Monday, January 10, 2011

The Logical Conclusion of Protectionism

From Don Boudreaux:

Reductios work so well when arguing against proponents of economic nationalism (that is, “protectionists”) because, economically and morally speaking, there is absolutely no difference between Suzy trading with Joe her next-door neighbor and Suzy trading with Jose in Mexico, Josef in Austria, or Javu in China.  None.

So when any protectionist argues, based on reason X, for restrictions on trade drawn along national political borders, it’s always enlightening to apply the same argument X to trade restrictions drawn more locally – even as locally as the individual.

Fritz Machlup said in class at NYU back in 1981 that arguments for protectionism, when followed through to their logical conclusion, always ‘prove’ that a person’s right hand should not trade with that person’s left hand."

53 Comments:

At 1/10/2011 5:10 PM, Blogger Benjamin said...

Precisely!

To fully facilitate global free trade, we need an all-powerful WTO to enforce global free trade laws (sovereign nations get in the way with protectionism), and a globalized central bank, in charge of a world currency and money supply (again, sovereign nations try to peg currencies, or cheapen their currencies through money printing).

The full flower of the free trade movement is global government, in charge of trade laws and monetary policy.

And if goods can flow freely, and if capital can flow freely, then labor should be able to flow freely to. I am glad the right-wing is coming around to this view.

One World, oh Brave New World, that has such strange and wondrous things in it.

 
At 1/10/2011 6:05 PM, Blogger James said...

Aristotle used logic to decide that heavy objects fall faster than light objects. Then that heretic Galileo looked for himself. He dropped a cannonball and a musketball simultaneously from the Leaning Tower of Pisa and observed that they hit the ground at nearly the same time.

Open you eyes to the reality of free trade. Logic tells us that when Intel dispatches a salesman from California to China and he gets a order for chips that employment is created for Americans. In reality the salesman is Chinese and when he gets an order it shows up on the to-do list at Intel’s chip factory in San Jose, Costa Rico. No American employment results. In the logic of free trade if the Chinese like American cars the Americans make them ship them to China. The reality is that China has a tariff on American cars so they are made in China. Once again no American employment results.

In practice free trade makes Wall Street rich at the expense of Main Street unemployment.

We have more free trade now than we have ever had. If free trade leads to prosperity then how did this unfortunate economic situation ever happen in the first place? Free trade is the problem not the solution.

 
At 1/10/2011 6:12 PM, Blogger Charles Filson said...

I'm curious to know your definition of 'Protectionism'. In the US, we have passed laws to prevent US Citizens from working for less than a certain amount; laws to prevent US children under a certain age from working; laws to prevent corporations from using certain practices that are dangerous to workers in the US; laws that prevent certain types of pollution in the US.

However, we have not passed any laws that prevent corporations from doing any of these things elsewhere. All we have done is insisted that these things not be done in the US, and we have therefore moved all such practices outside the US, and the related jobs along with them.
Is there any reason we could not require that all goods imported into the US follow our labor laws and pollution standards?

True free markets, in a local context like you suggest, would have to have no standards for wages , benefits, working hours, and working age at the very least.

Once you accept that such restrictions are acceptable at the local level (not allowing one man to hire his neighbor's 14 year old to work for 12 hours a day at $2/hour) it seems only logical that the same restrictions would be acceptable at the global level: not enforced by the WTO or some global power, but simply enforced by the USA not allowing the importation of goods that do not meet our standards of labor practices.

 
At 1/10/2011 6:21 PM, Blogger Prof J said...

Charles Filson,

You are absolutely right. We should not have such restrictions on voluntary interactions in the U.S.

 
At 1/10/2011 7:02 PM, Blogger Benjamin said...

You guys don't get it---no borders for labor, capital, services and goods is a positive.

We need a global government to implement this, since sovereign nations are sticks-in-the-global-mud.

 
At 1/10/2011 7:57 PM, Blogger Prof J said...

Benjamin,

Why not no government? That would be even better. After a global government would just be a supranational organization. It would be the federal government to the states.

 
At 1/10/2011 8:05 PM, Blogger VangelV said...

And if goods can flow freely, and if capital can flow freely, then labor should be able to flow freely to. I am glad the right-wing is coming around to this view.

You might try reading a bit more carefully or get a dictionary. If this is what you get out of Don's commentary the subject is way over your head.

In reality the salesman is Chinese and when he gets an order it shows up on the to-do list at Intel’s chip factory in San Jose, Costa Rico. No American employment results.

Really? Does that mean that Americans don't benefit from Intel's chips no matter where they are made? And don't American engineers design those chips? And don't American companies make the very expensive equipment than makes those chips? Don't American managers and sales people go to American based companies and sell Intel chips that those companies make and sell to Americans? And don't American customers of Intel based computers benefit from the use of those consumers by being able to control their operations better and stay competitive? Aren't there hundreds of thousands of American programmers that write code for Intel based chips? And don't American consumers benefit from the much cheaper products that those Intel chips made possible?

