Where is the Protectionist Love for Harvey?

The damage wrought by Hurricane Harvey has been rightfully lamented by folks all over the spectrum as Houstonians and others suddenly find themselves without food, water, housing, etc (fortunately, according to a report I heard on 106.7 The Fan yesterday, electricity still appears to be available as the storm in Houston has been mainly rain).

However, there is one group who should be out celebrating the scarcity brought on by the storm (and no, I’m not talking about the “disaster relief creates economic growth” people): protectionists scarcityists.

The whole argument for protectionism is that it is scarcity, not abundance, that fuels economic growth.  Scarcity (in this case, preventing the inflow of goods from foreign producers), they claim, promotes growth by giving companies more profits.  This trickles down to us normal people in the form of jobs and higher wages (so they claim), which offsets any price increases.

So, why aren’t scarcityists celebrating Harvey?  The storm has created enormous scarcity of many goods and services, sending prices skyrocketing.  According to the scarcityist theory, this should be quite the boon to the economy!  The profits reaped by those who have the resources will surely trickle down to the rest of the Houstonians and make them all better off than before!  Furthermore, the scarcityists must be denouncing the (metaphorical) flood of bottled water, clothing, and other necessary supplies that charities are sending and distributing to the area (it’s just unfair price competition, you see.  These goods are being subsidized so they can be sold/given away below market price, and some even by the government!).

The scarcityist may object that I am strawmanning his argument, but I refute that charge.  I am not strawmanning, but rather taking it to its logical conclusion.  If the argument applies to trade with China, it also applies to trade with Houston.  Hurricane Harvey is just the scarcityist’s argument writ large and with the scarcity concentrated, and we see the folly of his claims as clear as crystal.  Fundamentally, there is no difference between tariffs erected and a flooded city.

Sorry Scarcityists: Demand Curves Still Slope Downward

At Cafe Hayek, Don Boudreaux writes a response to the scarcityist argument, as he puts it:

[P]rotectionism is justified if enough consumers or voters are willing to pay higher prices in order to help workers.

Don lists three reasons why the scarcityists’ reasoning is incorrect.  Below is my addition of a fourth reason from the comments section of that post:

I’d add a fourth one, one which shows that this scarcityist’s plan to save jobs though higher prices cannot work:

When the relative prices of protected domestic goods rises, then some sacrifices must be made. Scarcityists assume, incorrectly, that all the goods where quantity demanded falls is from the importers rather than the domestic producers, and thus only foreigners’ jobs are harmed. But this is not so; we only import a fraction of our goods. If the relative prices of domestic protected goods X, Y, and Z rise, and if the scarcityists do not change their purchases of X, Y, and Z, then necessarily other purchases of domestic goods that were not subject to import competition (say, goods A, B, and C) will be cut back. For instance: if one has to spend more on sugar, steel, and toys, one has less to spend on dinner out, movies, and baseball games.

The scarcityist may respond by saying “But wait! I am not on my budget constraint. I don’t spend every penny I have. I can afford to spend more.” I have two responses to this: 1) Good for you, but for many of us, we are not that wealthy, and 2) Then that necessarily means you are saving less. By saving less, there are less loanable funds, which means less money for people to borrow to build homes and businesses, persue education, buy cars, etc. So, you’re taking jobs away from people in construction, business, education, automaking, etc. In short, as long as relative prices rise, quantity demanded of something has to fall. Why? Scarcity is still a thing.

In his 1971 book “Economic Theory,” Gary Becker has a neat little proof of this (see pages 21-23 of the 2007 edition). A more detailed proof and discussion can be found here: http://www.jstor.org/stable/1827018


Reexamining the Case for Trade

My latest working paper reexamines the case for international trade.  Here is the abstract:

Since the time of Adam Smith, high tariffs have been decried by economists as counterproductive to a country’s economic growth. However, in recent years, this consensus has come under scrutiny, not just from the political sector but also the academic sector. Using GDP per Capita as a measure of economic well-being and the Economic Freedom of the World Index to measure freedom to trade, I find a distinct positive effect lower mean tariff rates have on GDP per capita. The size of the effect varies on the income of the country, with the strongest effect on the poorest nations and the weakest effect on the wealthiest nations.

As this is a working paper, any and all constructive comments are welcome!

