NOTE: These posts have been reproduced from my old blog, "Random Notes", because I plan to cite their contents in an upcoming essay. I have finished the essay, but, unfortunately, it cites a lot of essays I have not yet reproduced. So it may take time to find and post all of them. Until then, you will like see a handful of these essays popping up on my blog amid a few new essays.
I am starting to see the same foolish posts once again. It appears that with Obama's victory the protectionists have been coming out of the woodwork. Mostly it appears these are the usual suspects on the left, those union-booster and anti-globalization types who have always had a strong voice in the Democrat party. However, there are also a number on the right. It appears, with the party reeling form the Obama victory, the Republicans are unsure of how to proceed and, as I mentioned before, the protectionist/populist "paelo-con" front is making a play to control the party*.
Let us look at one recent quote, this one from a protectionist of the left:
If you can prove that Obama wants to increase taxes to 90% of income then I will become a conservative I am willing to 50% on Income , if means getting people back to workI have question to most who post hereCan you explain why companies like IBM , who get TAX incentives in the USA is constantly investing in INDIA and China and have created more Jobs in these countries then in the US , while retaining more profits due lower taxes in the USDoes this not go contrary to you stand that Lower taxes for corporations , will lead more creation of more JOBS
Now, this is wrong on a number of points (including capitalization, punctuation and grammar), but as many are not relevant here, I will address it mainly as an example of protectionist arguments, mainly the obsession with jobs above all else. Because, while this particular author is clearly arguing form the left, the basic argument, that companies harm us by "sending jobs overseas", is at the heart of all protectionist arguments, be they from the left or from the (nominal) right.
First and foremost, this post commits the single most common error of mistaking "labor" and "wealth". Let me make this as clear as humanly possible.
Let us imagine two men. One lives in a hole in the ground, naked, without any tools. He climbs form his pit every day to scratch holes in the ground with his fingers into which he puts seeds he has painstakingly extracted form dried husks of grass. He waters them with water he carries in his mouth from the stream and weeds with his fingers. When the seeds finally grow into grain, he grinds it between rocks and then cooks it in a wooden pot he hand carved using flint and wood. The second man lives in a palace attended by a hundred servants, sleeps on silk sheets and has every need met the instant it enters his mind. He does nothing for himself but passes his days in idle enjoyment.
Who is rich?
According to the protectionists, the first man is much richer than the idle man, as he has so much more work to do. In fact, the second man is considered absolutely destitute as he does no work at all and has everything given to him. He would be much more wealthy if he forced others to take all the goods he owns and instead followed the pattern of the first man.
Sound absurd? But it is true. Just think of the arguments offered by those who try to "keep jobs in America".
Let us leave behind the reductio ad adsurdam and all the satire and just look at the most simple arguments. Protectionists argue, in a nutshell, that sending jobs to another country makes us more poor while enriching the other nation. but does that make sense?
Let me start simple. Do you make your own shoes? Hats/ Coats? Cars? Houses? If you allow anyone else to make a good for you, do you think that impoverishes you, or enriches you? Economic theory says the latter. You see, if we concentrate each on one task, then we can do it more efficiently, and thus overall production improves when each individual specializes and then trades for his needs, rather than each of us trying to be entirely self-sufficient.
And we can see this even better when it comes to the products of high technology. Could any individual not only provide for his own food, clothing and shelter, but also build his own car and computer and television, record his own DVDs, make his own movies, record his own music and generate his own electricity to power it all? Once we get beyond the most simple necessities, it is evident that we benefit from entrusting specialists with various tasks, as well as being able to work in groups to produce things such as cars and planes and trains that no individual could produce on his own.
So, if trade works well and makes all of us richer, then why does that change when it crosses national boundaries? If I am better off trading with the guy down the street, or even in another state, then why I am suddenly made less wealthy when I trade with someone in China or India? Why does crossing an arbitrary national boundary suddenly change voluntary and mutually beneficial trade into "exploitation"? Why is it beneficial for a man in Laredo to buy a coat from a factory thousands of miles away in New York, but harmful for him to buy a coat from a factory a mile away in Nuevo Laredo?
And the truth is, there is no harm. Trade is always based on mutually beneficial exchange. When someone is willing to trade, and the other party agrees, they both benefit, as each gets something they value more greatly than what they give up. It makes no difference to the purchaser if he gets his goods from his own nation or another, and it does not harm him if his transaction crosses an international border or not.
