Economics Was Invented to Refute Trump’s Tariff Arguments We’ve known tariffs are a bad idea since Adam Smith. Monday, March 5, 2018 FEE

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Economics Was Invented to Refute Trump’s Tariff Arguments

We’ve known tariffs are a bad idea since Adam Smit

When Adam Smith wrote Wealth of Nations, it wasn’t to refute the “godless socialists” 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.

Bastiat remade 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.

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.

What is unseen is the money American consumers no longer have when the tariffs are put in place. 

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.

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.

When the ledger is balanced, Americans, in general, are far better off without the tariff.

 

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 patronize those American industries which 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.

The principle applies equally to production as to consumption. The steel and aluminum tariffs proposed this week purport to create jobs in the domestic steel and aluminum industries. But what about the domestic manufacturers who currently buy steel and aluminum 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.

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 subsidize artificially higher wages.

No matter what spurious arguments special interests make in favor of tariffs, they are, at the end of the day, just another tax. 

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!’” Virtually every mercantilist who ever lived made the same excuse, and it doesn’t make any more sense than any of the others. 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 subsidizes 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 favor of a tariff on sunlight to protect manufacturers of LED light bulbs, you can’t be in favor of responding to subsidization of manufacturers in other countries with tariffs on imports entering your own.

No matter what spurious arguments special interests make in favor 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 to respond by placing more taxes on ourselves.

And don’t forget, all the unseen, negative consequences of tariffs apply equally to foreigners. If they are taxing imports on automobiles, their citizens have less money to spend on other products. Their businesses that use imported materials must raise their 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. The ability of foreign governments to protect their industries has a natural limit.

We’ve seen this movie before. The original wasn’t very good, and remakes are usually worse. 

Tariffs are never beneficial to the economy and least of all when an inflationary bubble is about to pop. During the 1920s, the Federal Reserve augmented a natural economic boom with an inflationary monetary policy, turning the boom into a bubble. When the Fed finally began to tighten, the market crashed, and a recession followed. Republican President Herbert Hoover responded by signing the Smoot-Hawley tariff, which made an already-bad situation worse. He then began a series of interventions that differed from FDR’s “New Deal” only in scale.

FDR saw Hoover’s interventions and raised them, resulting in an almost two-decades-long depression. Contrary to conventional wisdom, it did not end because of WWII. The depression 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 Bastiat and Hazlitt start trending next.

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Frédéric Bastiat’s Campaign Manifesto of 1846

June 30 is Frédéric Bastiat’s birthday. For those who love liberty, it is a day to celebrate his masterpieces, including The Law and his essay, “Government,” not to mention some of the best reductio ad absurdum arguments ever (such as the Candlemakers’ Petition and the Negative Railway). But even his fans sometimes forget that he ran for, and held, political office. That is unfortunate, given that what a principled libertarian politician stood for is very instructive.

That is why it is worth using Bastiat’s birthday to consider his election manifesto of 1846, his first try for office (which he lost). The entire manifesto is available online, but for a taste, consider the truncated version below:

To the Electors of the District of Saint-Sever, July 1846

[I suggest] a rallying principle…one simple, true, clear, fertile, practical idea…a party exclusively representing, in all its scope and entirely, the interests of the governed, of the taxpayers.

There are things that can be done only by the collective force or established authority, and others that should be left to private activity.

The fundamental problem in political science is to know what pertains to each of these two modes of action.

Public administration and private activity both have our good in view. But their services differ in that we suffer the former under compulsion and accept the latter of our own free will, whence it follows that it is reasonable to entrust the former only with what the latter is absolutely unable to carry out.

I believe that, when the powers that be have guaranteed to each and every one the free use and the product of his or her faculties, repressed any possible misuse, maintained order, secured national independence, and carried out certain tasks in the public interest which are beyond the power of the individual, then they have fulfilled just about all their duty.

Beyond this sphere…everything belongs to the field of private activity, under the eye of public authority, whose role should be one only of vigilance and of repression of disorder.

