Thursday, May 22, 2014

The Inevitable Corruption of Protectionism

NOTE: These four essays were reproduced from my now defunct blog Random notes, as they are referenced in my upcoming post on elective government and monarchy.

It is no secret that I am no fan of protectionism. I have been critical of almost every aspect of the matter. It manages to fail to understand trade, the purpose of labor, the free market, the nature of exchange, the function of government, individual freedom, division of labor, and pretty much every other aspect of economics you could imagine. (See postscript for a long list of citations.) However, there is one aspect I failed to mention, and that is increased opportunity for political corruption inherent in protectionism.

Now, of course that should not be surprising, I have often argued that giving government powers it should not have leads to increasing corruption. ("Transparency, Corruption and Reform", "Funding and the Corruption of Science", "Government Intervention and the Purpose of Government", "Symmetry and Asymmetry in Government") In addition, as there is the fact that there is no rational, objective way to impose tariffs or quotas, and so, as they are effectively arbitrary ("The Limits of "Scientific" Management", "Bad Economics Part 6"), there is no way in which they can be applied except based on whim, caprice or corruption. Since there is no way to tell whether the arbitrary values established are based on bribery or the whim of the regulator, there is also very little risk in accepting corrupt offers, making it even more likely that corruption will take place. 

However, the single biggest factor in protectionist schemes is the one that actually is sometimes mentioned in conventional economics texts, and that is the fact that., while there is a relatively large payoff for a very few beneficiaries, the costs are almost always small and widely distributed, which means even were there an interest in fighting protectionism, it is not economically feasible for any individual to spend much, while the beneficiaries can afford much more, making for very unequal struggles.

The example traditionally given is sugar, though I think economists forget many details. 

Sugar is seen as a good example, as, seen from the perspective of a consumer good, it shows almost exactly the point economists are trying to make. Protective tariffs and import quotas increase the cost of sugar maybe 50%. But, as consumers spend maybe $100 a year on sugar itself, and maybe twice that on sugar containing items (which they may not consider as expensive due to sugar tariffs), at most, consumers see $150 a year in increased costs. And so, even if 1000 angry consumers dedicated every cent to protesting, that would amount to $150,000. Almost nothing in terms of political activism.

On the other hand,it is likely the US sugar manufacturers would not exist at all without protection, as the difference in cost between Caribbean sugar and US sugar is more than high enough to offset import costs, making it likely US sugar would disappear without protection. That being the case, it is likely the industry would spend almost every dime to maintain these tariffs and quotas, which obviously would far outclass anything the consumer could muster. Not to mention that the industry, fighting for survival, would be much more passionate about the struggle than consumers looking to save 33% on a relatively minor expense.

What the economists miss in this example, and others, is that consumers are not always the buyers, or to be exact, protection also touches on goods purchased by producers, including sugar, and, though the logic is much the same, in some ways it differs. 

To return to sugar, we have candy makers, soda companies, and other industrial consumers of sugar. Now, as they too pay the 50% price increase, but buy in much larger quantities, we would expect them to have more interest than the consumers in fighting to end tariffs. (We saw this to some degree with fights several years ago over steel tariffs, pitting industrial consumers versus steel makers.) What makes it unlikely the industrial consumers will prevail are two factors. First, often industrial consumers have their own tariffs and quotas, protecting their goods, and making it difficult to argue against tariffs, lest theirs be attacked as well. In the end, they must decide if the savings are more beneficial than the loss of the protection, and they rarely do so.

In addition, it is unusual for a single consumer, even a large one, to buy more than 10% of the output of a given producer. Or even 10% of the market. And thus, though not on the same scale, we have the same problem we had with sugar. The industrial consumer still has less money he is willing to dedicate to the fight than the producer does. His savings will never match the gains of the producers, and so he will, in a strictly financial sense, always be at a disadvantage*.

I could go on, but the pattern should be obvious, a tariff or quota can easily be quite profitable for an industry, may even prevent a failing industry from going under, or create an industry where none existed before. On the other hand, the cost is largely diffuse and small, making it unlikely to raise a serious opposition, or to create enough political agitation to cause the sort of political stir regulators detest**.

And looking at it from that angle there is also a very real attraction to protectionism. First, the rhetoric of protectionism is nonsense, but it is well known nonsense which can apply anywhere. ("Protectionism", "Fear of the "Big"", "Beware Populist Deception", "The Wrong Reform") When a tariff or quota is questioned, one need only say it is to save jobs, protect an industry, compensate for foreign dumping, level the playing field, or any of a dozen other meaningless phrases and all will be fine. In addition, there is no rational way to tell which industries are in need of protection and which aren't, nor to tell which protection is valid and which is not. So, unless the critic is willing to argue against protectionism itself, which I can tell you is not a popular position despite the logic in its favor (even among supposed conservatives -- see "The Political Spectrum"). All of which means that there is very little chance of the media or political opposition raising any scandal over a specific protectionist measure unless they can clearly show evidence of bribery. Which means, with but a minimal amount of caution, corruption is almost worry free.