Of course many respond that it is not the individual who is harmed, but the nation. However, that is simply wrong. You see, in reality, there is no "nation", just a collection of individuals. The myth of the nation as something independent of its citizens, of the "volkgeist", was part and parcel of the late 19th and early 20th century nationalism that rose to prominence at the same time protectionism was experiencing its heyday. So it is no surprise that protectionists would fall back on this ancient foolishness. It is only surprising that so many would find it credible.
Before I go too far in complaining about nationalist economics, let me show exactly what I mean. The protectionists argue that, while individual consumers benefit from overseas purchases, "the nation" is harmed. But if that is the case, where is the harm? What is the nation but the sum total of all its citizens? If each and every individual benefits from his transactions, and he must as otherwise he would not carry them out, then would not the nation as a whole also benefit? Or is there some way that every citizen of the nation can benefit while "the nation" does not?
Recognizing the difficulty of arguing that everyone is benefiting but "the nation" is suffering, most protectionists adopt a different tack, arguing that the problem is that free trade harms the workers, which is why we start hearing these absurd arguments about a lack of work making us poor. As recent years have seen the US experience unemployment rates at 5% or less this argument has not been as effective as it once was, so we have seen it farther refined. Instead of simply losing jobs, the new argument is that we are losing "manufacturing" jobs and are being left with only "service" jobs, which is leading to impoverishment.
First, let me deal with a somewhat tangential matter, the fetish for heavy industry. There is nothing special about manufacturing jobs. At one time there were many more agricultural jobs, as technology changed, workers moved to heavy industry. Likewise, as heavy industry required fewer workers, due to automation, better equipment, changing demand, and a million other factors, and as lower skill level industry moved to cheaper nations, workers moved to other jobs. That is what we used to call "progress". There is nothing sacrosanct about industry, about farming, or about any job. Work is work, and workers will be employed in whatever capacity consumer demand suggests is most urgently needed.
However, even if we grant there is something particularly noble about tightening nuts on an Astro van or sweeping up metal filings, I have to wonder at the scorn heaped upon "service" jobs. Of course the protectionists and their enablers in the media tend to portray service jobs as burger flipping or cashier positions, but the truth is "service" is an ill defined term. It can cover everything from the kid with a bad attitude steaming milk at Starbucks to a brain surgeon, rocket scientist or NFL quarterback. Pretty much any job that does not result int he output of a physical product is in the realm of service. So all those vilified CEOs who earn "too much" are "service" jobs. So are all those multimillion dollar football, baseball and basketball players. So is every physician, nurse, college professor, lawyer, investment banker and pretty much anyone else wearing a suit to work. So, until the day comes when a mother says "Son, don't become a doctor, get a good job at the steel mill", I will not agree that there is any inherent inferiority in a "service" job compared to heavy industry.
But that is neither here nor there. It helps to show how generally weak the protectionist's understanding of the economy is, or else how dishonest their arguments can be, but it does not, in itself, make their arguments invalid. For that, we need to ask, what does it mean to "lose jobs", and how does it relate to our total wealth?
And the truth is, there simply is no way to "lose jobs". Yes, there is unemployment, but that is the result of market distortions caused by mandatory unions, inflation, minimum wage and other government interference. As economist after economist has pointed out, there is no reason for unemployment to exist outside of government interference with the economy. Labor is the single input required for every endeavor, the one input which cannot be completely eliminated, the one for which there is no perfect substitute. Given sufficient labor we can find a substitute for any other input, but labor itself is unique and in constant demand. Once we free labor being used to satisfy one need, it can be immediately applied elsewhere so long as any needs remain unfulfilled. So there is simply no way that labor should remain on the market.
And history bears this out. Look at the nations which have engaged int he most foreign trade and ask whether they are generally richer or poorer than their neighbors. And, of course, it only makes sense. As my first argument stated, when we specialize and trade for what we want, we all benefit. And the same holds for nations, as many have pointed out for centuries. If a nation stops trying to produce things at which it is not skilled, and instead buys them from another nation, then that nation will be generally wealthier.
Then again, even that is wrong, as it uses the aggregate absurdity of "nations" trading. Again, nations do not trade, individuals trade. So it is even absurd to speak of "nations" having advantages. Yes, in general some nations are wealthier, and so they have more capital invested per individual, and so, in general, more labor intensive jobs will go to other nations. However, even then there will be areas, or even individual firms, in the richer nation with lower investments which may be competitive with poorer nations. And, conversely, in the poorer nations there will be areas with higher costs of living which will not be competitive due to higher labor costs. Except in the case of laws, it is simply inaccurate to talk of nations rather than individual transactions.
