverished by trade by outsourcing everything?  Some people seem to think so.  For example, see this comment by a “William Ryan” on this Carpe Diem blog post:

Then we can just let China and Mexico make everything for us so the few at the top can hoard all profits and prosper from.

The problem with this sentiment is that it is mathematically impossible.  If we stick with the standard theory of trade (and one which these folks appear to accept), then the actor that produces something at the lowest economic cost will specialize in that production.  However, it is impossible to be the lowest-cost producer in everything.  “Lowest economic cost” is a relative term.  If one has a lower economic cost at one thing, s/he necessarily has a higher economic cost in another thing.  The example we gave yesterday of Bananaland and Fisherland provide a mathematical example of this concept.

This insight was developed by David Ricardo 200 years ago.  It is still relevant today.

On Bananas, Fish, and Trade

Commenting on this blog post, Warren Platts writes:

If imports were stopped by a stroke of a pen, there would still be a trillion dollars of pent up demand per year from American consumers. If the demand for goods couldn’t be satisfied with imports, domestic manufacturers would take up the slack, creating jobs. Things would be more expensive, sure, but the GDP would grow a lot faster, more people would have good jobs.

Warren’s argument, while common, is incorrect.  Imports, which do satisfy demand, generate more demand for other products by virtue of the fact they are of lower economic cost.  As Warren says, if these imports were stopped, “things would be more expensive.”  This inherently means that there are not “trillions of dollars in pent up demand per year,”that American manufacturers can simply “take up the slack.”  Rather, those trillions of dollars are released by the imports and would become constrained by the forbidding of such.

By way of example, let’s say we have two countries: Bananaland and Fisherland. In autarky (that is, no trade), Bananaland can produce 50 fish or 50 bananas.  Fisherland can produce 100 bananas or 200 fish.  If each country divides their time evenly between each activity, Bananaland can produce and consume 25 bananas and 25 fish.  Fisherland can produce and consume 50 bananas and 100 fish.  In this autarky, the price of bananas in terms of fish is 1 in Bananaland and .5 in Fisherland (in other words, Bananaland needs to give up 1 fish to produce 1 banana.  Fisherland need only give up half a banana to produce 1 fish). The two countries open trade with one other and, given that both countries want to consume the same number of bananas after trade as before (an assumption made for simplicity; doesn’t change the story if we relax this), then the citizens of Bananaland agree to send 25 bananas for 37 fish (a price of .68).  To satisfy this, Bananaland stops producing fish and produces only bananas (they produce 50 bananas).  Fisherland cuts back on banana production to 25 but ramps up fish production to 150.  The day comes and the two trade.  Now, Bananaland consumes 25 bananas and 37 fish.  Fisherland consumes 50 bananas and 113 fish.  Their total economic well-being (crudely called “GDP”) is Bananaland: 62 (25+37) and Fisherland: 163 (50+113).

Bananaland, convinced their getting a bad deal following the lack of fishing in their country (remember, what was once a thriving industry) and the low prices they now pay, elect a protectionist on the grounds that he (and he alone) will “Make Bananaland Great Again!”  He promptly forbids all imports of fish from Fisherland.  They go back to their autarky ways.  Since Bananalanders now pay higher prices for their fish and more resources are devoted there than elsewhere, they can only consume 25 fish and 25 bananas.  Their GDP falls to 50!*  There was “pent up demand,” but the higher costs the various citizens now have to pay to even just consume the same amount they did before eats up that “pent up demand.”  The domestic manufacturing simply cannot supply it.

Adam Smith first explored this concept way back in 1776, and David Ricardo formalized it with the theory of Comparative Advantage.  Trade occurs for the simple reason that it provides people with better outcomes than other alternatives.  Other alternatives simply cannot provide the desired outcomes.

Update: I realized, as reading though this, I made a small math error.  It has been corrected.

*It’s worth nothing a similar decline happens to Fisherland, a nation where they can produce much higher levels than Bananaland.  Their GDP falls to 150.  Even their manufacturing cannot satisfy the “pent up demand.”

On Protectionism and Competitiveness

A common argument heard for protectionism is that it increases/enhances competitiveness of the domestic firms, that it “levels the playing field” (this argument used to be made primarily when talking about “infant” industries in a country, but more recently is used to justify actions taken against China and other “trade manipulators”).  The problem with this argument is that it is simply impossible.