 
At 1/10/2011 8:09 PM, Blogger Benjamin said...

Prof J-

But Dr Perry said the analogy of the 50 states not having trade barriers, but a central trade and monetary authority, was beneficial to the populations of those 50 states.

Dr Perry was not calling for anarchy.

So, what would be best for the populations of the world would be one all-powerful trade authority, and one central bank, and one currency.

Free trade in labor, capital, goods and services.

What's not to like?

Free enterprise, and right-wing nirvana!

 
At 1/10/2011 9:01 PM, Blogger sethstorm said...


"The Logical Conclusion of Protectionism"

Only if one believes in the faulty assumption of costs being the same at the international level as they are at the intranational level.

Don't allow for that faulty assumption, and the argument collapses.








VangelV

The only competitiveness you want is how feudal towards business can you go.



And don't American companies make the very expensive equipment than makes those chips? Don't American managers and sales people go to American based companies and sell Intel chips that those companies make and sell to Americans? And don't American customers of Intel based computers benefit from the use of those consumers by being able to control their operations better and stay competitive? Aren't there hundreds of thousands of American programmers that write code for Intel based chips? And don't American consumers benefit from the much cheaper products that those Intel chips made possible?

Mostly no. They can make the development kits in the US, but have to go to a hellhole Third World country to manufacture what you get retail.

James is right in this case. Can't really say that for you.

 
At 1/10/2011 10:27 PM, Blogger Hydra said...

My county has been protecting my property ( or my neighbors) by restricting trade for decades. The neighboring county has pursued more of a growth/free trade policy. From an equal start the neighboring county now supports more people at higher per capital income and higher per capital assessed value. Even after higher taxes, they are better off.

Except, my county retains a certain bucolic charm.

The difference in wealth between the two counties is the price for bucolic charm and protectionism.

I never favored international protectionism, but I never fully made the local connection until mjp pointed it out.

 
At 1/11/2011 3:26 AM, Blogger PeakTrader said...

Free trade:

The Economic Organisation of a P.O.W. Camp
R. A. Radford, Economica, vol. 12, 1945

"...through his economic activity, the exchange of goods and services, his standard of material comfort is considerably enhanced.

...it is by trade that individual preferences are given expression and comfort increased.

We...received 1/4 of a Red Cross food parcel each...Starting with simple direct barter, such as a non-smoker giving a smoker friend his cigarette issue in exchange for a chocolate ration, more complex exchanges soon became an accepted custom. Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes.

One trader in food and cigarettes, operating in a period of dearth, enjoyed a high reputation. His capital, carefully saved, was originally about 50 cigarettes, with which he bought rations on issue days and held them until the price rose just before the next issue. He also picked up a little by arbitrage; several times a day he visited every Exchange or Mart notice board and took advantage of every discrepancy between prices of goods offered and wanted. His knowledge of prices, markets and names of those who had received cigarette parcels was phenomenal. By these means he kept himself smoking steadily – his profits – while his capital remained intact."

 
At 1/11/2011 9:18 AM, Blogger Paul said...

Benji,

Nothing you have written is a logical conclusion to the free trade argument save this:

"And if goods can flow freely, and if capital can flow freely, then labor should be able to flow freely to. I am glad the right-wing is coming around to this view."

Yes, except there are other variables to consider:

"You cannot simultaneously have free immigration and a welfare state."

~Milton Friedman


Which reminds me again: When will you be lecturing us all next about our deviations from Milton Friedman's holy writ?

 
At 1/11/2011 9:32 AM, Blogger Rufus II said...

In the Real World there is a tremendous difference between buying something from my next door neighbor, Joe, and buying the same product from Jose.

First, of course, is that there is a tremendously greater chance that Joe will buy something from me than there is that Jose will.

Second, Joe will pay taxes, locally, and his taxes will benefit my family.

Third, if Jose fails I won't have to pay his unemployment, and provide food aid, and medical care for his family.

 
At 1/11/2011 9:48 AM, Blogger Sean said...

there is absolutely no difference between Suzy trading with Joe her next-door neighbor and Suzy trading with Jose in Mexico, Josef in Austria, or Javu in China. None.
In other words, geography can have no correlation with any other attribute. Fail.

 
At 1/11/2011 12:37 PM, Blogger Benjamin said...

Paul-

I agree with MF on this, and that we should eliminate the welfare trapping of our nation, including HUD, Department of Labor, Commerce Department, USDA and 90 percent of the Department of Defense (which has become the largest welfare-boondoggle of all, for well-placed Senators and Congressman).

The logical conclusion of pro free trade argument is really a call for globalized government, with no barriers at all to capital, labor, services and goods, and one global monetary authority.

Atavistic nationalist impulses should be curtailed. Any effort to improve your lot through government must be tamped down.

