Saturday, January 08, 2011

10 Problems With Free Trade Among U.S. States

DaveinHackensack says he would like to see me debate Ian Fletcher on free trade, based on Fletcher's article "Ten Problems With Free Trade."

Well, let me start the debate by doing some editing of the Fletcher article (starting with a new title "Ten Problems With Free Trade Among American States"), my additions appear in bold below to illustrate my position as follows:  The same arguments against free trade among nations should logically follow as arguments against free trade among American states, counties, cities, or individuals.  That is, there is nothing really special or unique about an imaginary line called a national border that makes it economically different than an artificial line called a state border.  The economic benefits of free trade have nothing to do with whether a buyer and seller are on the same side, or different sides, of imaginary lines called national, state or county borders.  

Bottom Line: To argue against free trade among countries, one would also have to object to free trade among American states, counties, cities and individuals, see my edits below of Fletcher's article that hopefully make this point. 

"There is a myth in wide circulation that the superiority of free trade among American states is simply a settled question on which all serious economists agree. The flip side of this myth, of course, is that anyone who criticizes free trade among states must either be ignorant of economics, or the spokesman of some special interest which hopes to benefit from trade restrictions. Such critics are not only wrong, the story continues with admittedly impeccable logic, but profoundly worthy of public contempt, as they are necessarily either dumb or corrupt.

Unfortunately, this myth is just that: a myth, promoted by special interests (and millions of consumers) which benefit from free trade among American states, whatever the harm to the rest of the economy. Serious economists actually recognize a number of very serious criticisms of free trade among U.S. states -- even economists who ultimately decide that free trade is better than the alternatives, e.g. total self-sufficiency at the state level. They generally don't talk about the flaws of free trade among our states too loudly, for fear of provoking the public into supporting stupid forms of protectionism, but they certainly know they are there.

Thanks to recent developments in economics (most visibly signaled by Paul Krugman's winning the 2009 Nobel Prize posthumously), these criticisms are becoming more serious every day. There is, in fact, an inexorable erosion of the credibility of free trade among American states going on in the academy, not that you'd know it from watching the economists who show up on TV.

The rest of this article is just a wee bit technical. The point is not to baffle the reader, but to pry open the mysterious "black box" of free trade economics a little, and let non-economists in on the big secret that economists regard as dangerous to talk about too loudly: free trade economics is a package of mechanisms that, like any piece of machinery, can and do break down all the time. And when they break down, free trade among our 50 American states ceases to be a good idea.

Free trade among American states has roughly ten very serious problems (see article for the ten problems).

Conclusion: Hopefully, the above list should convince the reader that free trade among U.S. states is, at the very least, an extremely complicated question, and by no means something that anyone is entitled to consider simply settled. Therefore it is high time that critics of free trade among American states, and those who advocate economic self-sufficiency at the state-level, were given the serious hearing that they deserve."

74 Comments:

At 1/08/2011 11:52 AM, Blogger Scott Lincicome said...

Great points re: the economic incongruence of Fletcher's position. And as usual, Fletcher ignores entirely the morality of free trade among individuals and, conversely, the blatant immorality of his protectionism. If you're interested, I actually did debate Fletcher on these points. I'll leave it to your judgment as to who comes up lacking.

Start here: http://lincicome.blogspot.com/2010/03/scoring-great-trade-debate.html

Then go here: http://lincicome.blogspot.com/2010/03/scoring-great-trade-debate-ctd.html

Then finish here: http://lincicome.blogspot.com/2010/03/scoring-great-trade-debate-pt-3.html

-SL

 
At 1/08/2011 12:02 PM, Blogger Mark J. Perry said...

Thanks for those links, Scott, that's very helpful.

 
At 1/08/2011 12:42 PM, Blogger Tim Worstall said...

Myself I would be most ungentlemanly and simply point out that the writer is employed to make the case for protective tariffs.

http://en.wikipedia.org/wiki/United_States_Business_and_Industry_Council

His actual job is to make the owners of US owned manufacturing companies richer at he expense of US consumers. So of course he's arguing that way.

 
At 1/08/2011 1:19 PM, Blogger Scott Lincicome said...

Exactly right, Tim. But it's always preferable to attack a man's ideas than his credentials/intentions.

Admittedly, that's quite often our adversaries' primary tactic, but, unlike us, they rarely have facts or principles on their side.

 
At 1/08/2011 2:26 PM, Blogger Buddy R Pacifico said...

"That is, there is nothing really special or unique about an imaginary line called a national border that makes it economically different than an artificial line called a state border.

Following this line of reasoning leads one to criticise those anywhere that block trade. So, the beauracrats and policy makers that create non-tariff barriers to block goods and services from the fifty states deserve as vehement a criticism as those who might do so in the U.S.

No trade borders then no criticism borders.

 
At 1/08/2011 2:32 PM, Blogger morganovich said...

buddy-

both tariffs and non tariff barriers always impoverish the imposing nation (in real terms) more that they benefit it.

such policy is, in effect, its own punishment.

it's just an easy punishment to hide as it accuses in tiny bits to all the consumers in a country and the purported benefits to special interest (protected industries) are very narrow and easy to point to.

sure, someone who repeatedly punches themselves in the face deserves some criticism, but objectively, it ought to take care of itself after a while.

 
At 1/08/2011 2:57 PM, Blogger James said...

The economic benefits of free trade have nothing to do with whether a buyer and seller are on the same side, or different sides, of imaginary lines called national, state or county borders

Not to the buyer or the seller perhaps but there are other players involved.

When I watch a football game on TV I really do not care that the New York team is in New Jersey. I bet that there is a huge economic impact in favor of New Jersey and detrimental to New York. The same holds true of Apple products made in China. Not living in New York or New Jersey I have no preference as to which wins. Being a patriot I do have a preference as to whether wages paid to make iPods goes to an American or not. Moreover, I would expect that if those wages were paid to an American it would create an externality from which I would benefit. Those employed Americans would pay taxes which would make the government less inclined to raise my taxes for example.

I think I am going to file this one beside that article that says cold weather proves global warming.

