Tariffs Make Us Poorer in the Long Run

I was drinking last night in Snyder's tavern in West Shokan, and two friends were defending Trump's tariff program. After four Canadian Clubs, I wasn't about to go into the apples-and-oranges example that illustrates comparative advantage; then, one of the friends emailed this Breitbart column defending the tariffs because products made with the protected metals have been in strong demand. 

Comparative advantage is a simple insight: If someone can do something that you can do, even if not as well as you (i.e., so that they are poorer and less productive than you in all respects), it makes sense to have them do the thing or things at which they are most productive or at which you are least productive if it enables you to spend more time on the things on which you are most productive. The total output goes up (their production plus your greater production), and the surplus can be divided.

Studies of comparative advantage have confirmed that it works in the real world. When you shop at Wal-Mart or Target, you benefit from free trade.

When tariffs are first imposed, it is normal for output in the protected industries to go up in the short-term because the effects of making yourself poorer aren’t yet felt. In addition, today’s economy is accelerating due to the monetary expansion of the Obama years. There is high demand as the monetary cycle peaks, which probably enhances the short-term effect on the protected industries. 

The greater demand for home-based products (what Breitbart calls “firms hit by tariffs”) creates short-term employment gain in those few industries. A year or two after employment goes up in the specific industries, the prices of the protected products that they make go up, so there is less money to spend, and demand in other areas falls, so people lose jobs in computers, plastics, barber shops, and so on.

The tariffs make the protected industries seem to do better (as Wall Street has done since the 1970s because of monetary subsidies), but in a few years everything else turns sour. You will have made yourself poorer.

Here is an article by Deirdre McCloskey on comparative advantage that may be helpful.

Tariffs are one example of short-term or focusing-on-the-obvious-but-ignoring-secondary-effects thinking that the famous book by Henry Hazlitt, Economics in One Lesson, explains. It is an easy-to-read book, and I recommend it. It is available for free here.

HL Mencken on American Education

Daniel B. Klein just sent me this quote.  It pretty well sums up what is wrong with American education, except Mencken wrote it around 1920. (See Mencken, H.L. (1987) Smart Set Criticism. Regnery Gateway. Washington, DC, p. 222.)

Think of what the average American schoolboy is taught today, say of history or economics. Examine the specific orders to teachers issued from time to time by the School Board of New York City—a body fairly representative of the forces that must always control education at the cost of the state. Surely no sane man would argue that the assimilation of such a mess of evasions and mendacities will make the boy of today a well-informed and quick-minded citizen tomorrow, alert to error and wary of propaganda. The plain fact is that such an education is itself a form of propaganda—a deliberate scheme to outfit the pupil, not with the capacity to weigh ideas, but with a simple appetite for gulping ideas ready-made. The aim is to make “good” citizens, which is to say, docile and uninquisitive citizens. Let a teacher let fall the slightest hint to his pupils that there is a body of doctrine opposed to the doctrine he is officially ordered to teach, and at once he is robbed of his livelihood and exposed to slander and persecution. The tendency grows wider as the field of education is widened. The college professor of Emerson’s day was more or less a free agent, at all events in everything save theology; today his successor is a rubberstamp, with all the talent for trembling of his constituent gutta-percha. In the lower schools the thing goes even further. Here (at least in New York) the teachers are not only compelled to stick to their text-books, but also to pledge their professional honor to a vast and shifting mass of transient doctrines. Any teacher who sought to give his pupils a rational view of the late Woodrow at the time Woodrow was stalking the land in the purloined chemise of Moses would have been dismissed from his pulpit, and probably jailed. The effects of such education are already distressingly visible in the Republic; let Dr. Wells give an eye to them when he is among us. Americans, in the days when their education stopped with the three R’s, were a self-reliant, cynical, liberty-loving and extremely rambunctious people. Today, with pedagogy standardized and a school-house in every third block, they are the herd of sheep. (Ovis aries).

Junk Debt Increases by 58%--Boomers Are Screwedmers

On May 25 CNBC reported that Moody’s, the bond-rating service, has warned that since 2009 junk debt has increased by 58% and is at an all-time high (h/t Jim Rickards's Daily Proof). Mariarosa Verde and Daniel Gates of Moody's write:

The record number of highly leveraged non-financial companies globally has set the stage for a particularly large wave of defaults when the next period of broad economic stress ultimately arrives...Although the near-term credit outlook is benign and the speculative-grade default rate remains low, the non-financial corporate debt burden today is higher than its peak before the 2008-09 financial crisis.

In other words, the Federal Reserve Bank is setting the stage for a major crash. Verde and Gates add:

A decade of low growth and low interest rates has been a catalyst for formidable changes in non-financial corporate credit quality.

Much of the reason is the low economic growth rate that Fed pump priming and extraordinarily low interest rates have managed to produce. This constellation--low interest rates, increasing default risk, slow growth--comes about because of strong Baby Boomer demand for investment return coupled with the Fed’s deliberate reduction in interest rates to sustain its low-wage, slow-growth economic regime, supported by both the Democratic and Republican parties.

The Boomers should be renamed the Screwedmers. They let the Greatest Generation screw them on Social Security, and now they are letting the Fed screw them on interest rates and future crashes that will occur when the are most in need of assets.

Verde and Gates conclude:

When defaults do eventually spike, credit losses are likely to be elevated, Moody's says. Today speculative-grade companies have some $3.7 trillion in rated debt outstanding, with B1 or lower rated debt accounting for about $2 trillion of this total.

Left-Wing States Move to Subvert Janus v. AFSCME

This June 29 Wall Street Journal article gives a brief historical overview of the litigation that led to the Janus v. AFSCME case decided last week. It goes on to discuss the tactics that Democratic administrations in states like New York and California are using to subvert the legal ruling. These include forced worker orientations, in which new hires are pressured to agree to join the union; allowing workers to opt out of the union only during a brief window period, as during the last 10 days of the year; and making it illegal for groups that oppose coerced unionism to obtain addresses so that they can notify workers of their right to withdraw from the union.

"When it comes to tilting the field in favor of unions, Mr. Messenger says, “California seems like they keep inventing new things.” The same day the court decided Janus, Gov. Jerry Brown signed a state budget with a provision that “the timing of the mandatory orientations is not public record—it can’t be disclosed to the public,” in Mr. Messenger’s words. An earlier law provides that “the names, contact information, of public employees is not a public record, and can only be given to a union.”

Just Walk Away

I received this video from someone who lives in the Town of Olive, near me. This young man, Brandon Straka, is a dynamo. He says it all. Bless him.