This is not anarchy--we need a global government to ensure contracts are enforceable and property rights preserved. A nice side bonus would be no more wars by nation-states.

Free enterprise and and global capitalistic nirvana! What is not to like?

 
At 1/11/2011 12:50 PM, Blogger Ron H. said...

"In other words, geography can have no correlation with any other attribute. Fail."

Sean, at what distance from you does geography begin to make a difference? Why would an imaginary political line in the dirt make a difference in some cases and not in others?

Keep in mind that in some cases, Suzy and Jose might also be next door neighbors with one of those imaginary lines running between their houses.

Assuming that neither language nor currency are a problem - unless you believe they really are - I'm interested in why you think they shoudn't engage in voluntary, un-coerced trade that benefits them both. You might want to avoid explanations that use restrictions imposed by third parties, such as government.

Also, the fact that Suzy and Jose are members of different tribes probably shouldn't matter either.

 
At 1/11/2011 2:26 PM, Blogger Sean said...

Ron H.,

Sean, at what distance from you does geography begin to make a difference?
If the argument against protectionism is about human freedom, then yes, geography is irrelevant to the argument. But if the argument is about the side effects of a given trade, then a lot of the costs and benefits of that trade are geographically correlated.
For example, if China makes the steel and we buy it, they get the jobs and the pollution, and we get the steel. Jobs and pollution both have geographically correlated externalities.
If a trade bloc is trying to manage extenralities, geography matters. QED.

I'm interested in why you think they shoudn't engage in voluntary, un-coerced trade that benefits them both.
They should, as long as all the relevant externalities are exposed in the trade (although that may be impractical). But the assertion that geography can *never* matter is ludicrous.

 
At 1/11/2011 2:31 PM, Blogger VangelV said...

In the Real World there is a tremendous difference between buying something from my next door neighbor, Joe, and buying the same product from Jose.

OK, I'll play along. Let's go.

First, of course, is that there is a tremendously greater chance that Joe will buy something from me than there is that Jose will.

Only if you make something that Jose does not want to buy and Joe does. And only if Joe likes your price. You can be sure that if you charge more than Jose he will not be buying from you.

Second, Joe will pay taxes, locally, and his taxes will benefit my family.

But Joe also consumes tax revenues. Perhaps you are single and are paying higher taxes to send his kids to school. Or he is unemployed and you are paying support for his family. You don't have to pay for anything Jose consumes because your total bill is limited to what you choose to pay for his product and nothing more.

Third, if Jose fails I won't have to pay his unemployment, and provide food aid, and medical care for his family.

That is a good thing, isn't it? Why should you have to pay for Joe's failure?

 
At 1/11/2011 2:34 PM, Blogger VangelV said...

The logical conclusion of pro free trade argument is really a call for globalized government, with no barriers at all to capital, labor, services and goods, and one global monetary authority.

No. The logical conclusion is to get rid of governments as much as possible and limit their powers to security (although I can argue even against that). Governments should not have the power to meddle in the voluntary economic and social transactions that their citizens engage in.

 
At 1/11/2011 2:38 PM, Blogger Paul said...

Benji,

"I agree with MF on this.."

No, you don't at all. You routinely argue against and lampoon free-trade arguments. Um, like you do in the rest of your comments in your reply. You're the true MF deviant, Benji. Exhibit A below:

"The logical conclusion of pro free trade argument is really a call for globalized government, with no barriers at all to capital, labor, services and goods, and one global monetary authority."

No, that's not logical at all. Sovereign nations can trade efficiently with one another without a need, or a desire, to converge. Your absurd logic leap runs flat into cultural and political differences.

Once again, you're just pissed because the Chinese eat your lunch in the furniture business.

 
At 1/11/2011 2:39 PM, Blogger VangelV said...

For example, if China makes the steel and we buy it, they get the jobs and the pollution, and we get the steel. Jobs and pollution both have geographically correlated externalities.

We would only buy Chinese steel if it were cheaper. And if Chinese workers and tax payers were to subsidize our steel imagine the extra jobs that we would create in our sectors that use that subsidized steel. Our more competitive produces would mean many more jobs and more wealth accumulation with less pollution. Why is this a bad thing?

They should, as long as all the relevant externalities are exposed in the trade (although that may be impractical). But the assertion that geography can *never* matter is ludicrous.

But the argument that artificial boundaries matter is ludicrous. You have not written anything to suggest otherwise.

 
At 1/11/2011 4:17 PM, Blogger Ron H. said...

"For example, if China makes the steel and we buy it, they get the jobs and the pollution, and we get the steel."

...and the clean air. Why is this a problem? Don't you think the Chinese are aware of what they are doing, and should make their own decisions about what is in their own best interest?

Are you suggesting that US buyers of steel should choose to pay more for US manufactured steel to protect Chinese people from pollution?