Everyday Economics: Bioshock Edition

On my recent trek between Virginia and Massachusetts (and back), I listened to an audio version of the book Bioshock: Rapture by John Shirley (If you’re looking for something light to take your mind off of things, this is a good book).  The book details the rise and fall of Rapture, a massive underwater city built by Andrew Ryan (a not so subtle jab at Ayn Rand) to escape the “parasitic” governments of the world and build a society dedicated to freedom and free markets.  While the initial goal of Rapture may have been freedom and free markets, as the novel (and the video game that the novel is based on) details, Rapture becomes a totalitarian police state with an extremely wealthy (and often sadistic) upper class, and extremely poor low class, and no one in between.  Some see Bioshock as a refutation of Randian philosophy, however, I will not address that here as I am no expert in Ayn Rand (for an excellent discussion, see The Value of Art in Bioshock: Ayn Rand, Emotion, and Choice by Jason Rose).  I’ll leave that to people far smarter than I.  Rather, I want to address the economic situation of Rapture and discuss, briefly, how that contributed to the downfall.

A few quick disclaimers before I begin:

  1. As far as I know, Bioshock: Rapture is not canonical.  However, it is the only detailed source I can find thus far on the days of Rapture that take place before the video game (which is canon) so I will operate on the assumption that my source material is canonical knowing full well everything I write here could become completely worthless insofar as discussing canonical information (the lessons gleaned from this book are still important, however).
  2. Nothing in this essay should be taken as implying the rise or fall of Rapture is purely economic.  There are many other factors involved (social, political, medical, psychological, etc).  I skip or gloss over these not because I think they are unimportant (quite the opposite, really), but because I simply lack the expertise to discuss them with any confidence.
  3. I will be avoiding using direct quotes in this version of this essay.  The reason for this is simple: I have the audio book, not the book itself.  I can’t easily do verbatim quotes and attribute them to proper pages for citations.  Therefore, the reader should be aware that I am doing this partly out of memory (although I did scribble some notes) and further the reader should assume that whenever I describe what’s happening in Rapture, that is a reference to the work of Mr. Shirley.  The only original material will be my analysis.  Any inaccuracies, either to details or analysis, belong to me and me alone.

The short version of what follows: Rapture cannot be classified in any meaningful sense as a “free market.” It suffers from several deficiencies that prevent us from labeling Rapture as a free market: lack of property rights, lack of free trade (autarky), lack of labor mobility (autarky in the labor market), rejection of altruism, widespread and institutionalized fraud (this issue is speculative based off of interviews with characters within the book but not substantiated by details), and censorship (indirect at first, but more direct later).  In Andrew Ryan’s Rapture, “free market” and “laissez-faire” were not much more than dishonored buzzwords.  It can best be described, in the words of James Buchanan, as “moral anarchy,” (see Moral Science and Moral Order, especially page 190 and Limits of Liberty, especially Chapter 7).  These factors, coupled with other psychological, social, and other factors, lead to the decline, civil war, and eventual fall of Rapture.  Continue reading

Some Links

Scott Sumner points us to some good news on trade for the world.  His conclusion is excellent:

Unfortunately, one major country stands on the sidelines pouting while the rest of the world moves toward ever freer trade. Sad.

JMM: So much for making America great again…

Mike Munger reviews Nancy MacLean’s smear-job new book on James Buchanan and Public Choice

John McGinnis discusses what happens when government moves beyond its core functions.

Mike Rappaport on law and legislation

Mark Perry celebrates Thomas Sowell’s 87th birthday

What Does Protectionism Protect?

What does protectionism protect?

Some claim that it protects jobs, but that’s not true.  By raising the price of the “protected” good, it reduces quantity demanded, thus reducing the need for labor and other inputs in that particular industry.  Plus, by increasing the price of the protected good, it reduces demand from other areas of the economy just to pay for the new price, costing jobs and inputs into those areas as well (eg, if you have $100 and a suit jacket costs you $50, you have $50 to spend on a night out.  If, due to tariffs, the price raises to $100, you now have nothing to spend on a night out if you buy the suit jacket).

Some claim protectionism protects industries/firms; helps them grow.  That’s not true, either.  As Mercatus Center scholar Dan Griswold reminds us: “Protected industries tend be lazy about innovation and customer service because they are shielded from normal market competition – think the U.S. Postal Service.”  Protectionism tends to weaken the protected industries, not strengthens them (this, in turn, could lead to perpetual calls for protection by the industry.  A good example of this is the US sugar industry.  The subsidies and tariffs it receives were only supposed to be temporary, while the new American nation got on her feet.  Almost 300 years later, they’re still around).

Some claim protectionism protects the economy, it “makes us great” by encouraging exports and reducing imports.  This isn’t true either.  As Dartmouth College professor Douglas Irwin reminds us: “a tax [tariff] on imports is equivalent to a tax on exports. Any restraint on imports also acts, in effect, as a restraint on exports.”  Whether you measure economic gain in the number of exports or the total volume of trade, tariffs reduce both, so it can’t encourage economic growth.

So what, then, does protectionism protect?  Nothing, so far as I can tell.  All it does is reduce the number of goods a society can enjoy by increasing prices.  This is why I call protectionism by its proper name: scarcityism.