But what of those who do lose jobs? Well, the truth is, in a free market, people lose jobs. Does it matter if you lose a job to India or Ohio? Jobs move, industries shrink and grow, some areas have a competitive advantage, even within the same nation. Yes, those jobs which require a large number of people without much education will tend to go to regions where labor is cheap, either within a nation or to other nations. However, that will then free the more expensive labor for tasks which require more education and capital. Yes this will require those who are unemployed to find other work, perhaps to develop new skills, but that is the nature of the free market. A lack of foreign trade does not change that, people still lose jobs.
But perhaps all of this is something of a moot point. I actually forgot the most basic argument, the one everyone seems to forget. Trade is just that, trade. For us to hire foreign employees, we have to pay them, and, in return, they spend that money for things from our nations. As Lord Say wrote a long while ago, despite the use of money, the truth is goods exchange against goods**. Which means we cannot "outsource' to India or China unless they are also purchasing form us. Now, yes, the government claims there is a "trade deficit", but that is just semantics. Goods always exchange against goods. Unless they hoard dollars, the Chinese and Indians eventually have to exchange those dollars for something, and so there is no real trade deficit. The government, by not recognizing the purchase of capital goods, or of tourism expenditures, or purchases of services, or spending for construction in the US, creates these "trade imbalances", but the truth is, except due to floating exchange rates, good exchange against goods, and there is no imbalance of trade***.
I could go on and on, but it seems for every argument I raise there are two more spurious rebuttals. The basics are simple and irrefutable. Specialization and division of labor are beneficial to all involved. Trade never takes place (absent coercion) unless both parties are benefiting from the trade. Economically, national borders are as meaningless as state borders, town borders, or any other imaginary line, national borders differing only because of the existence of tariffs and other added costs.
And if we can agree to all those arguments, then I simply see no way to argue for protectionism. If we benefit from trade and specialization, and that is true inside a nation or between nations, then what possible argument exists to shut off the borders? That someone may lose a job to a lower cost worker? But that is true inside a nation as well. Are we to change the laws so no one loses their job ever? If so, then we will see economic growth vanish.
No, there really is no good argument. However, I don't have the space here to cover all the many arguments I have seen. If you want to see some other similar topic, I included a link in the Postscript to a list of articles on this topic. And, if I don't cover it there, you can always submit your argument, or question, in the comments. I'll do my best to respond to any question or argument raised.
* At the moment, it does appear the party is lurching generally a bit leftward, which can only help the paleo-cons. You see, despite all their protestations of being "the only true conservatives", their policies are much closer to the left than the right. If you doubt that, remove all mentions of Christianity from Buchanan's policies and look at what is left: anti-trade, pro-Palestinian, pro-union, anti-immigration, and ardently opposed to Bush's war on terror. Except for the immigration position, it is the same platform Obama advocated. And, if we include the unions in the Democrat picture, then even the anti-immigration position is an acceptable Democrat position. All of which means the paleo-cons are definitely closer to the mainstream on the left than on the right.
** Yes, inflation and devaluation of currency can warp the exchange rate, but still at some point goods exchange against goods. Unless a currency is devalued to zero, at some point goods in some quantity will be exchanged.
*** Trade "deficits" can also be created by the illusion of nations trading. If China takes dollars and then trades them to India for goods, then India buys form us, the charts show we have a positive balance with India and a negative balance with China, but in terms of total trade, we are in balance, and who cares who in particular buys goods?
Rather than attach a massive list of my earlier writing on protectionism, I will send those interested to my post "Cheap Lighters, Overseas Dumping and Monopolies" which contains an up to date list of all other posts on protectionism and related matters. Much of what appears above can be found in an expanded form in those earlier posts.
I do not agree with government providing money to corporations. However, I do not see tax cuts as "corporate welfare". In fact, I would argue that corporations should not be taxed, as the money earned by corporations will be taxed anyway when paid out as dividends to the owners, meaning to tax it from the corporation is double taxation at the least. In addition, as corporate taxes are then paid either by the customers or in lower dividends, the incidence fo taxation is almost entirely random, and often regressive, at least when passed on to customers. So I would hardly be upset to see corporate taxes end entirely. That being the case, cutting taxes for specific corporations does not bother me.
Subsidies, on the other hand, are a different matter. But that is whole other post.
Originally posted in Random Notes on 2009/01/14.