Protectionism is hardly unique in this regard, but it does provide a good example of three reasons government tends to become corrupt, especially as it grows larger. First, as the amount of power grow, the amount of money one can make grows, making it both more profitable to pay off government officials, and making the amounts paid higher, and tempting to more and more office holders. Second, as government power expands into ever more areas, the rules governing the exercise of that power become more arbitrary, especially as the justifications for such intervention become more tenuous. As we can understand less about the reasons for government involvement, it becomes easier for those who want to do a favor for wealthy friends to justify doing so, as the standards are arbitrary enough that it is impossible to argue that they are not acting reasonably. After all, when the legitimate activities establish numbers based on nothing but whim or guesswork, how can you tell that from numbers paid for by industries?

Which brings us to the third reason, one we did not discuss, but an interesting one nonetheless. As government grows, not only do we increase the number of people in government, creating more and more places for interested parties to try to gain influence, but we also increase the number of unelected bureaucrats, especially life long faceless civil servants.  Underpaid, with little chance for advancing far, but possessing power valuable to many outsiders, these are very tempting targets for those who would buy government favor. In addition, as their functions become more specialized, it is unlikely many of those above their position understand precisely what they do, making it easier to slip by arbitrary decisions. (By which I mean, arbitrary by the already arbitrary standards of government regulation.) And finally, as these bureaucrats are anonymous, unlikely to attract media attention, and unknown enough that their activities are invisible to the world at large, corruption can persist for quite some time invisibly***.

And that is something all people must bear in mind. While protectionism does cause economic harm, and creates favored firms which enjoy unfair privileges ("Anti-Business Businesses", "Bad Economics Part 17, "Anti-Business Nonsense", "Moral For Me, But Not For Thee", "Antibiotics, Automobiles and the Free Market"),not to mention the way government involvement distorts and damages the interactions between people ("How the Government Corrupts Relationships", "Bureaucratic Management and Self-Policing")  those arguments do not always make an impression. However, if we make a point of showing that ever larger government, in addition to other harms, also creates ever more corruption, leading eventually to a state where "success" can only be bought from the government, and individual actions are meaningless, unless granted government approval, I think we could have a winning argument. Many people are strangely comfortable with big government and intrusive laws, but very few like corruption, or want to imagine the government as all powerful. And so this argument may actually gain some ground if presented properly.


* The few times we have seen exceptions, it was almost always under two unusual circumstances. First, situations where the consumer had inordinate political influence, such as automakers, who could call on union clout. This political imbalance could easily compensate for the unequal funding. Second, some industries, despite having less money at stake, place more emphasis on it. Industries which are on the verge of collapse, or where competition, especially with foreign producers, requires stringent cost cutting, can often drive a company to place more money on the line than would normally be the case. In addition, some consumers do realize that a large investment in the present may yield a larger payment in the future, and so will dedicate more, though others realize even a temporary win can be turned back quickly, and so would be unwilling to take the risk.

** As I discussed in my many essays on bureaucracy ("Bureaucratic Management", "The Bureaucratic Mind", "Bureaucracy Revisited", "The Inevitability of Bureaucratic Management in Government Enterprises"), government agencies fear nothing so much as drawing attention. So long as it will not cause political trouble, they are willing to undertake any action, but once it risks political scandal, they will refuse to do anything. In this case, as the risk is almost nonexistent, it is very easy to induce them to pass any tariff one desires.

*** There are always internal audits and audits by the GAO and similar oversight agencies. However, as I said before, many times the standards used are so arbitrary it is impossible to determine if a choice is valid or not. Especially as we reach "policy level" bureaucrats, it is almost impossible to tell, as policy is often made based on opaque requirements, which are identical in appearance to purchased favors. And so, even with oversight and audits there are many problems with identifying corruption.



My earlier writing on protectionism can be found at:
Exploiting Workers?
The Shortcomings of Pragmatism
The Theory That Wouldn't Die
Beware Populist Deception
Fear of Trade
The Limits of Econometrics
The World's Oldest Myth
Authoritarian Oil Talk
I Have Seen The Light
Free Trade, Employment, Outsourcing, and Protectionism
When Help Hurts
Pragmatism Revisited
Misplaced Blame and A Power Play
Remember I Predicted It
Inescapable Logic
Smaller Government , Fair Weather Friends and Special Cases
Cheap Lighters, Overseas Dumping and Monopolies
Jobs, Jobs, Jobs, and More Jobs
Capital Investment
Fairness and the Free Market
More Proponents of Protectionism
John Stossel Imitates Me Again
Has No One Heard Of Lord Say?
Retaliatory Tariffs
Clarfiying My Argument
The Limits of "Scientific" Management
The Endless Cycle of Intervention
Exploited Labor
Planning For Imperfection
Protectionism Right and Left
Unfair Advantage and Foreign Trade
"Fair Trade"
War Stimulates the Economy? Let's Nuke San Francisco!
Bad Economics Part 6
Bad Economics Part 14
Clarfiying My Argument
Production and Consumption 
Capitalism and Its Consequences 
Put Your Money Where Your Mouth Is, Or The Logical Implications of Price Gouging Laws 
Moral For Me, But Not For Thee 
Defending Freedom? 
Clarifying a Reality of Capitalism
There are some additional posts on related matters, such as populism, fear of trade, even "Greed Versus Evil" and "In Praise of Contracts", which related to the topic fairly directly, but as they did not seem precisely on topic I left them off the list.

Originally posted in Random Notes on 2010/06/20.

No comments:

Post a Comment