In the above quote, substitute Alabama for China, and see how it reads.

 
At 1/11/2011 4:55 PM, Blogger Sean said...

VangeIV,


Why is this a bad thing?
I didn't use it as an example of "bad". I used it as an example of geographical side effects.

But the argument that artificial boundaries matter is ludicrous. You have not written anything to suggest otherwise.
If they're completely artificial, then they don't matter by definition. And in many cases political lines don't matter. But historically political lines tend to be drawn around geograhpical areas that share the same water, food sources, air quality, weather, culture, etc, etc, etc. So if your town gets the factory, your town gets to breath the pollution, not just one guy. It's a useful simplification to group that area when showing the certain effects.

If this isn't obvious, I don't know what is.

 
At 1/11/2011 4:58 PM, Blogger Sean said...

Ron H.,

Don't you think the Chinese are aware of what they are doing, and should make their own decisions about what is in their own best interest?
Sure, if all the Chinese in the geographical area sign off on it, or delegate a representative to weight the tradeoffs, like government, sure. But it's a decision that affects a georaphical area, not just the guy building the factory. Which is my point.

Are you suggesting that US buyers of steel should choose to pay more for US manufactured steel to protect Chinese people from pollution?
Nope. My point here is that decision that affects a group tends to be made by a group, for legitimate reasons.

 
At 1/11/2011 5:31 PM, Blogger Ron H. said...

"Sure, if all the Chinese in the geographical area sign off on it, or delegate a representative to weight the tradeoffs, like government, sure."

Sean, we can't know for sure what is happening in China at this level, but I suspect the people in an area have little to say about where a steel mill will be built. Would you refuse to buy that steel for this reason?

"But it's a decision that affects a georaphical area, not just the guy building the factory. Which is my point.

So if your town gets the factory, your town gets to breath the pollution, not just one guy.
"

So, if I understand you correctly, and I'm not sure I do, you would like to see all pollution causing enterprises located away from where we live. Perhaps outside the US. This is very different from the argument most protectionists make here.

By the way, I think you will find that when per capita GDP reaches about $3500 anywhere in the world, people feel well enough off to become concerned with their natural environment and pollution. At less than that, just getting by takes too much effort to have the luxury of worrying about such things.

 
At 1/11/2011 6:43 PM, Blogger Sean said...

Ron H.,

Would you refuse to buy that steel for this reason?
That's not a decision I can afford. If I could afford it and thought it would make a difference... maybe.

This is very different from the argument most protectionists make here.
Pollution is a "cost", and we should weigh it in the cost/benefit analysis accordingly. As you pointed out, for some groups the cost is worth it. For China as well as the US, fairness would require that cost be appropriately exposed to the people making the decision and the
negativily affected properly involved in the decision process and compensated. But that's often impractical. Failing that, we hold our noses and try to use arbiters like government to compensate for those externalities. Granted, that often doesn't work out, either.

 
At 1/11/2011 7:45 PM, Blogger sethstorm said...


The Economic Organisation of a P.O.W. Camp
R. A. Radford, Economica, vol. 12, 1945


What I am suggesting is that the costs would be higher between countries (or in your case, prisoner-of-war camps). Find a better example without that problem.

 
At 1/11/2011 11:54 PM, Blogger VangelV said...

If this isn't obvious, I don't know what is.

What is obvious is that you are and likely to remain clueless.

 
At 1/12/2011 12:36 AM, Blogger Sean said...

VangeIV,

I assume that if you had an argument, you'd make it. But you just go back to name calling.

 
At 1/13/2011 8:49 AM, Blogger James Fraasch said...

This is where you guys lose me.

Which one of you would PREFER for your dollar to go to a Chinese company making a trinket.

All things being equal you have to admit that it is better for YOU to have that dollar go to another American.

China has rebuilt and built an incredible infrastructure as a direct result of us spending so much money on their trinkets. That is not an arguable point. They make stuff, we send our dollars to them to buy it. They use their dollars (or tax revenues to the government on those dollars) to build roads, bridges, entire cities.

Does anyone disagree with the point above?

Ok, so then logically thinking, all things being equal, would it not then benefit us to KEEP those dollars in the US so that we could do the same then: reinvest in our crumbling infrastructure for the benefit of our society as a whole.

Your points are all that it is a net benefit to all Americans that we can buy cheap stuff from China because 50 cents in savings on a trinket bought from China is 50 cents that the American consumer can spend elsewhere. Multiplied by millions of transactions, the net benefit can be quite the sum. But what if that 50 cents in savings is again spent on more Chinese trinkets?

How exactly does that do anything for employment here in the US? Someone has to sell the trinket you say?

I'd rather we manufacture AND sell the trinket. The goal of all this should be to figure out how to have American manufacturers compete on a global scale. Not with tariffs that distort free markets, but with less costly regulation (start by getting rid of Sarbanes-Oxley), less costly environmental compliance, lower energy costs (from nuclear to natural gas), and significantly lower corporate tax rates.

