Saturday, January 22, 2011

Free Trade Among U.S. States Doesn't Work

A few weeks ago, I had some editing fun with Ian Fletcher's anti-free trade position.  Here's  s0me editing of Ian Fletcher's new book "Free Trade Among American States Doesn't Work: What Should Replace It and Why":

"The fundamental message of this book is that nations U.S. states, including the U.S. Virginia, Florida and Michigan, should seek strategic, not unconditional integration with the rest of the world economy United States economy. Economic openness within the United States, like most things in life, is valuable up to a point—but not beyond it.  Fairly open trade among U.S. states, most of the time, is justified. Absolutely intra-national free trade among American states (or even intra-state free trade, intra-county free trade, intra-city free trade, intra-neighborhood free trade or intra-household free trade),100 percent of the time, is an extremist position and is not. The difference between the two is rational protectionism for American states to promote fair inter-state trade, instead of unrestricted free inter-state trade."

Update: See Don Boudreaux's excellent "Open Letter to Ian Fletcher," where he accepts Fletcher's position that "free trade doesn't work," and therefore refuses to buy and import a copy of Fletcher's book into his household.  

22 Comments:

At 1/22/2011 9:54 PM, Blogger Benjamin said...

Of course, the logical extension of free trade arguments is that we have a world authority to mandate free trade, and open borders for goods, services, labor and capital, and a global currency--in other words, like the United States, except global.


This would in fact lead to higher global living standards, if free trade arguments are true.

The arguments for free trade while holding on to atavistic nationalistic tendencies are empty--if the USA, for example, bars imported sugar, and no one can tell us different, then we have to buy US grown sugar.

This props up the sugar industry, and the profits, jobs, traditions and byways of the 200-year-old industry. Free trade would crush the sugar industry and everyone in it, but lead to higher incomes for Americans, as we got our cheaper sugar.

I join Dr Perry in calling for open borders for labor, goods, services and capital.

 
At 1/22/2011 10:07 PM, Blogger soups said...

China’s Innovative Way of Skinning the United States!
Mark Twain’s, on point, used “more than one way to skin a cat”, in A Connecticut Yankee in King Arthur’s Court, follows: “she was wise, subtle, and knew more than one way to skin a cat”, that is, more than one way to get what she wanted. Thefreedictionary.com provides a conventional definition of beggar-thy’s-neighbor as: an international trade policy of competitive devaluations and increased protective barriers that one country institutes to gain at the expense of its trading partners. Under the guise of fostering ‘indigenous innovation’ in its economy, the Chinese government creatively applies its own, non-conventional, subtle version of beggar-thy-neighbor. Its version doesn’t entail the competitive devaluation of its own currency, which would enhance China’s exports and inhibits its trading partners’ exports. China’s ‘indigenous innovation’ version perpetrates an over-valuation of the currencies of one or more of its trading partners. This adversely affecting all that (those) trading partners’ trade, with all its (their) trading partners, not just trade with China. During the periods China pegged its currency to the U.S. Dollar, China’s version of beggar-thy-neighbor was 8 times as damaging to the U.S. economy as what the media refers to as “China keeping it currency undervalued”.

In November 2003, Warren Buffett in his Fortune, Squanderville versus Thriftville article recommended that America adopt a balanced trade model. The fact that advice advocating balance and sustainability, from a sage the caliber of Warren Buffett, could be virtually ignored for over seven years is unfathomable. Until action is taken on Buffett’s or a similar balanced trade model, by the powers that be, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery.

 
At 1/22/2011 11:08 PM, Blogger morganovich said...

benji-

so your idea to promote freedom is government? can you actually be serious?

in the long run, free trade is a self promoting system. those who erect tariffs on imports injure themselves more than they benefit.

you also make a very questionable jump to a single currency which does not follow from just desiring to promote trade.

as most economies will always have a larger domestic component that a trade component, domestic monetary concerns will always trump those for trade.

to the extent that economies, regions, whatever, suffer from idiosyncratic shocks then they need their own interest rate and monetary policies.

read mundell on optimal currency areas. currencies are more useful with broader acceptance, but less well tailored to the economic conditions of individual regions. there is an optimal point where the two offsetting issues reach a maximum. that OCA is considerably smaller than the world.

ask greece and portugal how much they like having to accept externally determined monetary policy.

a better solution would be to do as the austrian school has suggested and simply divorce currencies from nations.

if you actually think about it, nations are terrible keepers of currencies. they always have strong incentives to adulterate money for political gain and a "world currency" would likely be the worst of the lot.

just who one would trust to administer such a thing is a question open to a great deal of debate, but it's an idea that will come in the next 10-20 years barring a sudden uptick in the responsibility of governments.

