Essential Economics for Politicians

Trade Retaliations Make Your Own Country Worse Off

But what about other countries that impose import tariffs against our goods to “protect” their own industries and employments? Should we not respond with retaliatory tariffs and related import restrictions to teach them a lesson? If we do we only injure ourselves, in so responding to the trade barriers erected by other countries.

A British economist, Henry Dunning MacLeod, gave a vivid reply to the argument for a retaliatory tariff back in 1896. He said:

“By the method of retaliatory duties, when the [other country] smites us on one cheek, we immediately hit ourselves an extremely hard slap on the other. [The other country by its import duties] does us an injury, and we, by retaliating, immediately do ourselves a great deal more. The true way to fight hostile tariffs is by free trade.”

Retaliating with counter tariffs merely makes the goods previously purchased from the foreign country more expensive for the consumers of your own country, lowering their standard of living through higher prices and a smaller variety of goods from which to choose. And by reducing the sales earned by the foreign producer in your country, he has less revenue from which to buy your country’s exports, with a negative effect on those sectors of your own economy.
 
Donald Trump Refuted by a South Carolinian – in 1830!

I earlier quoted from President Trump’s remarks during his recent visit to Charleston, South Carolina. Let me quote a South Carolina economist, Thomas Cooper (1759-1839), who published the following words in his 1830 Lectures on the Elements of Political Economy, in what became one of the most widely used economic textbooks at that time in the United States. Dr. Cooper was a president of South Carolina College and a Professor of Chemistry and Political Economy. He said:

“The whole use of foreign trade is to import commodities that are wanted, at less cost, than they are produced at home. This is the very basis and essential character of it. Hence, the principle of restrictions and prohibitory imposts [tariffs], forbidding an article into being introduced from abroad because it can be had cheaper from abroad – goes to the utter annihilation of all foreign commerce . . .

“The restrictive system tells us in fact, that we shall greatly profit by being confined as prisoners within our own houses, without intercourse out of doors; that is it our duty to let our domestic neighbor grow rich on our credulity, and persuade us to buy from him an inferior article, at a higher price . . .

For [this] principle being adopted, where is it to stop? To talk after this, of our being the most enlightened nation upon earth, is a satire upon ourselves more bitter than our own enemies have it in their power to utter. To be governed by such ignorance, is indeed a national disgrace.”
 
Unknown-2-18-300x141.jpeg
 
Mexico currently sends more than 80 percent of its exports to the United States: cars, auto parts, machinery, electrical equipment, medical instruments, oil, and fresh and processed fruits and vegetables, among other goods. In all, Mexico exported more than $316 billion in goods and services to the United States in 2015, the Office of the U.S. Trade Representative reported.

A 20 percent tariff would crush some of these industries.
 
The United States would suffer, too. Mexico is our third-largest trading partner, importing more than $267 billion in U.S. goods and services in 2015. Even if Mexico does not reciprocate with tariffs of its own, the United States would also be hurt. Just not as much as Mexico, since U.S. exports to Mexico account for only about 13 percent of total U.S. exports — not 80 percent.

The threatened 20 percent tariff is huge. By comparison, the simple average tariff rate on Mexican goods was around 4 percent prior to implementation of the North American Free Trade Agreement (NAFTA); it has declined to about 0.5 percent today.

Since the recent great recession, the Mexican economy has expanded at an average rate of 3.2 percent per year. The U.S. economy, by comparison, has grown an average of 2.1 percent per year.

The growing Mexican economy increased job opportunities, pushing the unemployment rate down to 3.4 percent in December 2016. It also triggered a period of reverse migration, as tens of thousands of Mexicans living in the United States returned home.

Since 2009, in fact, the number of Mexicans returning home exceeded the number of Mexicans entering the United States by approximately 140,000, according to the Pew Research Center.

A 20 percent tariff would put the brakes on Mexico’s expansion and likely reverse the migratory trend, as Mexicans, both legally and illegally, seek economic opportunities in the United States.
 
Trade barriers “dumb down” our economy by undoing the good work of our best engineers, scientists, and entrepreneurs. The most creative and best-trained minds in America developed the jet engines, the containerization technology, and the Internet and global telecommunications that have done so much to promote the growth of global trade and output.

In contrast, trade barriers are a kind of anti-technology. The mind-numbing columns of arbitrary tariff rates in the Harmonized Tariff Schedule and the tangled regulations that limit trade and investment stand in opposition to decades of technological advancement. We find a way to move goods, services, and capital around the world faster, more efficiently, and at lower cost, only to watch the politicians in Washington throw sand into the gears by erecting artificial barriers to commerce.

Excerpted from Dan Griswold’s 2009 volume, Mad About Trade.
 
Critics have argued that U.S. multinationals are “abandoning” the home country and moving technology and jobs offshore through foreign operations and participation in global supply chains. Actually, the reverse is true: through increased firm-level competiveness enhanced by the key U.S. role in global supply chains, U.S productivity and living standards are higher today than they would have been otherwise.
 
Here’s a letter to the Washington Post:

Charles Lane deserves applause. Not only does he expose the radical-left-wing origins of the Trump administration’s proposal to change the way that goods transshipped through the U.S. are accounted for in trade statistics, Mr. Lane also reveals the utter meaninglessness of bilateral trade ‘imbalances’ – such as America’s trade ‘deficit’ with Mexico (“Trump’s attempt to massage economic data isn’t new. But there’s a better way.” February 24th).