Right now is the time to try. We have millions of Americans that would be willing to do manufacturing jobs at wages that just a few years ago would have been impossible to imagine. Its amazing what 2 years of being out of work will do to someone's judgment about what a "fair" wage actually is.

I'd rather we focus on rebuilding our country instead of building the infrastructure of a country that will jail someone for life if they speak out against their own government.

James

 
At 1/13/2011 11:32 AM, Blogger VangelV said...

Which one of you would PREFER for your dollar to go to a Chinese company making a trinket.

By definition, anyone who buys from that Chinese company prefers the dollar to go to it rather than for it to stay in his pocket. When making choices people look at what is the greatest benefit for them. They do not know the person who is getting their dollar and frankly don't care because their decision rewards merit, not nationality, political affiliation, religion, gender, or other factors.

All things being equal you have to admit that it is better for YOU to have that dollar go to another American.

If they make a better product and offer a better deal than it will go to another American. But that dollar has to be earned by satisfying the consumer.

China has rebuilt and built an incredible infrastructure as a direct result of us spending so much money on their trinkets. That is not an arguable point. They make stuff, we send our dollars to them to buy it. They use their dollars (or tax revenues to the government on those dollars) to build roads, bridges, entire cities.

Yes, that is what happened. American consumers bought products that they wanted from Chinese companies and some of those dollars were invested in infrastructure by the Chinese. That is a good thing because it increased their standard of living.

Ok, so then logically thinking, all things being equal, would it not then benefit us to KEEP those dollars in the US so that we could do the same then: reinvest in our crumbling infrastructure for the benefit of our society as a whole.

All that has to happen is to have American companies become competitive and offer good products at fair prices. They can actually do that because many American companies are still very good at manufacturing. (Keep in mind that the US exported more than the Chinese even though the American population was much smaller. (Based on the 2008 data that I have access to.))

One difference is that the US government spends far too much money on its welfare/warfare programs and cannot support an infrastructure spending program. China does not spend nearly as much on maintaining a global military presence and does not have to fund a huge social program like Medicare. Another difference is the willingness of the Chinese to privatize highways and have developers and construction companies make the necessary investments.

 
At 1/13/2011 11:42 AM, Blogger VangelV said...

Your points are all that it is a net benefit to all Americans that we can buy cheap stuff from China because 50 cents in savings on a trinket bought from China is 50 cents that the American consumer can spend elsewhere. Multiplied by millions of transactions, the net benefit can be quite the sum. But what if that 50 cents in savings is again spent on more Chinese trinkets?

So? When you buy things you make the best choice for you. If you buy from company A all you are saying is that it did more to meet your requirements than company B, C, D, etc. Spending more on a domestic product does not ensure that any more will be invested in infrastructure by your government so I do not understand your logic.

How exactly does that do anything for employment here in the US? Someone has to sell the trinket you say?

If there is more money to spend for domestic goods and services then it does do something for US employment. But let us not blame the Chinese for rules and regulations that make some American goods too expensive or for an education system that cannot produce the type of employees that are required.

I'd rather we manufacture AND sell the trinket.

As I wrote, the US was the world's biggest exporter. That means that you do manufacture and sell stuff to other countries.

The goal of all this should be to figure out how to have American manufacturers compete on a global scale.

That is easy. Cut the size of government by 90%, lower corporate tax rates and stop putting up barriers to productive activities to bail out the uncompetitive companies.

Not with tariffs that distort free markets, but with less costly regulation (start by getting rid of Sarbanes-Oxley), less costly environmental compliance, lower energy costs (from nuclear to natural gas), and significantly lower corporate tax rates.

It isn't that complicated. Just cut down the size of the federal government and have it stick to the powers delegated to it in the Constitution. (Better yet get rid of the Constitution and go back to the Articles of Confederation.)

Right now is the time to try. We have millions of Americans that would be willing to do manufacturing jobs at wages that just a few years ago would have been impossible to imagine. Its amazing what 2 years of being out of work will do to someone's judgment about what a "fair" wage actually is.

Good luck. Voters don't want spending on them to go down. They want spending on the other guy to go down. They actually like government meddling. And if you have been paying attention to Mark, US manufacturing is doing fine. It has been increasing output steadily even as it has been cutting workers because it relies on automation to do the job.

I'd rather we focus on rebuilding our country instead of building the infrastructure of a country that will jail someone for life if they speak out against their own government.

Why not do what the Chinese have done? Allow private companies to build more infrastructure and have them collect tolls for those that want to use it.

 
At 1/13/2011 12:36 PM, Blogger James Fraasch said...

Your arguments are flimsy in two posts here in these comments.