 
At 1/08/2011 3:01 PM, Blogger Scott Lincicome said...

James, I'm absolutely thrilled you used the iPod as your example.

See here: http://lincicome.blogspot.com/2010/12/politicians-misguided-reliance-on.html

(And many more posts here on Carpe Diem about iPods, global supply chains and who benefits.)

 
At 1/08/2011 3:27 PM, Blogger Hydra said...

This comment has been removed by the author.

 
At 1/08/2011 3:32 PM, Blogger Benjamin said...

Well, not sure we have free trade inside USA. Try selling CA wine in Florida. Try selling insurance across state lines, or practicing law in another state.

Sheesh, we don't even have free enterprise inside the USA. Try building a skyrise condo in Newport Beach. Try growing colored cotton in CA (not kidding about this).

Also, each state does not manage its own money supply.

To make the world perfect, is Dr. Perry suggesting we have a global monetary authority? That is the logical extension of his argument.

Oh, that will go over real well with the Tea Party crowd--a WTO controlling all international trade trade laws, and a GMA (Global Monetary Authority) controlling global money supply.

Brave New World, here we come!

 
At 1/08/2011 4:31 PM, Blogger DaveinHackensack said...

Mark,

I'd actually like to see you to debate Ian Fletcher based on his book, "Free Trade Doesn't Work: What Should Replace it and Why", rather than just on that one article. And if your best tack is a reductio ad absurdum argument replacing countries with American states, then I'd be even more willing to bet on Fletcher winning that debate.

It would be great to see you both debate this on one of Bloomberg TV's "Intelligence Squared" debates, but in the meantime, I'll try to give Fletcher a heads up about this blog post and see if he'd be willing to spar with you in the comments here.

 
At 1/08/2011 4:33 PM, Blogger James said...

both tariffs and non tariff barriers always impoverish the imposing nation (in real terms) more that they benefit it.

Congratulations you have correctly regurgitated the professor’s words and are assured a suitable academic grade.

Now for those of us, now in the majority including a majority of Republicans, who have concluded that free trade is the problem not the solution could you give us a real world example to support you thesis. I do not think there are any but I could be wrong.

Just to help you with your search and prevent you from wasting your time here is of list of nations for which your statement in NOT correct:

United States of America. From 1828 until after World War II the USA was the worlds most trade protected economy. The first act of the first Congress was to establish a tariff. Protection intensified with the “Tariff of 1828” also known as the “Tariff of Abomination.” That tariff, while it did not last long, was the largest tariff we ever had. It was higher than the Smoot-Hawley tariff of 1930. From 1800 to 1900 US tariffs averaged about 30 percent. While Abraham Lincoln is known as the Great Emancipator he could also be also be called the Great Protector. In 1861 he imposed protective tariffs of about 50 percent. Those tariffs remained high until World War I. When Smoot and Hawley introduced their new tariffs in 1930 tariffs were already high about 40 percent.

Great Britain. Their tariffs were second only to the USA. They tried free trade but gave it up when the USA and other trade protected economies ate their lunch. That flirtation with free trade caused Great Britain to lose it position in the world to a trade protected USA. That same flirtation with free trade has produced the mess we are in now. After more than a hundred years of harm from free trade the people opted for socialism.

South Korea. In 1973 General Park Chung-Hee launched an Industrial program which included import bans, tariffs, excise taxes, a ban on foreign travel, and a refusal to respect foreign patent and copyright rights. The economist now negotiating the US-Korea free trade agreement were trained on pirated American textbooks for which neither the author nor the publisher were compensated.

Japan.Toyota started out as Toyoda Automatic Loom a manufacturer of textile machinery. At the time Japan’s biggest export was silk. They moved into car production in 1933. Their product was very poorly made. Had Japan followed free trader theory they would have purchased from the most efficient producers GM and Ford which were operating in Japan at the time. Instead Japan chose to protect their industry. In 1939 Japan kicked GM and Ford out. Toyota exported their first car to the US in 1958. It failed. Convinced that industry was more important than silk, Japan kept on protecting until they got it right.

China.Historically China has been a prosperous country. Its long period of poverty coincided with a period of free trade imposed on them by the British at the point of a sword after they lost the Opium War. After more than a hundred years of harm from free trade the China became Communist. Now, like Japan, they have mastered to game and are now doing to free trade United States the same thing that protected United States did to free trade Great Britain.

UCLA historian Eugen Weber noted that before third world countries received the blessing of free trade they were poor but self sufficient. Afterwards they were poor and dependent. Haiti is an example. The US pushed free trade on them and destroyed their ability to support themselves. NAFTA supporter Bill Clinton admitted that loosening trade barriers has only exacerbated hunger in Haiti and elsewhere: "It may have been good for some of my farmers in Arkansas, but it has not worked. It was a mistake...I had to live everyday with the consequences of the loss of capacity to produce a rice crop in Haiti to feed those people because of what I did; nobody else."

 
At 1/08/2011 4:34 PM, Blogger James said...

This comment has been removed by the author.

 
At 1/08/2011 4:41 PM, Blogger DaveinHackensack said...

Mark,

What happened to the comment I just left here -- did you delete it? Will you also delete Ian Fletcher's comments if he decides to respond here? I hope not. I contacted him via Seeking Alpha to alert him to this blog post.

 
At 1/08/2011 4:44 PM, Blogger Mark J. Perry said...

No comments have been deleted, there are some comments with links that go into the Blogger spam filter like the one you just left, and I have no control over that. You should see it now, I sometimes have to go in and approve comments mistakenly marked as spam.

Mark

 
At 1/08/2011 4:47 PM, Blogger DaveinHackensack said...

OK Mark,

Thanks for the clarification. Must be because I included the link and that got it tagged as spam.

 
At 1/08/2011 4:52 PM, Blogger James said...

Try selling CA wine in Florida. Try selling insurance across state lines, or practicing law in another state.


Benjamin,

Can you name an insurance company that does not operate across state lines? Almost all of those doing business here (California) are national companies operating in more than one state.

