The Tendency toward Self-Destructive False Equivalence

During the past year, I have heard many advocates of protectionism claim that without tariffs trade is not fair.  The Chinese have tariffs, so we need to have tariffs as well in order to make trade fair.  Trade must be equivalent. If they buy from us, we need to buy from them.

This reasoning makes as much sense as this:   Since I buy from Wal-Mart but Wal-Mart doesn't buy from me, I should stop buying from Wal-Mart.  It isn't fair that trade is one way.

That is mistaken, of course. If we buy from the Chinese, but they do not buy from us, the dollar will become weak, and the Chinese currency, the yuan renminbi, will become strong. The Chinese goods will become expensive, and Americans will stop buying them. That has not occurred because of the policies of China's communist dictators.

China's communist dictators believe that if they do not subsidize demand for their manufactured products, then their regime may collapse.  If rural inland farmers who have migrated to the cities find themselves unemployed, then they will riot.  As a result, the communists depress wages.  In accordance with the law of supply and demand, low wages stimulate employment.  The migrant farmers do not realize that their $8,000-a-year paycheck is small.  They do not know that Americans who are less productive than they are earn $40,000 a year.  

The Chinese use a few methods to keep wages low and to make their urban migrants suffer in exchange for social passivity.  These include printing ever-larger amounts of yuan; using much of the printed yuan for valueless real estate, ghost cities, and pet projects;  suppression of the yuan by directly purchasing US dollars; purchasing treasury bonds with purchased US dollars; and tariffs. 

These are self-impoverishment strategies: They make the average citizen poorer because they weaken the yuan.  At poorer wages, employment is stimulated, and citizens are too busy to riot, but most are poorer.

In exchange, Americans benefit from the option to purchase inexpensive merchandise that is cheaper than we could purchase without China's self-impoverishment strategies.  The cost of that is that some manufacturing plants close, but the benefit outweighs the cost.  If every American spends more on manufactured goods, the cost is enormous; if there is a 20% increase in manufacturing employment, the benefit is small. 

Americans follow similar but more moderate self-impoverishment strategies.  For instance, America's Federal Reserve Bank prints lots of paper money and hands it to unproductive Wall Street stock jobbers, investors who are so incompetent that they required a $29 trillion bailout ten years ago and continue to require ongoing monetary subsidization.  

The ongoing subsidization of Wall Street makes Americans poorer, of course, because someone has to pay.  At poorer wages, Americans enjoy full employment, but we don't go as far as the Chinese because our farms have been integrated into the modern economy.

Nevertheless, Wall Street benefits from other self-impoverishment policies. The subprime crisis and excessive investment in technology both have benefited investors at the expense of American workers. However, Wall Street does not benefit from tariffs and trade impediments, which are also a self-impoverishment strategy.

The decision to establish tariffs would ordinarily make Americans poorer; however, do not underestimate the stupidity of the Chinese.  They may decide to make their citizens poorer still by further purchasing additional dollars.  This may result in Americans' becoming richer as the dollar strengthens; however, there will be further disinvestment in domestically produced importable merchandise--the opposite result of what Trump's supporters want.

The tendency toward self-destructive false equivalence is seen on the left as well as among Trump's supporters. Many leftists make this argument: America is the only country to have a political commitment to freedom; isn't that a reason to end the political commitment to freedom?  Well, yes, the rest of the world has a history of gassing dissenters and Jews, and left-wing, social democratic regimes are in that long tradition.  The left has a long history of self-destructive, delusional false equivalence. It is sad that the majority of Trump's supporters have adopted it as well.

Free Trade Is Not America's Problem

In a recent article in Human Events.com (h/t Glenda McGee) Pat Buchanan gives an incisive analysis of the faltering neo-conservative, "Rockefeller Republican" movement within the Republican Party. He lyrically depicts professional Republicans' attitudes toward the Tea Party movement as those of plantation owners toward their field hands.  I appreciate Buchanan's Populist writing, but Populism is part of the problem, not the solution. 