First in response to Rufus you say:

But Joe also consumes tax revenues. Perhaps you are single and are paying higher taxes to send his kids to school. Or he is unemployed and you are paying support for his family. You don't have to pay for anything Jose consumes because your total bill is limited to what you choose to pay for his product and nothing more.

Joe is going to be there no matter what you do for his product...unless of course he cannot support himself because you have decided to business with Jose. If Joe needs to leave because he cannot sell enough product then he will be replaced by what? A lower income earning person paying a lower price for a home next to yours therefore depreciating your very own property value. So in essence your argument becomes, screw Joe and my very own property value, too.

Yes, Joe consumes tax revenues but only to the extent at which he utilizes them...just like you.

Then in your response to my original post you admit that China is now WEALTHIER as a result of our doing business with them.

Wealth is not a 2+2=6 game. If we by definition send $2 of wealth to China then we by definition have become $2 less wealthy. There is no mystical multiplier effect here. The world's collective wealth has not been changed, instead it has been transferred.

I admit, yes we did receive a trinket for that $2 so our balance sheet is in balance, but our tax revenues (and infrastructure improvements) are not increased and therefore beneficial investment of those $2 is not done in the United States but in China instead.

All of these arguments are based on the premise that it doesn't matter if I spend $2 in China or $2 on Joe. That's BS. It matters to Joe. It matters to local/state/federal tax revenues. It matters to school districts and municipalities. It matters to home values.

Price/quality being equal, it is much more beneficial to buy a good from Joe. Can we at least agree on that?

 
At 1/13/2011 12:58 PM, Blogger Sean said...

James,

I actually think that free trade is really not the root problem, it's American competitiveness. I don't have any truly good ansers, though.

 
At 1/13/2011 2:24 PM, Blogger James Fraasch said...

Sean, I agree.

But I keep seeing people on this blog post that there is no difference if I buy a product from Mexico/China/Zimbabwe versus me buying the same product from my neighbor.

If there was ONE GOVERNMENT (as was advanced by another commenter) then we would all benefit since that one government would get the tax revenue and then use it for the benefit of society as a whole.

But precisely because we are a world of sovereign countries, WHERE you buy a product from does matter.

I'd like the people advancing the theory of free trade having no impact on my neighbor to at least acknowledge that point.

James

 
At 1/13/2011 3:58 PM, Blogger Ron H. said...

James Fraasch,

"Then in your response to my
original post you admit that China is now WEALTHIER as a result of our doing business with them.
"

What could possibly be wrong with that? We are also wealthier as a result of doing business with China. Trade is not zero sum where one party gains and the other loses.

"Wealth is not a 2+2=6 game."

Actually, it is. Think about it. When you trade freely with someone else, you give them something you have in exchange for something you want more. The other party is doing the same. Both parties are better off by making the trade.

"If we by definition send $2 of wealth to China then we by definition have become $2 less wealthy."

No, you are confusing money with wealth. You might work for an hour in order to obtain a trinket that you want. But, since your employer doesn't have any trinkets to give you, he instead gives you a certificate verifying that you have worked for an hour, and are therefore entitled to a trinket, or some amount of food, or gas, or rent, or whatever you most desire. Money is kind of magic that way. By working for an hour, you have created that amount of value, just as the trinket maker has created the value of the trinket. When you trade, you are getting something you want more than the hour of labor, and the trinket maker is getting a certificate he can use to get something he values more than the trinket.

What can you possibly find wrong with that arrangement? Forget about China. It doesn't matter where you are, or where the trinket maker is. It works the same way.

What I don't understand, is why you think Joe should be happy making trinkets, when he would be better off as a plumber, or an accountant, an airline pilot, or a circuit designer. Trinket making is a low value job that most of us would rather not do, so good riddance I say. Let those who are willing to make them, do so.

 
At 1/13/2011 4:50 PM, Blogger VangelV said...

Joe is going to be there no matter what you do for his product...unless of course he cannot support himself because you have decided to business with Jose. If Joe needs to leave because he cannot sell enough product then he will be replaced by what? A lower income earning person paying a lower price for a home next to yours therefore depreciating your very own property value. So in essence your argument becomes, screw Joe and my very own property value, too.

No. My argument is that there is no need for Joe to screw you because he can't produce what he wants to sell efficiently. Joe should do what he is best at and what he should be paid should be determined by his customers.

Yes, Joe consumes tax revenues but only to the extent at which he utilizes them...just like you.

He is still a consumer and Jose isn't. That is an argument against your previous position.

Then in your response to my original post you admit that China is now WEALTHIER as a result of our doing business with them.

No, China is wealthier because it accumulated capital that allowed it to sell products and services that it could not provide before using people skilled enough to create those products and services.

Wealth is not a 2+2=6 game. If we by definition send $2 of wealth to China then we by definition have become $2 less wealthy. There is no mystical multiplier effect here. The world's collective wealth has not been changed, instead it has been transferred.