Last time (Thanksgiving) I bought wine in Florida it was from California. Many lawyers practice in more than one state.

 
At 1/08/2011 5:02 PM, Blogger Scott Lincicome said...

James,

You might want to round out your history lessons with a few other sources. The myth that the USA prospered in the 19th century because of protective tariffs has been repeatedly debunked.

See, e.g., here: http://www.thefreemanonline.org/columns/thoughts-on-freedom/tariffs-and-freedom/

And in Chapter 7 of this book: http://www.amazon.com/dp/193530819X/?tag=catoinstitute-20

Start with that, and then let's chat.

 
At 1/08/2011 5:16 PM, Blogger PeakTrader said...

U.S. states have similar labor standards and enviornmental laws, and the same currency.

So, there are fewer competitive advantages between U.S. states than between countries.

 
At 1/08/2011 6:37 PM, Blogger Scott Lincicome said...

Peak,

What about trade between, say, Loudoun County, VA (median household income - $110k) and Clay County, KY (MHI - $16k)? Would that be ok? Or should we prevent the Clayites from trading with the Loudounites bc the Clayites have such cheap labor and (most likely) far lower living standards?

(This is a serious question. I'd be interested to hear your - and anyone else's - thoughts)

 
At 1/08/2011 6:58 PM, Blogger DaveinHackensack said...

Scott,

In answer to your question, I think trade between those two counties would be (and is) fine.

Now, let me ask you a serious question: can you think of some salient differences between trade within the U.S. and trade between the U.S. and foreign countries?

 
At 1/08/2011 6:59 PM, Blogger Benjamin said...

James-

Perhaps I should have been more clear. You have to be licensed in each state.

A CA wine producer, for example, cannot sell directly over the web to FL consumers (unless the law recently changed) Has to go through a FL distributor, licensed, etc.

Insurance the same. They are licensed as separate cos. in each state.

Still, the big Q: Should there not be global free trade and then, if so, a global monetary authority? The arguments are the same.

I do not heard for anybody calling for a global monetary authority. Strikes me as the same as free trade.

There is reciprocity among some states on bar licenses.

 
At 1/08/2011 7:29 PM, Blogger Craig said...

"is Dr. Perry suggesting we have a global monetary authority?"

Well, we once had global money; it was called gold. Interestingly enough, no authority was needed. Now, that was logical.

 
At 1/08/2011 7:34 PM, Blogger Scott Lincicome said...

Dave,

It depends on what you're comparing. At a basic level, there are of course different legal, cultural and logistical differences between countries that aren't present between states. But from a purely economic perspective - labor, resources, capital, regulations, etc. - there is little difference between interstate and international trade. This is particularly true because (a) most commodities trade between individuals in different nations is in dollars; (b) states can have dramatically different comparative advantages (as well as labor, environmental, and regulatory standards); and (c) all trade is between individuals, not counties, states or nations. (And my apologies for misstating my question earlier in this regard; I should have said "residents of Loudoun county, etc.).

 
At 1/08/2011 9:44 PM, Blogger PeakTrader said...

Scott, in your example, preventing trade would hurt the consumers in the rich county and hurt the producers in the poor county.

Now, what if a foreign government decides to compete with the poor U.S. county by selling the same good at half price?

 
At 1/08/2011 9:50 PM, Blogger Hydra said...

Ed Risse would take this seriously. He promotes local self sufficiency as a means to prevent wasting energy on travel and related trade. He believes it is necessary to reduce the income gap, have nines or more levels of government in order to insure accountability, and that it is necessary to prevent massive overconumption in order to conserve resources and prevent a resource shortage crisis.

And he believes that costs need to be allocated so they are shared fairly.

 
At 1/08/2011 10:58 PM, Blogger Ian said...

This is a reductio ad absurdum--which can, by definition, make any argument appear absurd, including arguments for democracy or sliced bread. That protectionism can sometimes be beneficial indeed begs the question of what the optimal tariff area is. Thus great protectionists of the past, like Alexander Hamilton and Friedrich List, were also advocates of appropriate political unions (the Constitution, the Zollverein) designed to create optimal tariff areas.

Ian Fletcher

 
At 1/08/2011 11:02 PM, Blogger PeakTrader said...

Ian, that sounds like a bunch of jibberish to me. What's your point?

 
At 1/09/2011 12:03 AM, Blogger Ron H. said...

"A CA wine producer, for example, cannot sell directly over the web to FL consumers (unless the law recently changed) Has to go through a FL distributor, licensed, etc."

Benji, surely you understand that such restrictions are a result of lobbying by, and campaign contributions from Florida wine distributors. The effect is to harm Florida wine buyers who could otherwise buy directly at lower cost.

The same is true of all other interstate restrictions on insurance, lawyers, etc. A small group benefits at the expense of consumers, just as they do in countries that restrict trade with others.

The Founders wrote the Commerce clause of the Constitution to allow the federal government to regulate or "regularize" interstate trade to avoid such restrictions. Unfortunately, since that time, the Commerce clause has been interpreted to mean that the federal government can control any and all activity that might have any possible effect on commerce, including non-activity like not buying health insurance. This is a long way from the original intent.

 
At 1/09/2011 1:20 AM, Blogger Sean said...

The first reaction I have to the response the criticism of trade among nations could also apply to states is: so what?

For the other points: it may take some time to go through the debate...

 
At 1/09/2011 1:48 AM, Blogger DaveinHackensack said...

Scott,

You are downplaying some significant differences between international trade and trade within the U.S. (e.g., currency: Paul Tudor Jones and others have argued that China's devaluation of its currency in '94 and suppression of it since has had a huge impact in moving manufacturing jobs from the U.S. to China.). And you are also eliding others (e.g., the mobility of workers within the U.S., versus from here to other countries; federal labor laws, including the federal minimum wage; the fiscal impact of business conducted here versus overseas, etc.).

As Ian Fletcher noted in this excerpt from his book, "laissez faire hasn’t been taken seriously in America’s domestic economy for well over 100 years". He didn't offer this as a specific example, but it seems clear to me that the federal minimum wage is an example of the lack of laissez faire domestically -- Clay County can't offer a minimum wage 1/10th as large as Loudoun County, for example. Fletcher's point was that if unrestrained laissez faire doesn't make sense domestically, why would it make sense when it comes to international trade?