In particular, Buchanan does not offer a coherent model of trade.  He couples his attack on the neo-conservatives with an attack on free trade, or at least what seems to be an attack on free trade. He does not articulate a rational position. If his position is protectionist, he is suicidal. If he is in favor of a laissez faire, zero tariff trade policy as preferable to the various treaties he mentions I'm all for it. Also, I wouldn't mind eliminating NAFTA which just creates a different kind of trade barrier. WTO (the later name for GATT) is another story. It has pushed the world toward lower tariffs all around. This ought to stimulate the world's economic health. Americans should be able to generate new jobs through entrepreneurship and imagination. That they haven't isn't the fault of reducing trade barriers; it is the fault of a fascist economy that inhibits creativity and entrepreneurship. If Buchanan is in favor of dismantling the blockages: the income tax, the Fed, government regulation and the like then I am with him. But I don't agree that trade is the source of our problems.  Creating trade barriers is just another way to subsidize sclerotic industries and unproductive work.

Free Trade Petition

Nigel Ashford of the Institute for Humane Studies has sent me the following e-maill about a Free Trade Petition for academics:

>The Atlas Global Initiative for Free Trade, Peace and Prosperity is circulating an international petition in support of free trade available in over 20 languages. The petition will be launched on April 1 at the G20 summit in London. The organizers hope that academics of all disciplines will sign the petition to help avoid an era of harmful economic nationalism. For more details and to sign the petition, see the links below.

http://atlasnetwork.org/tradepetition/

The petition reads as follows

>Free Trade Is the Best Policy

>The specter of protectionism is rising. It is always a dangerous and foolish policy, but it is especially dangerous at a time of economic crisis, when it threatens to damage the world economy. Protectionism’s peculiar premise is that national prosperity is increased when government grants monopoly power to domestic producers. As centuries of economic reasoning, historical experience, and empirical studies have repeatedly shown, that premise is dead wrong. Protectionism creates poverty, not prosperity. Protectionism doesn’t even “protect” domestic jobs or industries; it destroys them, by harming export industries and industries that rely on imports to make their goods. Raising the local prices of steel by “protecting” local steel companies just raises the cost of producing cars and the many other goods made with steel. Protectionism is a fool’s game.

>But the fact that protectionism destroys wealth is not its worst consequence. Protectionism destroys peace. That is justification enough for all people of good will, all friends of civilization, to speak out loudly and forcefully against economic nationalism, an ideology of conflict, based on ignorance and carried into practice by protectionism.

>Two hundred and fifty years ago, Montesquieu observed that “Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities.”

>Trade’s most valuable product is peace. Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.

>Trade promotes peace by encouraging people to build bonds of mutually beneficial cooperation. Just as trade unites the economic interests of Paris and Lyon, of Boston and Seattle, of Calcutta and Mumbai, trade also unites the economic interests of Paris and Portland, of Boston and Berlin, of Calcutta and Copenhagen – of the peoples of all nations who trade with each other.

>A great deal of rigorous empirical research supports the proposition that trade promotes peace.

>Perhaps the most tragic example of what happens when that insight is ignored is World War II.

You can sign the petition here.

Bill and Hillary Clinton at the Emerson Resort and Spa

I exercise at an exclusive hotel in the Catskills, about 15 minutes from my home, called the Emerson Resort and Spa. Dean Gitter, a visionary entrepreneur who aims to turn the central Catskills into a gaming center, developed the hotel. It is truly a pleasure to be able to work out in a world class hotel, which boasts a beautiful spa as well as a first class gym. The pleasure is enhanced by the Emerson's generosity in extending reduced rates to the good people of the Woodstock-Pine Hill region in the east-central Catskill Mountains.