Really? You mean that you value what you got from China for $2 less than what you paid for it? If that is the case why did you agree to the transaction.

Your statement above shows just how little it is that you understand of economics. A trade between two parties only happens because both preferred what they got to what they gave up. You need to think about the implications of that statement.

 
At 1/13/2011 4:58 PM, Blogger VangelV said...

I admit, yes we did receive a trinket for that $2 so our balance sheet is in balance, but our tax revenues (and infrastructure improvements) are not increased and therefore beneficial investment of those $2 is not done in the United States but in China instead.

You are confused; your infrastructure would certainly not be built if you had to pay Joe $12 for that trinket.

All of these arguments are based on the premise that it doesn't matter if I spend $2 in China or $2 on Joe.

No. They are based on the argument that you should choose what you buy from whichever producer you want at a price that is acceptable to you.

That's BS. It matters to Joe.

Of course it does. He wants you to pay him $12 for the $9 it cost him to make the trinket instead of bying it from Jose for $2 because Jose can make it for $1.73.

It matters to local/state/federal tax revenues.

It does? Why? If there is sales tax you will still wind up spending about the same amount of money. Just because Joe charges you more it does not mean that you can buy his product and other things as well. The extra $10 cost will have to come out of Jennifer's sales.

It matters to school districts and municipalities. It matters to home values.

Why?

Price/quality being equal, it is much more beneficial to buy a good from Joe. Can we at least agree on that?

But when you choose between two products is is usually because they are not equal. And I do not have to agree because I may not like Joe or his company and would prefer to deal with someone that is more trustworthy until they can win my trust. Why do you think so many Americans bought Toyota and Honda cars over those made by GM?

 
At 1/13/2011 5:04 PM, Blogger Sean said...

James,

I'd like the people advancing the theory of free trade having no impact on my neighbor to at least acknowledge that point.
Yes, there are externalities that in trades that are not exposed to the parties performing the trade. I'm not sure how to expose those externalities to the transaction. I suppose that if and only if that can not be done in a mechanical sense does trade regulation potentially (or the formation of a trade block, etc.) have value.

 
At 1/13/2011 6:58 PM, Blogger James Fraasch said...

VangelV

You are missing my point entirely. If it costs Jose $1.50 to make his trinket and 50 cents to ship it and Joe makes his trinket for $2 then the transaction would could the same to me.

My point to you and others on this comment board is that you are making no determination on spending that $2 on Jose versus Joe.

Your argument is that borders don't matter, that the $2 going to Jose is the exact same as it would be going to Joe so there should be no preference.

My point is that at the same price it is more beneficial for you to keep those dollars in your neighborhood. Right?

 
At 1/13/2011 7:27 PM, Blogger James Fraasch said...

Here is the simple math of it. We'll use round numbers to we can all follow along.

Assume Joe Neighbor makes an engine that costs $1000. It costs him $900 for the parts so his profit is $100 per engine.

Now assume the Wicked Witch of the East makes the same engine in Oz and the cost to us Americans is the same as Joe Neighbor, $1000. Her profit is $200.

The argument you are advancing is that there is no difference between me buying the engine from the Wicked Witch or from Joe.

If I buy that engine from my neighbor Joe, then Joe will turn around and pay:
20% to the Federal Government as income tax ($20)
6% to the Pennsylvania treasury for state income tax ($6)
2% to the municipaility that I live in just south of Pittsburgh ($2)

Assuming the same tax breakdown in Oz (20% to the central government, 6% to the province, and 2% to the local government agency) then the combined governments of Oz get to dole out the $56 in a way that they see fit and in a way that would not be to the net benefit of YOU, but instead to the net benefit of other Ozians.

So, in your argument you are saying that it doesn't matter to you where you buy the engine. But I have showed you above that by buying the engine from the Land of Oz, you have forgone revenue to government in the amount of $28 which would have otherwise been used by the government in a way that it sees as a net benefit to your fellow Americans. Who knows, maybe it would even be used to pay down our debt.

In this case, borders matter. Thinking that they don't is purely intellectual nonsense.

James

 
At 1/13/2011 7:44 PM, Blogger Mark J. Perry said...

James:

The only way your argument might make sense is if 100% of the money spent locally stays in the local economy forever, and only if 100% of the spend out of the local economy "leaks out" and NEVER comes back to benefit the local economy. That's ridiciulous.

As an extreme case, what if 100% of the money spent locally with Joe leaves the country immeditately to his favorite charity in Mexico or Africa, or his family in Mexico or Africa, or on vacations to Mexico or Africa?

On the other hand, what if 100% of the money spent on Jose's products in Mexico returns immediately to your local community, either because he buys Ebay products from your neighbor, or he just loves to visit your city?

Or stated differently, are you so committed to your local economy, that you would agree to never take a vacation to another state or country, never watch a foreign film, never consume any foreign products, neven eat any ethnic food, etc.?