Fletcher's position here is more nuanced than Mark or you seem to acknowledge. He's not anti-trade. On the contrary, he writes,

"Economic openness, like most things in life, is valuable up to a point—but not beyond it. Fairly open trade, most of the time, is justified. Absolutely free trade, 100 percent of the time, is an extremist position and is not."

 
At 1/09/2011 2:29 AM, Blogger DaveinHackensack said...

It's worth noting, too, that no less a proponent of free trade than Paul Samuelson raised questions about it toward the end of his life:

"Free trade is not always a win-win situation," Samuelson concludes. It is particularly a problem, he says, in a world where large countries with far lower wages, such as India and China, are increasingly able to make almost any product or offer almost any service performed in the United States.

If we trade freely with them, then the powerful drag of their far lower wages will begin dragging down our average wages. Our economy may still grow, he calculates, but at a lower rate than it otherwise would have.

 
At 1/09/2011 3:49 AM, Blogger jonathan said...

Sean wrote: "The first reaction I have to the response the criticism of trade among nations could also apply to states is: so what?"

Okay, now apply it to trade between counties. After that, townships. You can probably see where I'm going with this.

Ian wrote: "This is a reductio ad absurdum--which can, by definition, make any argument appear absurd, including arguments for democracy or sliced bread."

If an argument's premises do not lead to an absurd conclusion, then the reductio cannot be properly employed. If they do, then the reductio is a legitimate and welcome form of argument.

 
At 1/09/2011 5:37 AM, Blogger Tim Worstall said...

OK, fair enough that I shouldn't attack Fletcher purely for his source of income.

So, let us take his arguments as being exactly correct then.

No, he's right in every particular. That free trade enriches the Chinese and Indians (and Ethiopians, Indonesians, those from Burkina Faso and so on) at the expense of Americans, Brits (like myself), the French, Germans and so on.

That free trade means that the rich of the world get richer more slowly than they would do without free trade and that the poor of the world get richer more quickly than they would do without free trade.

And the problem with this outcome is precisely what?

Don't forget, I am assuming that Fletcher is correct in his analysis. Yet the end result of his analysis is that people on $30,000, $50,000, $100,000 a year, living as high on the hog as any group of humans ever have done, mark time for a bit, while those living in the murderous destitution of $1 a day poverty get to climb up out of it and into something like a joyous life.

I simply for the life of me cannot see anything wrong or immoral in this outcome.

 
At 1/09/2011 8:25 AM, Blogger Prof J said...

Re: global money authority.

To have one authority creating money for the entire world is the opposite of free trade since it is monopolistic. A fully-fledged free trade stand would lead one to free banking with competitive note issue. Of course, this is politically impossible since it would prevent the state from expropriating individuals' resources, as is done now.

 
At 1/09/2011 9:03 AM, Blogger PeakTrader said...

When you focus on the costs of free trade and ignore the benefits, you'll have an article like "Ten Problems With Free Trade."

 
At 1/09/2011 9:23 AM, Blogger PeakTrader said...

I heard this on the radio:

Say you give 30 students 30 different candy bars. Then ask them to rate their candy bars on a scale of 1 to 10. Their average score is 5.

Then create an environment of free trade. After they trade their candy bars, their average score rises to 7.

So, their living standards rose 40% just from free trade.

Or say there's a country with short people painting ceilings and a country of tall people painting floors. Productivity could increase by trading industries between countries, although you could say the old industries were "wiped out."

 
At 1/09/2011 10:12 AM, Blogger Jason said...

Hmm, the latest issues with rare earth elements are an interesting test of free vs. protected markets.

China protects this market very aggressively as necessary to its long term plans. America didn't seem to care too much when rare earths were dumped in the late 90's. Now, the supply is constrained to the point where components are in allocation.

So, all consumers of rare earth elements (all of us in some way or another) had benefits of lower prices for 10 years, and are now dependent on Chinese companies for these, really essential, raw materials. This will continue until other sources of rare earths production are spooled up.

It seems to me that China's policies are successful in this effort.

 
At 1/09/2011 10:42 AM, Blogger Chad said...

LOL at the posters who think identifying an argument as reductio ad absurdum renders it invalid.

In fact, reductio ad absurdum is a perfectly valid and powerful form of argument, the logic of which is frequently used in mathematical proofs.

Of course, reductio attempts may have logical holes in them, and if you can find them then you can say that the attempt has failed. So give it a go, but my advice would be to first learn a bit more about logic and argument.

 
At 1/09/2011 10:51 AM, Blogger Mark J. Perry said...

Thanks Chad for your comment.

The logic of opposition to international trade leads directly to the opposition to intra-national trade among states, and even the opposition to trade among individuals. The inevitable result of the anti-free trade position is economic self-sufficiency at the national level, then self-sufficiency at the state level, and inevitably self-sufficiency at the household or individual level.

Since most people don't grow their own food, make their own clothing or furniture, or build their own houses suggests that almost all individuals reject economic self-sufficiency and embrace the principles of free trade.

 
At 1/09/2011 10:52 AM, Blogger DaveinHackensack said...

This comment has been removed by the author.

 
At 1/09/2011 11:08 AM, Blogger DaveinHackensack said...

"The logic of opposition to international trade leads directly to the opposition to intra-national trade among states, and even the opposition to trade among individuals."

Mark,

I'm sorry that Ian hasn't made the case here himself (yet, at least), but as I noted referring to his work, he isn't opposed to international trade. He just doesn't think it should be conducted without any restrictions. As he noted in this excerpt from his book,

"Fairly open trade, most of the time, is justified. Absolutely free trade, 100 percent of the time, is an extremist position and is not. (The difference between the two is rational protectionism.)"

And as I noted above in this thread, your reductio argument analogizing international trade to trade between U.S. states does have logical holes in it, one of them being our federal minimum wage law, which precludes extreme wage arbitrage of the kind you see in international trade. You can't open a factory in Mississippi and pay your employees $1 per hour. You can open a factory in China and pay workers even less.