On Tuesday I was working out at about 5:00 pm and was the only one in the gym. This is part of the joy of being a professor in August. The door opened and I spied someone who looked like Hillary Clinton. The door opened further and Bill Clinton stuck his head in the door. I said "hi" and he did not really respond. About 1/2 hour later as I was nearing the end of my nautilus circuit a secret service agent came in and looked over the weights. About a dozen secret service agents were standing in the lobby when I left.

I did not blog about this until Thursday morning as I did not want to disturb the Emerson's confidentiality. The Catskills badly need exposure of this kind.

I did not get a chance to speak to Bill Clinton, and I have thought for two days what I would have said if I did. This is it. America's relationship with China has not been adequately managed. There will be a serious danger of a nuclear war in the 22nd century. I do not know this for certain, nor does anyone else know or not know. But it is more than a slim chance.

In 2007 Business Network (bnet) quoted former Secretary of State Henry Kissinger (Kissinger was Secretary of State under President Richard M. Nixon.):

''The center of gravity of the world is moving from the Atlantic to the Pacific. The key countries of the world are mostly located in Asia, or will be in the next 50 years,'' he said in a speech about future Sino-U.S. relations.

"When the center of gravity moves from one region to another and another country suddenly becomes very powerful, what history teaches us is that conflict is inevitable," he added.

The country Kissinger is describing is China. Because of today's important concerns about the Middle East and terrorism, the management of the Chinese relationship has been overlooked. The current Olympics highlights Chinese growth.

Kissinger adds concerning Chinese growth:

"There is nothing we can do about it, there is nothing we can do to prevent it, there is nothing we should do to prevent it."

I am fairly good at timing the stock market, and not too many people can say that. Dr. Kissinger has a point. I cannot prove it, but I do believe that there is a risk of nuclear war with China in the 22nd century IF we do not begin to manage the relationship with China more intelligently.

I would have urged President Clinton to make use of contact that he has with Chinese officials to educate them as to the advantage of the path of economic growth, free trade, and peace. The country that innovates fastest is the one that shows that it is best, not the country that displays the greatest military power. David Ricardo offers the Chinese a model that they have not contemplated sufficiently in their history.

President Clinton, please tell the Chinese leadership that a path of freedom, free trade and intellectual expression, as opposed to government control of "salt and iron" and military power, will prove Chinese excellence. I am certain that Mr. Clinton will have the opportunity to interact with high-level Chinese officials in the coming years. He can make an incalculable contribution to America's future by helping the Chinese to conceptualize the path to ascendancy.

Obama and Clinton Vie to Impoverish America

There is little question of the comparative advantage of free trade. While specific jobs or professions may be lost or gained due to trade, the net advantage is necessarily positive. Were it not so, the trade would not occur. Two centuries ago the classical economists such as Ricardo and Smith showed that relative price differences among countries create opportunities. If every country focuses on the economic activities at which it is best, the world becomes more productive. Over the long term the higher productivity is translated into higher wages and wealth. In contrast, the arguments that oppose trade are nationalistic and emotional.

At the extreme, countries like North Korea or the communist countries of the immediate post-World War II era that have attempted economic self-sufficiency or autarky have become impoverished. Likewise, countries with substantial protectionism such as India experience high levels of starvation. India, with six decades of protectionism and a high level of income equality leads the world in child starvation. Similarly, the British Corn Laws in the 19th century led to mass starvation in Ireland (with over one million dead). The argument against free trade is the argument for public impoverishment.

It is not surprising that Barack Obama and Hillary Clinton, two economic illiterates, compete to proclaim their opposition to free trade. Yahoo! reports that Obama questions Clinton's anti-free trade credentials. With economic illiteracy among the public, shoddy education, an ignorant mass media and a corrupt Congress, our government aims to impoverish the average American:

PITTSBURGH - Democratic Sen. Barack Obama on Monday questioned rival Sen. Hillary Rodham Clinton's opposition to free trade agreements that some voters contend has eliminated thousands of U.S. jobs and mocked her weekend visit to an Indiana bar as pandering to the working class.