But I fear that a third valid point made by Mr. Lane will go unnoticed – namely, that the Trump administration is mistaken to insist that no value is added in the U.S. to goods transshipped through the U.S. to other countries. We can see the administration’s error clearly if we ask ‘Why do foreign producers first ship their goods to the U.S. rather than directly to these goods’ ultimate destinations?’ The answer must be that there is value to foreign producers in transshipping their goods through the U.S. Therefore, supplying transshipping services is a valuable American contribution to the global economy.

Such transshipments require the specialized services of American ports and warehouses – specialized services for which foreign merchants pay. To conclude that, because transshipment services don’t alter the physical shape or contents of goods, these services aren’t a valuable economic contribution makes no more sense than to conclude that, because the services of truck drivers don’t alter the physical shape or content of goods, the services of truck drivers aren’t a valuable economic contribution.

Just as farmers do not deliver their produce directly to the homes of final consumers but, instead, to warehouses and shippers who add value (and who profit) from supplying storage and shipping services, many foreign manufacturers do not deliver their products directly to the countries of final destination but, instead, to American warehouses and shippers who add value (and who profit) from supplying storage and shipping services. It would be deeply misleading for the trade accounts to fail to register the value of these services.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
 
The Source of Systemic Risk

It is government intervention into markets, borrowing and printing money to sustain currency values and debt prices, that allows bubbles to inflate systemically, causing a financial crisis when they burst. That’s the conclusion of Reinhart and Rogoff, This Time is Different: Eight Centuries of Financial Folly (2011).

As the head of the FDIC, Sheila Bair argued that the sub-prime lending debacle would not have occurred had the regulators simply maintained traditional capital requirements and lending standards. Regulators, particularly the Fed and Treasury, were deeply implicated in creating the crisis and hence intent on a massive bailout. Lacking sufficient budget resources and facing angry taxpayers, they resorted to the most opaque solution, to re-inflate the asset bubble this time in both houses (to avoid trillions more in financial institution losses and global failure) and stocks (to keep consumer spending up and the economy afloat). The multi-trillion dollar cost was shifted to savers whose interest earnings evaporated.

Every insider account portrays a dysfunctional, unaccountable regulatory structure that any private insurer would label “irrational”. But politicians didn’t hold regulators accountable. Instead, the subsequent reform effort, a 1,500 page bill named for the Two Congressmen most implicated in the crisis, Dodd and Frank, spawned 22,000 pages of regulation, rewarding regulators by covering up and doubling down.
 
Without Discipline Democracy is Threatened

The U.S. financial regulatory system may look like the product of a maniacal mob, but it was made fragile by political design. Politicians aren’t necessarily irrational, but they face incentives to favor constituents (and patrons), and they avoid taxpayer accountability by raising money through opaque means, like issuing debt and/or providing implicit or explicit debt guarantees. Banks, and more recently the Fed, buy this debt or it is sold to foreign governments in return for exports. Undisciplined, government intervention erodes market discipline and feeds on itself
 
Actually, Repealing Obamacare Wouldn't Kill Anyone

https://fee.org/articles/actually-repealing-obamacare-wouldnt-kill-anyone/

The best statistical estimate for the number of lives saved each year by the Affordable Care Act (ACA) is zero. Certainly, there are individuals who have benefited from various of its provisions. But attempts to claim broader effects on public health or thousands of lives saved rely upon extrapola- tion from past studies that focus on the value of private health insurance. The ACA, however, has expanded coverage through Medicaid, a public program that, according to several studies, has failed to improve health outcomes for recipients. In fact, public health trends since the implementa- tion of the ACA have worsened, with 80,000 more deaths in 2015 than had mortality continued declining during 2014–15 at the rate achieved during 2000–2013.

 
  • The Affordable Care Act has led to substantial increases in Medicaid enrollment but shows no effect in the aggregate on private insurance coverage; a lower share of non-elderly Americans had private insurance in 2015 than at the start of the recession in 2007–08.
    • Economic recovery, not the ACA, has driven changes in private insurance coverage: during 2007–10, total employment fell 5.5% and private insurance coverage fell 7.0%; during 2010–15, total employment rose 8.8% and private insurance coverage rose 9.5%.

    • The share of non-elderly Americans with private health insurance fell from 66.8% in 2007 to 65.6% in 2015.

    • By contrast, the share of non-elderly Americans enrolled in public insurance, primarily Medicaid, has increased from

      18.1% in 2007 to 25.3% in 2015, accounting for the entire reduction in the uninsured share of the population.

      https://www.manhattan-institute.org/sites/default/files/IB-OC-0217.pdf
 
We Don't Need Fannie and Freddie; We Need Freedom

https://fee.org/articles/we-dont-need-fannie-and-freddie-we-need-freedom/

Take away Fannie and Freddie’s capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size. Equity of at least 5 percent of total assets should be their required leverage capital ratio. …Given their undiversified business, something more might be prudent. In any case, the hyper-leverage which allowed Fannie and Freddie to put the whole financial system at risk needs to be permanently ended. …Designate them as the Systemically Important Financial Institutions (SIFIs) they indubitably are. Fannie and Freddie…have conclusively demonstrated their ability to generate huge systemic risk.
 
You must log in or register to reply here.
Back
Top