 
At 1/09/2011 11:12 AM, Blogger DaveinHackensack said...

"To have one authority creating money for the entire world is the opposite of free trade since it is monopolistic."

You are ignoring the point that competitive devaluations of currencies can be used to restrict imports in lieu of tariffs (and they also make a country's exports more competitive). I think that's the point the previous poster was getting at, and it seems to be a legitimate one. If tariffs are violation of free trade because they restrict imports, why isn't currency devaluation, which does the same thing?

 
At 1/09/2011 11:15 AM, Blogger Mark J. Perry said...

Minimum wage laws are evil, artifical, anti-market policies that make the country as a whole worse off, and the same goes for tariffs. To use one evil, wealth-destroying public policy (min wage laws) to justify another evil, wealth destroying public policy (tariffs) doesn't make sense to me.

 
At 1/09/2011 11:20 AM, Blogger DaveinHackensack said...

[I deleted the original of this comment so I could re-post it with the correct hyperlink]

"Yet the end result of his analysis is that people on $30,000, $50,000, $100,000 a year, living as high on the hog as any group of humans ever have done, mark time for a bit, while those living in the murderous destitution of $1 a day poverty get to climb up out of it and into something like a joyous life."

Well, first, I'm not sure that the Chinese jumping out of the windows of FoxConn plants were climbing "into something like a joyous life".

And second, median real wages in this country fell 5% from 1999 to 2009. If you're happy to let that trend continue, as long as it means an increase in wages in poor countries, you and I have a fundamental disagreement. All things equal, I'd like to see the world's poor improve their lot. But not at the expense of my countrymen.

A related issue (perhaps a subject for a future post by Dr. Perry) is why Germany seems to be weathering globalization better than the U.S. or the UK in recent years. Some (e.g., Tom Geoghegan have argued that it's partly because of Germany's labor policies.

 
At 1/09/2011 11:30 AM, Blogger PeakTrader said...

Dave, I'll ask the same question here:

I can understand how restricting production can benefit society, but how does restricting free trade benefit society?

 
At 1/09/2011 11:41 AM, Blogger morganovich said...

james-

"Now for those of us, now in the majority including a majority of Republicans, who have concluded that free trade is the problem not the solution could you give us a real world example to support you thesis. I do not think there are any but I could be wrong."

are you joking?

read your ricardo. all trade restrictions shrink the production possibility frontier. this is not even remotely unclear stuff, you just have never bothered to understand it.

here's a concrete example for you.

imagine the US imposes a tariff on foreign steel.

this will increase the price of all steel sold in the US.

that price is paid by ALL americans. sure, some % of that may accrue to the US steel industry, but that % is less that 100% while the full 100% of increased costs will be faced by US consumers.

thus, the US gains (100-I%) X P in industry, and loses 100 P in buying power.

I = import % > 0 or else why bother having a tariff?

thus, you ALWAYS lose more than you gain from a tariff.

the argument that US steel workers are better off is true, but the loss to everyone else is greater than their gain and always must be. this is a mathematical fact. if we could compete at the other prices, we'd already be doing it.

you are just short sightedly enamored of a few jobs and the benefits to one industry because it is concentrated in one place and easy to point to, while the costs in buying power and in other jobs, even thought they are considerably greater, are always spread out and more difficult to see.

perhaps before you spout off again about the regurgitation of others, you ought to get even a basic working knowlwdge of economics and trade and stop your own regurgitation of stupid media lies based on special interest politics.

you clearly have no idea what you are talking about nor do you have even a rudimentary ability to think logically. where is the causality in any of your tariff examples?

there is none. you have zero evidence that the tariffs either had any positive effects or were in any way economically warranted. tariffs are always good political theater. they inflame the uneducated and uncomprehending masses (and yes, i mean you) and get they do vote for the party that wants to blame woes on foreigners.

then they never work.

sure, a country undergoing industrialization can grow in spite of bad trade policy, but that doesn't mean that the trade policy didn't slow them down.

you can keep your house warm i the winter even with the front door wide open if you crank the heat up enough and build a huge fire, but that doesn't mean it would work better if you shut the door.

 
At 1/09/2011 11:49 AM, Blogger morganovich said...

ian-

there is no such thing as an optimal tariff area. you are confusing it with currencies. show me one example of a tariff that makes a tariff area better off. i will bet you that you can't.

your reductio argument is also totally incorrect.

look at it the other way:

the smallest economic unit is the individual.

do you agree that individuals benefit from the specialization and distribution of labor and from trade with one another?

unless you made your own computer and run your own ISP, i'm going to say that you have to say yes.

taking this as so, then show me any plausible reason why at some point in the future, this trade with others stops being beneficial.

where can you draw a line 2 people? 200? 2000? 2 billion?

this is basic extrapolation from first principles.

unless you can show me some reason why the benefits of trade suddenly stop or reverse at N+1 trading partners, then you have no argument.

 
At 1/09/2011 11:52 AM, Blogger morganovich said...

james-

a simpler critique of your examples is this:

all you have shown is that governments and citizens did not understand economics and therefore worked against their own (aggregate) self interest then (though perhaps in pursuit of their own special interests like appointing up businesses and buying votes) just as you fail yo understand them and work against our own aggregate interests now.

congratulations on being the latest dullard to grab the baton of benighted protectionist stupidity in the relay race of history.

 
At 1/09/2011 11:56 AM, Blogger Chad said...

Remember when Mankiw and Weinzierl proposed a height tax as a logical extension of utilitarian redistribution?

The NYTimes wrote about it, and this was one of the criticisms:

"Peter Diamond, an economist at M.I.T., says the paper’s basic mistake is the notion 'that if you can draw a silly inference from an approach, then that discredits a model.' He comments: 'I think there is probably no model that passes that test.'"