If that great and fundamental boundary were thus established, then…On the one condition that he or she did not encroach on the freedom of others, each citizen would fully and completely enjoy the free exercise of his or her physical, mental, and moral faculties.

Freed from all regulating constraint, society would then be in the best possible position to develop its riches, its education, and its morality.

But even if there were agreement on the limits of public authority, it is no easy matter to force it and maintain it within those limits.

Government power…naturally tends to grow. It feels cramped within its supervisory mission. Now, its growth is hardly possible without a succession of encroachments upon the field of individual rights. The expansion of government power means usurping some form of private activity, transgressing the boundary…between what is and what is not its essential function.

Government becomes all the more costly as it becomes oppressive…each of its intrusions implies creating some new administration, instituting some fresh tax, so that our freedom and our purse inevitably share a common destiny.

Consequently, if the public understands and wishes to defend its true interests, it will halt authority as soon as the latter tries to go beyond its sphere of activity…to deny authority the resources with which it could carry out its encroachments.

[This does] not consist in hindering the government in its essential activity…It consists solely in keeping the government within its limits; in preserving the sphere of freedom and of private activity as completely and extensively as possible.

[Beyond that] we would have to pay, not to be served but to be serfs, not to preserve our freedom but to lose it

In [citizens’] interest, let there be good public management of what can unfortunately not be carried out otherwise. In their interest also, let there be complete and utter freedom in everything else.

It is entirely up to the public to decide how, to what extent, and at what cost it means to have things managed, otherwise representative government would be nothing but a meaningless deception and the sovereignty of the people a meaningless expression. Now, having recognized the tendency of any government to grow indefinitely…on the subject of its own limits, if you leave it to the government itself…then you might as well put your wealth and your freedom at its disposal. To expect a government to draw from within itself the strength to resist its natural expansion is to expect from a falling stone the energy to halt its fall.

The organized vigilance of the public…[should] help [government] within the sphere of their legitimate duties, but…mercilessly confine them within that sphere…This natural form of opposition…attacks the government neither in those who hold office…it gets to the bottom of things and pursues evil to its very roots.

If one day a member [said] “Gentlemen, fight among yourselves over power, all I seek to do is restrain it; wrangle over how to manipulate the budget, all I wish to do is to reduce it”…[opposing parties], apparently so bitterly opposed, will very soon pull together to stifle the voice of that faithful representative. They will call him a utopian, a theoretician, a dangerous reformer…they will heap scorn upon him; they will turn the venal press against him.

Anyone who has created a product should have the option of exchanging it, as well as of using it himself. Exchange is therefore an integral part of the right to property. Now we have not instituted and we do not pay government in order to deprive us of that right, but on the contrary in order to guarantee us that right in its entirety. None of the government’s encroachments has had more disastrous consequences than its encroachment on the exercise of our faculties and on our freedom to dispose of their products…based on the most flagrant plunder.

When the state becomes the distributor and regulator of profits, all sectors of industry tug at it this way and that to tear from it a shred of monopoly…by restraining the government you consolidate it rather than endanger it.

It is the inordinate expansion of its power that makes the state have recourse to the most hateful tax invention. When a nation…is forever begging for state intervention, then it must resign itself to being mercilessly ransomed; for the state can do nothing without finance…Does [it] call on its government to intervene in every matter? In that case, it should no longer complain about being overburdened.

I…expect the welfare of my country to result from…our good faith in supporting the government in the useful exercise of its essential powers and from our firm determination to restrict it to those limits. The government has to be firm facing enemies from within and from without, for its mission is to keep the peace at home and abroad. But it must leave to private activity everything that is within the latter’s competence. Order and freedom depend on those conditions.

As a politician as well as a writer, Frédéric Bastiat advocated a government that would, by focusing narrowly on ensuring that individuals “did not encroach on the freedom of others,” guarantee each citizen the ability to “fully and completely enjoy the free exercise of his or her physical, mental, and moral faculties.” And he did so surrounded by a sea of special interests whose plans for piracy he threatened. That took principles and courage. We should remember both on his birthday.

 

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