Just as minimum wage cannot create new jobs, it just outlaws current jobs, so it is with protectionism.  Protectionist tariffs do not create more efficiencies and competition, they just outlaw/restrict certain efficiencies and competition.  This doesn’t make the protected firms more competitive.  In fact, it reduces the competitiveness of the protected industries!

Allow me to explain via metaphor:

In the 2016-2017 NFL season, the Cleveland Browns were the worst professional football team (as measured by the win-loss record).  “This is hardly fair,” say the Browns ownership.  “The other teams are so much better than we; we only got a single win!  This is costing us revenues from ticket sales, jersey sales, etc.  Other teams can woo big-name free agents better than we can and we need to mortgage our future by trading draft picks to get anyone good via a trade.  How can we expect to compete?”  NFL commissioner Roger Goodell agrees: “In order to increase league competitiveness, I hereby issue the following decree,” he says.  “Whenever a team is playing someone worse then them, they must bench their top players at each position.  This will allow teams like Cleveland to be more competitive!”

I do not think anyone would argue that Mr. Goodell is right in his proclamation, that hobbling better teams makes the League more competitive.  It reduces the competitiveness of the League.  It reduces the quality of the product of the League.  The Cleveland Browns are helped by this rule change, make no mistake, but only at the expense of the rest of the League and the consumers of its product (football fans).

Like much of protectionism, the argument for tariffs on the grounds of enhancing competitiveness relies on a half-truth, an economic sophism (to borrow Bastiat’s term).  It relies on the seen effect of the benefit to the protected firm(s), but does not see the unseen costs to everyone else.

On Foreign Ownership

At this Cafe Hayek blog post, commentators Ed Rector and Tony Hart echo similar concerns.  First, Ed:

In other words, foreigners owned 17.46% of US assets in 2000 and foreigners owned 26.41% of US assets in 2009.

What is overlooked in the series of posts on the trade deficit vs returning capital flows is that those foreign-owned US assets earn a return that is presumably paid to those foreign owners.

and now Tony:

So, Griswold tells us about US assets owned by foreigners. What about foreign assets owned by US citizens and businesses? And then compare the incomes going out and coming in.

Both echo concerns that a greater share of US assets (that is, assets that are located in the US), are now owned by foreigners.  For some reason, this is a bad thing (although neither elaborate why).  But there is little reason to be concerned in these numbers.

First, the capital stock of the US (and indeed the world) is not fixed.  The fact that a greater share of US assets are owned by foreigners does not necessarily mean that fewer assets are now owned by Americans.  Indeed, as Griswold’s data (in the linked blog post) show, American-owned assets have been rising, too!  Americans are getting more productive and foreigners want a piece of that pie, too.

Second, the fact that assets are foreign-owned is not, as is often insinuated (to be fair, not by these two comments) a national security threat.  If anything, it reduces security issues.  As economic ties build between areas, then the risk of conflict falls.  Foreigners earn returns on their investments, which makes the cost of going to war higher.  Sure, there may be some assets you don’t want owned by a potentially hostile foreign nation (power plants, weapon factories, etc), but that’s not what’s being bought.  Trust me, the Swedes aren’t going to weaponize their Ikea stores.

Third, in a direct response to Tony’s comment above, the fact that foreigners are investing more into the US than we are investing elsewhere is a good thing.  It’s not a sign of US weakness; it’s a sign of US strength.  It indicates the US holds better opportunities for investments than other options in the rest of the world.  Just logically, it doesn’t make sense that foreign-owned assets make the US weak: no one boards a sinking ship just to plunder its treasure.

Fourth, in direct response to Ed above, the fact that foreigners earn returns on their investments is, again, a good thing.  It means those assets are productive: their producing goods/services valued by Americans, they’re employing Americans (generating payroll and the like); in short, they’re being useful.  Again, this is a testament to the strength of the US economy, not a weakness.  The fact that the returns go to someone on the other side of an imaginary line is meaningless.

The tl;dr version of this post: I fear assets owned by a Chinese person no more than I do assets owned by a North Carolinian.