Mankiw responded:

"I wonder what Peter's alternative approach is. If economic theorists are allowed to embrace inferences from a model that they like and cavalierly reject those that they consider 'silly,' what is the point of theory? That discretion gives the theorist the freedom to always confirm his priors. The economist ends up using theory like a drunk uses a light post--for support rather than illumination.

"It seems to me that if you are going to reject a logical inference from a model, you have to explain why."

Mark is laying out a similar challenge in this post, and the closest I've seen to an answer is DaveinHackensack's point that trade can change patterns of welfare and he doesn't want people within a certain geographical distance of him to ever get the wrong end of those changes. I disagree with the values underlying his preference, but at least he is engaging the argument properly.

 
At 1/09/2011 12:40 PM, Blogger morganovich said...

james-

my first response to you did not take for some reason.

"
Now for those of us, now in the majority including a majority of Republicans, who have concluded that free trade is the problem not the solution could you give us a real world example to support you thesis. I do not think there are any but I could be wrong."

you are in fact dead wrong there. read your ricardo. ALL tariffs reduce the production possibility frontier.

consider:

the US imposes a tariff on imported steel.

this increases steel prices in the US.

some of this price increase benefits US producers, but by definition, they are not the whole market or else why would you need a tariff (there would be no imports).

so, US benefit = P X (100 - I).

but US harm = P X 100.

US consumers face the entire harm of increased prices, but us producers capture only a portion of the benefit.

thus, ALL tariffs wind up harming the imposing area.

this is a mathematical certainty.

and before you make the mistake of claiming "well what about the additional steel jobs and their buying power", ask yourself "what about the even greater number of lost jobs in other industries due to decreased buying power of consumers"?

protectionism has never worked. never. it's just a particularly virulent form of political virus facilitated by the fact that the costs and benefits of it are asymmetrical. a few special interests get benefits that are quite visible, and the vast majority suffer injury that is not.

 
At 1/09/2011 12:44 PM, Blogger morganovich said...

your numerous (and irrelevant) examples or protectionism provide no argument at all.

so what?

so people have done dumb things in the name of political expedience. big deal.

you provide not ONE SCRAP or evidence that these tariffs ever helped anyone. there is no logic, evidence of causality, nor even evidence of coincident benefit in any of what you claim.

it's pure non sequitior masquerading as argument.

sure, lots of industrializing nations have shown huge growth despite bad trade policy. trade is not the only variable and others can swamp it, but that says nothing about the effects of the policy.

you can keep your house roasting warm in the winter even if you leave the front door open. just crank up the heat and build a huge fire. that is hardly proof that the door being open make the house warm, which is literally the argument you are attempting to pass off.

 
At 1/09/2011 12:53 PM, Blogger morganovich said...

i apologize if these dupe. i am having a difficult time getting some of these posts up.

james-

you are just dead wrong about tariffs ever helping. here's a very concrete example for you that works for any industry:

imagine the US imposes a steel tariff.

this increase the price of steel.

this increase benefits US steel companies, but they do not get all the benefit.

some steel is still imported.

their benefit = P X (100-I) where I = % imports.

but all US consumers face the higher prices.

so the loss to them is p X 100 which will ALWAYS be greater because if I were not greater than zero, there would be nothing to impose a tariff upon.

every job gained by US steel is offset by more than one lost in other industries due to the net drop in american purchasing power.

i think you need to get at least a basic understanding of economics before you accuse others of regurgitation. it seems to me that it is you who are regurgitating a bunch of baseless nonsense foisted on you by those with political agendas.

 
At 1/09/2011 1:15 PM, Blogger Tim Worstall said...

"And second, median real wages in this country fell 5% from 1999 to 2009. If you're happy to let that trend continue, as long as it means an increase in wages in poor countries, you and I have a fundamental disagreement."

Lovely use of statistics there. You're comparing the peak of aboom (99) with the depths of a recession (09). That's know as "not playing fair".

It's also true that median wages isn't really the right metric for the US. Even more so than other countries. We should use median compensation: for a goodly portion of compensation comes in the form of health insurance, as you know, and that is not included in the wages figure. So a second "naughty, tut tut" for that. For compensation has been rising.

But even if those corrections to your statement were unnecessary. As you know, economics is about the allocation of scarce resources, the goal being the maximal possible human utility over time. Do I regard the US (or British for that matter) middle classes marking time in the growth of their wealth as being "worth it" if it means hundreds of millions escaping destitution elsewhere?

Yes I do actually. And other than blind tribalism it's difficult to think of any moral system that wouldn't say the same.

Finally, at FoxConn, you do know that the suicide rate of their workers is *lower* than the Chinese suicide rate as a whole? Despite the fact that their employees are mostly those young people who all over the world have the highest suicide rates within the countries?

 
At 1/09/2011 1:31 PM, Blogger Jet Beagle said...

DaveinHackensack: "Fletcher's point was that if unrestrained laissez faire doesn't make sense domestically, why would it make sense when it comes to international trade?"

Who is helped by any minimum wage laws? Skilled labor. Who is hurt most by minimum wage laws? The unskilled labor who liberals somehow believe they are helping.

Who is helped by restriction on interstate sales of health insurance, Dave? I'm pretty sure it is the medical practitioners who were able to "convince" state legislators that their specialty needed to be included in insurance policies. How does that help consumers anywhere?

Who is helped by state laws which restrict the selling of wine across interstate borders? How do consumers in any state possibly benefit from such laws?

How does citing the existence of the few bad protectionist laws which restrict interstate trade make a case for bad protectionist laws which retrict international trade?

 
At 1/09/2011 1:38 PM, Blogger Ron H. said...

Jason,

"It seems to me that China's policies are successful in this effort."

China's seemingly successful policy is self defeating, and only provides temporary success.

It's not that rare earth elements are actually rare, in fact they are quite plentiful worldwide. The problems are with production, which includes unpleasant things like toxic waste. Restrictive policies such as those China has pursued will encourage others to get back into the game, and the temporary advantage will be lost. Free markets will guarantee it.

 
At 1/09/2011 2:01 PM, Blogger Jet Beagle said...

DaveinHackensack: "And second, median real wages in this country fell 5% from 1999 to 2009."