 
At 1/23/2011 7:40 AM, Blogger Jet Beagle said...

soups,

Please explain how, by pegging its currency to the U.S. dollar, China damaged the U.S. economy. You seem to be arguing that making U.S. exports more expensive in China than they otherwise would be is damaging the U.S. economy. Do you ignore the lower costs for American businesses and American consumers who pay less for imports from China than they otherwise would pay?

 
At 1/23/2011 1:45 PM, Blogger Ron H. said...

morganovich-

"a better solution would be to do as the austrian school has suggested and simply divorce currencies from nations.

if you actually think about it, nations are terrible keepers of currencies. they always have strong incentives to adulterate money for political gain and a "world currency" would likely be the worst of the lot.
"

You are right about this.

The Austrian School rejects the idea that a currency or interest rates need to be administered by a central authority.

Adulterating money for political gain is only possible with a central authority such as a central bank.

As the Austrian School sees no role for the political class, such views are obviously unpopular with that group. The Keynesians, on the other hand...

 
At 1/23/2011 2:05 PM, Blogger Ron H. said...

soups,

"China’s ‘indigenous innovation’ version perpetrates an over-valuation of the currencies of one or more of its trading partners. This adversely affecting all that (those) trading partners’ trade, with all its (their) trading partners, not just trade with China. During the periods China pegged its currency to the U.S. Dollar, China’s version of beggar-thy-neighbor was 8 times as damaging to the U.S. economy as what the media refers to as “China keeping it currency undervalued."

It's always been my understanding that a country can only directly determine its own currency value. Please explain how it is possible for China to manipulate the global value of the USD as it relates to US trading partners? Do you have any references?

Also please explain how a monetary policy is measured to determine that it is 8 times as damaging to the US economy as some some other policy.

 
At 1/23/2011 8:41 PM, Blogger muirgeo said...

Sure free trade between the states works. We have similar labor laws, minimum wages laws, environmental standards ect....


What you thought you were being clever? You didn't even rise to the level of glib.

 
At 1/24/2011 10:29 AM, Blogger morganovich said...

muir-

what country do you live in?

minimum wage varies by state, as do scads of other labor and union laws.

environmental law as well as energy and business and personal taxes also vary very significantly state to state. you can do lots of things in nevada that you cannot in california.

were you trying to be clever? you did not even rise to the level of "minimally informed".

 
At 1/24/2011 1:18 PM, Blogger Michael Smith said...

Soups wrote:

Until action is taken on Buffett’s or a similar balanced trade model, by the powers that be, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery.

I love how the left's arguments evolve.

First we were told that our economic problems were the result of "Republican de-regulation" of the economy that permitted the forces of greed to run wild on Wall Street and cause a housing bubble.

But then, once the Democrats got control of Congress and the White House, that claim was largely abandoned -- the Democrats made no effort at all to re-impose any of these regulations allegedly undone by Republicans, probably because they knew full well that that "Republican de-regulation" was a complete myth.

Instead, the Democrats shifted focus to a whole new outlook: Our economic problems were due to "inadequate aggregate demand" and could be solved by a massive "stimulus" bill. So they upped Federal spending by a trillion dollars.

But that didn't produce the promised effect of keeping unemployment below 8% -- so the "stimulus" claim has now been largely abandoned and replaced with still yet another economic boogeyman supposedly standing in the way of recovery: The trade deficit with China!

And so now we have people like soups telling us that only by pursuing a "balanced trade model" can we expect recovery.

The truth is the left's grasp of economics remains mired in Marxist/mercantilist myths and fallacies that were refuted long ago.

 
At 1/24/2011 4:33 PM, Blogger VangelV said...

It's always been my understanding that a country can only directly determine its own currency value. Please explain how it is possible for China to manipulate the global value of the USD as it relates to US trading partners? Do you have any references?

No, he has no references. All he has is opinion that is not supported by any data or sound theory. I believe that our friend is one of those people who assumes that what is good for exporters is good for the country.

 
At 1/24/2011 10:23 PM, Blogger Ron H. said...

"No, he has no references. All he has is opinion that is not supported by any data or sound theory. I believe that our friend is one of those people who assumes that what is good for exporters is good for the country."