Well, I'm having a little trouble varifying this assertion, Dave. Can you please provide some evidence to support it?

From the Bureau of Labor Statistics, I found these numbers for real weekly earnings, adjusted to constant 1982-1984 dollars:

1990 - $316
1999 - $330
2000 - $334
2009 - $345

Not sure why the BLS adjusts to 1982-1984 dollars. Had they adjusted to 2009 dollars, the growth over the past decade would appear to be much larger.

Perhaps you were referring to some subset of the working population. Or perhaps you were referring to households. I don't know, but the BLS data I was able to retrieve do not support your assertion. Furthermore, as Tim Worstall already pointed out, your statement compared the peak of a boom (1999) with the depth of a recession (2009).

 
At 1/09/2011 3:57 PM, Blogger Jason said...

Ron H, I have no doubt in your conclusion. Several other sources are spooling up as I type. Including Molycorp, the much publicized company here in the US.

This is an instance where our national interests meet free market principles. Clearly, the Chinese are manipulate the market.

So, my question is, what should a response be? If tariffs are destructive, and trading partners are not playing well in the sandbox, what can we do?

 
At 1/09/2011 4:32 PM, Blogger Marco said...

Jason,

If the Chinese government wants to do favors for Chinese industries and harm Chinese citizens in the process, the American government should express its regret but otherwise do nothing.

The alternative that so often occurs is for the American government to "retaliate," which is just another way of saying that American politicians get to give favors to American industries at the expense of American citizens while spouting nationalistic slogans to score popularity points among those too stupid to understand the economics.

 
At 1/09/2011 4:39 PM, Blogger juandos said...

DaveinHackensack said: "It's worth noting, too, that no less a proponent of free trade than Paul Samuelson raised questions about it toward the end of his life..."...

Hmmm, if memory serves I do believe Paul Samuelson was a Keynesian of note but so what?

Samuelson never did get a grip on reality...

Samuelson's intellectual counter part Milton Friedman did understand the world we live in...

 
At 1/09/2011 6:16 PM, Blogger Sean said...

Jonathan,

Sean wrote: "The first reaction I have to the response the criticism of trade among nations could also apply to states is: so what?"

Okay, now apply it to trade between counties. After that, townships. You can probably see where I'm going with this.

What you're pointing out here is that scaling factors apply. You wouldn't expect the same level of specialization or bureaucracy in a mom-and-pop shop as as multi-national corporation, but where do you draw the line on what level of process overhead you're willing to incur? The organization has to make the choice.
But US states are as large as some countries. That's why the constitution provides Congress with the ability to regulate commerce among the states.

 
At 1/09/2011 8:44 PM, Blogger DaveinHackensack said...

Mark,

"Minimum wage laws are evil..."

Whether or not you think the federal minimum wage is evil (I, and I think most people would disagree), it's existence represents a gaping hole in your reductio argument.

Peak Trader,

"but how does restricting free trade benefit society?"

For starters, restricting free trade enabled the U.S. to develop a manufacturing base in the first place. Intelligent and limited restriction of free trade can also prevent a global race to the bottom in wages and working conditions.

"Or say there's a country with short people painting ceilings and a country of tall people painting floors. Productivity could increase by trading industries between countries"

Sure, and that would be a classic case of comparative advantage. But is that what's really happening in most cases these days? Are Chinese taking manufacturing jobs because their workers are somehow physically superior for the job than ours, or because they have lower wages and fewer worker protections?

Tim Worstall,

"Lovely use of statistics there. You're comparing the peak of aboom (99) with the depths of a recession (09). That's know as "not playing fair"."

No, that's known as using the most recent relevant statistical data I could find, which came from p.15 of this Census doc (PDF) released last fall.

"It's also true that median wages isn't really the right metric for the US. Even more so than other countries. We should use median compensation: for a goodly portion of compensation comes in the form of health insurance, as you know, and that is not included in the wages figure."

Are you suggesting that median employer health insurance policies have become more generous over the last ten years? Feel free to back up that counter intuitive claim.

Jet Beagle,

"Who is helped by any minimum wage laws?"

Everyone who would have earned less without it.

"Well, I'm having a little trouble varifying this assertion, Dave. Can you please provide some evidence to support it?"

See p.15 of the Census PDF I linked to above.

 
At 1/09/2011 8:45 PM, Blogger DaveinHackensack said...

Mark,

"Minimum wage laws are evil..."

Whether or not you think the federal minimum wage is evil (I, and I think most people would disagree), it's existence represents a gaping hole in your reductio argument.

Peak Trader,

"but how does restricting free trade benefit society?"

For starters, restricting free trade enabled the U.S. to develop a manufacturing base in the first place. Intelligent and limited restriction of free trade can also prevent a global race to the bottom in wages and working conditions.

"Or say there's a country with short people painting ceilings and a country of tall people painting floors. Productivity could increase by trading industries between countries"

Sure, and that would be a classic case of comparative advantage. But is that what's really happening in most cases these days? Are Chinese taking manufacturing jobs because their workers are somehow physically superior for the job than ours, or because they have lower wages and fewer worker protections?

 
At 1/09/2011 8:45 PM, Blogger DaveinHackensack said...

Tim Worstall,

"Lovely use of statistics there. You're comparing the peak of aboom (99) with the depths of a recession (09). That's know as "not playing fair"."

No, that's known as using the most recent relevant statistical data I could find, which came from p.15 of this Census doc (PDF) released last fall.

"It's also true that median wages isn't really the right metric for the US. Even more so than other countries. We should use median compensation: for a goodly portion of compensation comes in the form of health insurance, as you know, and that is not included in the wages figure."

Are you suggesting that median employer health insurance policies have become more generous over the last ten years? Feel free to back up that counter intuitive claim.

Jet Beagle,

"Who is helped by any minimum wage laws?"

Everyone who would have earned less without it.

"Well, I'm having a little trouble varifying this assertion, Dave. Can you please provide some evidence to support it?"

See p.15 of the Census PDF I linked to above.

 
At 1/09/2011 9:24 PM, Blogger DaveinHackensack said...

Jet Beagle,

I happen to think Americans ought to be able to buy insurance across state lines. That they can't is not the result of an intelligent trade restriction but more the result of an accident of American regulatory structure where securities are mostly regulated at the federal level and insurance at the state level.

Similarly, restrictions on inter-state wine sales are also sort of a historical accident. I'm against those restrictions as well.

Not every restriction on trade is an intelligent or good one. Again, I think Fletcher's position makes sense here,

"Fairly open trade, most of the time, is justified. Absolutely free trade, 100 percent of the time, is an extremist position and is not."

 
At 1/09/2011 10:21 PM, Blogger Jason K said...

Aren't states allowed to set their own minimum wage laws above that of the federal government's? Meaning that each state could have its own minimum wage rate just like each country can? Until the beginning of 2010, Kansas had a minimum wage of $2.65.

 
At 1/10/2011 1:11 AM, Blogger PeakTrader said...

Dave, it's more accurate to say restricting free trade slowed improvements in U.S. living standards than "enabled the U.S. to develop a manufacturing base."

Also, we've seen how free trade allowed the U.S. to lead the rest of the world combined in the Information and Biotech Revolutions.

Government can create "a global race to the bottom in wages and working conditions" (see China), which spilled-over into other poor countries and even into the U.S., although the gains of U.S. consumers are greater than the losses of U.S. producers.

So, why would you want to restrict free trade?

 
At 1/10/2011 2:27 AM, Blogger Ron H. said...

Jason,

"So, my question is, what should a response be? If tariffs are destructive, and trading partners are not playing well in the sandbox, what can we do?"

What can we do? We should do exactly what we are doing, that is - nothing. You answered your own question in your first sentence.

"Several other sources are spooling up as I type. Including Molycorp, the much publicized company here in the US."

Keep in mind that the Chinese process rare earth elements to sell to others, and that is what they would like to do. Flexing their market muscle may have backfired for the reason you pointed out about other sources spooling up. Now users of these products will be wary of relying on a single source.

By the way, China is once again selling to others. They cannot withhold forever, what would be the point?

The market is working as it should.

 
At 1/10/2011 4:19 AM, Blogger Jet Beagle said...

daveinhackensack,

Your original statement was that real median wages fell 5% in this country since 1999. But the source you claim supports that assertion does not support your assertion at all.

The page you cited shows that real median household income fell 5% since 1999. Further, that page explains that the decline in household is the direct result of the economic recession.

Household income is not at all the same thing as wages. In a recession year with 10% unemployment (2009), household income will almost certainly be much lower than in a year where unemployment is below 4% (1999). That's because so many workers in those households are unemployed.

Real median wages in the U.S. have not declined 5% since 1999. I provided evidence for this in my earlier reply to you.

 
At 1/10/2011 4:42 AM, Blogger Tim Worstall said...

"Are you suggesting that median employer health insurance policies have become more generous over the last ten years? "

No, but it is obvious that they've become more expensive for the same cover over that time. So total compensation to workers, as measured by the general inflation rate (so not as measured by hte specific, higher, health insurance inflation rate) have risen over that time.

With household incomes, don't forget that this is also based on only cash compensation, it does not include benefits in kind.

And it also does not include the shrinking number of people in a household. Not too much of an effect over a decade but it's still there.

Finally, about rare earths. This is actually my day job. Yes, China has been feeding us all the rare earths we could eat at prices we were more than happy to pay.

Now there's at least a suspicion that having driven everyone else (Molycorp etc) out of business they're interested in exploiting their monopoly.

And yet what's actually happening is that vast numbers of non-China suppliers are gouging great big holes in the earth to get rare earths. I could point you to 14 or so serious (ie, fully funded, people actually digging already) mines who will be producing by 2014 and there's at least another 60 odd junior miners (of whom I am one) with REEs that could be provided if financing becomes available.

Which rather goes to show that even if you do exploit trade rules to try and gain a monopoly, such a monopoly doesn't actually last so it's not worth playing with such trade rules to gain that monopoly.

 
At 1/10/2011 8:20 AM, Blogger Jet Beagle said...

Tim Worstall: "it also does not include the shrinking number of people in a household. Not too much of an effect over a decade but it's still there."

That's exactly right, Tim.

Also, the effect may be larger than one might think. From 1999 to 2007, the percentage of households comprised of only one person increased from 25% to 27%. I could not quickly find data on the number of single earner multi-person households, but I've seen indications that this group has also increased over the past decade.

 
At 1/10/2011 9:56 AM, Blogger PeakTrader said...

Dave, protectionism, e.g. restricting free trade, didn't enable the U.S. to develop a manufacturing base.

It prevented limited resources from shifting into emerging industries, which prevented higher wages and better working conditions (or a higher standard of living).

For example, many resources in Japan didn't shift from the Industrial Revolution into the Information and Biotech Revolutions, because of protectionist policies.

The Japanese focused on improving goods in older industries rather than allow resources to shift into new industries (or restrained open markets, free trade, etc.), which benefited foreign consumers more than Japanese producers, and eventually led into a "Lost Decade" or two.

 
At 1/10/2011 1:11 PM, Blogger juandos said...

DaveinHackensack claims: "Whether or not you think the federal minimum wage is evil (I, and I think most people would disagree), it's existence represents a gaping hole in your reductio argument"...

How do you know most people would disagree especially if they had the facts on hand to show that the whole 'minimum wage' nonsense has caused all sorts of problems?

Seriously you should consider the common sense of folks like Walter Williams and Thomas Sowell before you routinely applaud the socialist concept of minimum wage...

 
At 1/11/2011 11:31 PM, Blogger Bob said...

The fundamental flaw in the argument replacing Nation-states with State-states is that you forget that nations provide an aggregate benefit to all (Armies, and by extension borders), while there is no such benefit for each state. Virginia, for example, does not keep a standing army to keep the Maryland rabble out, though it would be nice sometimes.

Why not allow a tariff against our nation-enemies -- so long as it hurts them more than it hurts us ==> a least-regrets sort of approach?

 

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