Yes, I knew that, but couldn't resist asking just to see what answer he could possibly come up with. :-)

 
At 1/25/2011 1:56 PM, Blogger Sean said...

Ron H., VangeIV,

Doesn't it seem that buying dollars or Treasury in large numbers would bring up the value of the dollar in general, and not just in respect to the renimbi? And if many central banks hoard a reserve currency, is that result not compounded?

 
At 1/25/2011 3:19 PM, Blogger VangelV said...

Doesn't it seem that buying dollars or Treasury in large numbers would bring up the value of the dollar in general, and not just in respect to the renimbi? And if many central banks hoard a reserve currency, is that result not compounded?

Careful. If the Fed prints dollars and uses them to buy USTs to finance the government's spending plans I would expect it to lose purchasing power against the goods and services that have have not gone up in volume. More dollars chasing the same number of barrels of oil would mea that it eventually goes up, not down.

And why would CBs hoard USDs if they know that the Fed will keep printing and printing? I would argue that somebody at the margin will figure out a clever way to get out without triggering the alarm bells. Someone mentioned that a player like China can go to the futures market and sell silver short at the same time as it is buying all that it can on the physical market. Or buy large commodity companies that have a large amount of USD denominated debt. Or finance the construction of infrastructure at home or abroad by issuing USD denominated debt. At some point the rug gets pulled out from under the market and debts become worthless while the assets remain. At that point a new currency will be proposed as the reserve and the US will not be able to consume as much oil and other commodities as it used to.

 
At 1/25/2011 3:40 PM, Blogger Ron H. said...

Sean,

I don't know why a foreign government would want to hoard USD as they must be paid for with something else. In China's case with manufactured goods exported to the US. In it's simplest form, USD are sent to China in exchange for goods, then those dollars are used to buy Treasuries, which are US products. This returns the dollars to their point of origin, and the net effect on the currency is zero.

Unless I'm missing something, I can't envision a cartel of other countries conspiring to hoard USD, as the Fed is printing money at a rate that is causing its value to drop rapidly. Others have no control over this.

In fact, I believe China, and others have talked of turning away from the USD as a reserve currency due to its shaky condition.

 
At 1/26/2011 10:23 AM, Blogger Sean said...

VangeIV,

And why would CBs hoard USDs if they know that the Fed will keep printing and printing?
You say that as if it's a hypothetical and not something actually happening. I don't fully know why they do it: I just have a bunch of half-baked pieces of information on the topic.

At some point the rug gets pulled out from under the market and debts become worthless while the assets remain.
That is an ancient and honorable criticism of mercantilism that goes back to the middle ages (and a valid one). But consider: one could argue that borrowing money is just as foolish, because you have to pay it back with interest. Perhaps other countries view currency manipulation as a form of loan: encourage investment now and consumption later.

 
At 1/26/2011 10:25 AM, Blogger Sean said...

Ron H.,

In fact, I believe China, and others have talked of turning away from the USD as a reserve currency due to its shaky condition.
I'm not sure that would be such a bad thing, all things considered. But certainly the Chinese proposal of using their own is a long way from reality at this time.

 
At 1/26/2011 4:27 PM, Blogger Ron H. said...

Sean,

"But consider: one could argue that borrowing money is just as foolish, because you have to pay it back with interest."

I'm not sure who would argue that. Interest is just a measure of my time preference for something. At a low enough rate, I would rather have it now, than wait until later.

I suppose if I'm demonstrably worse off after borrowing, then it was foolish.

 
At 1/26/2011 10:03 PM, Blogger Sean said...

Ron H.,

I suppose if I'm demonstrably worse off after borrowing, then it was foolish.
Some people borrow money to invest: they gamble that with more money, they'll be able to make more money. That gamble doesn't always pay off. Other people put purchases on credit cards and then suffer a drop in income. There's also a long history of countries borrowing to wage war and then paying high interest for a long time.
So in the case of a responsible borrower, it's time shifting. But it doesn't always work out that way. But I'm not against responsible borrowing: I'm saying there are other forms of "time-shifting".

 
At 1/26/2011 10:32 PM, Blogger VangelV said...

But consider: one could argue that borrowing money is just as foolish, because you have to pay it back with interest.

That is not entirely true. We live in a world where money printing by the central banks must continue in order to keep the financial system solvent. That means that if you borrow money over the long term you will pay back your debts with greatly depreciated money later and that if this monetary expansion takes place as interest rates stay low borrowing is not all that dangerous.

The trick is not to borrow to consume but to borrow to buy something that will generate a decent return over a long period of time. I still remember hearing Marc Faber argue in a Hong Kong bar (he had had a few drinks) in the latter part of the 1990s that one day soon the best bet would be to use borrowed money to buy gold, silver, and oil. Had I taken his advice and used borrowed money rather than just savings I would be a hell of a lot richer today.

Perhaps other countries view currency manipulation as a form of loan: encourage investment now and consumption later.

I think that other countries are pissed off that they are trading real goods for depreciating paper and that they have to put up with huge inflation rates that are causing problems at home. This is why they cannot let the USD printing continue for much longer without rejecting the arrangement.

 
At 1/26/2011 10:44 PM, Blogger VangelV said...

I'm not sure that would be such a bad thing, all things considered. But certainly the Chinese proposal of using their own is a long way from reality at this time.

Perhaps. When I worked in China I became friends with a government economist (who turned me on to Rothbard, Mises, and Hayek) who was connected with the finance ministry as well as one of the provincial governments. He still looks me up once in a while and we chat about a number of issues. When I asked him about how he can justify the stupidity of holding that many USDs he pointed out that the government was hedging its reserves by guaranteeing borrowing that is used to finance large infrastructure projects, buying foreign commodity companies with large debts, and using the futures markets in ways that he would not explain.

It is my guess that the Chinese are expecting the USD to have a quick fall one day in the short to medium term and that they have taken on much more protection than many of us realize. All those commodity stockpiles, domestic railways, roads, schools, bridges, airports, African plantations, South American mines, canals, African railways and ports, etc., will all still be there after the USD implodes. At that time the bondholders that financed those activities will find that they will receive much of the Chinese government's USD reserves but that those reserves will not have nearly the purchasing power that they once used to.

From what I can see the Arabs might like that too because all that money that was borrowed to build those towers in Dubai and desalination in Saudi Arabia will have very manageable debts backing them. At that time the rest of the world will decide that it is better if it consumes all those products that used to be purchased by the formerly wealthy Americans.

 
At 1/28/2011 10:10 AM, Blogger Sean said...

VangeIV,

The trick is not to borrow to consume but to borrow to buy something that will generate a decent return over a long period of time.
Absolutely true, but easier said than done. Investment is always a gamble. You're a smart guy and apparently history has shown you to make good bets. But you don't know until afterwards. A lot of house flippers thought they were making good bets too.


I think that other countries are pissed off that they are trading real goods for depreciating paper and that they have to put up with huge inflation rates that are causing problems at home.
That sounds true, but if they weren't so dependent on export-led growth, they likely wouldn't have that problem. Nobody's innocent here.


It is my guess that the Chinese are expecting the USD to have a quick fall one day in the short to medium term and that they have taken on much more protection than many of us realize.
Sounds correct to me. The Chinese are pretty savvy in these things.


At that time the rest of the world will decide that it is better if it consumes all those products that used to be purchased by the formerly wealthy Americans.
Yes, that will come. America is like a somewhat spoiled kid with an allowance it doesn't realize will go away. We need to lose our complacency in a big way, and hten maybe we can recover our discipline early enough to avoid some of the worst of the fallout when nobody wants our paper anymore.

 
At 1/28/2011 5:00 PM, Blogger VangelV said...

Absolutely true, but easier said than done. Investment is always a gamble. You're a smart guy and apparently history has shown you to make good bets. But you don't know until afterwards. A lot of house flippers thought they were making good bets too.

Any one investment can be a gamble and you could have periods that will provide losses no matter how prudent you were. But if you want to increase your wealth you need to concentrate on capital accumulation, not consumption.

I had no problem with people buying homes even when I considered them expensive. My problem came from their use of leverage and their inability to figure out that at a certain price a house purchased for investment purposes would likely consume rather than generate cash flows. In my case I really like to buy when you have to pay 100 times the monthly rental. That keeps me out of trouble and away from housing most of the time.

That sounds true, but if they weren't so dependent on export-led growth, they likely wouldn't have that problem. Nobody's innocent here.

You mean that countries should be less competitive so that they would not have exports? How does that help?

Yes, that will come. America is like a somewhat spoiled kid with an allowance it doesn't realize will go away. We need to lose our complacency in a big way, and hten maybe we can recover our discipline early enough to avoid some of the worst of the fallout when nobody wants our paper anymore.

I am not as down on Americans as many people on this site. After the crisis they will recover as they always have. But to do that they need to vote out of office the fools who created the massive bureaucracies that made them so much poorer.

 

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