I think you're advocating "Backyard Economics," which is really "Backward Economics," as I argue here .

 
At 1/13/2011 8:41 PM, Blogger VangelV said...

If there was ONE GOVERNMENT (as was advanced by another commenter) then we would all benefit since that one government would get the tax revenue and then use it for the benefit of society as a whole.

Why do you want government to get bigger and collect more in taxes? The best government is one that governs least.

 
At 1/13/2011 9:30 PM, Blogger VangelV said...

You are missing my point entirely. If it costs Jose $1.50 to make his trinket and 50 cents to ship it and Joe makes his trinket for $2 then the transaction would could the same to me.

You are missing my point. Who you give your $2 is up to you and depends on what trinket you prefer. It is your money so the producers should try to impress and satisfy you, not the other way around.

My point to you and others on this comment board is that you are making no determination on spending that $2 on Jose versus Joe.

I don't really care because when I buy something I do not use the religion, political affiliation, race, gender or nationality of the producer. I look at what options I have and choose my top preference. Most people do exactly the same thing.

Your argument is that borders don't matter, that the $2 going to Jose is the exact same as it would be going to Joe so there should be no preference.

My argument is that when I make my choices I don't use the identity of the supplier as the primary factor in the decision making process. Few people actually do because that factor is usually way down the list.

My point is that at the same price it is more beneficial for you to keep those dollars in your neighborhood. Right?

Yes. When I get the best product at the best cost it makes sense to buy from the local producer. But most people do not use origin of the product as a primary selection factor.

 
At 1/13/2011 9:39 PM, Blogger VangelV said...

The argument you are advancing is that there is no difference between me buying the engine from the Wicked Witch or from Joe.

No, I am saying that you will buy the best engine at the best price. In the real world the low cost producer will lower the price to get your business and you will probably choose to get the best deal.

In your example Joe will be constrained by his $900 cost. His competitor can charge you $875 and make a nice profit as she sells many more units as Joe is forced out of business. Instead of paying Joe $1000 you will pay her $875 and have $125 left over to buy other products from other people.

Assuming the same tax breakdown in Oz (20% to the central government, 6% to the province, and 2% to the local government agency) then the combined governments of Oz get to dole out the $56 in a way that they see fit and in a way that would not be to the net benefit of YOU, but instead to the net benefit of other Ozians.

Taxes are benefits? Since when is that true? And if they were benefits you are free to pay as much as you want as a donation to the government.

So, in your argument you are saying that it doesn't matter to you where you buy the engine. But I have showed you above that by buying the engine from the Land of Oz, you have forgone revenue to government in the amount of $28 which would have otherwise been used by the government in a way that it sees as a net benefit to your fellow Americans. Who knows, maybe it would even be used to pay down our debt.

I would rather have the extra $125 in my pocket than have the government get $28 from Joe in taxes. Other Americans do too or they would not be buying the cheaper goods made by foreign companies.

 
At 1/13/2011 11:42 PM, Blogger James Fraasch said...

My point is that at the same price it is more beneficial for you to keep those dollars in your neighborhood. Right?

Yes. When I get the best product at the best cost it makes sense to buy from the local producer. But most people do not use origin of the product as a primary selection factor.

You have given me my point. Borders matter even to you.

This is counter to the original point from Don Boudreaux where he argues that "economically and morally speaking there is absolutely no difference between Suxy trading with Joe her next-door neighbor and Suzy trading with Jose in Mexico, Josef, or Javu".

It matters BOTH economically and morally.

I guess that means you are a protectionist as much as I am.

This is all I am arguing about the point made by Boudreaux. To suggest that there is "absolutely no difference" is ridiculous on its face. Of course there is a difference. There is a difference in revenues to ones government, to ones morality, and much more.

For the same cost (the premise of my argument) one should morally and economically choose the neighbor to do business with instead of the foreigner.


James

 
At 1/14/2011 12:51 AM, Blogger Ron H. said...

"You have given me my point. Borders matter even to you."

Apparently you don't read well. VangelV wrote:

"When I get the best product at the best cost it makes sense to buy from the local producer

That means that everything is NOT equal. A better deal from the local producer will get him the sale.

You give examples of equivalent items being sold at the same price, but that's almost never the case. There is always a reason to prefer one over the other, and for most people that reason is price.

We should all be free to trade with whoever we want without interference from third parties such as government.

For most people that means buying the best product at the lowest price, without caring where it's made. For you, that means paying more for an item from Joe, because he's your neighbor. If you're really concerned about government revenue, you can always send them extra money to make up for lost tax revenue.

Most items are imported because they can compete with domestic products on price. Otherwise, there would be no reason to import them.

Your engine example isn't realistic, because the engines made by WW of the E would more likely be priced at $900 or less, to compete with Joe. Selling at $1000 wouldn't make sense.

Before you start worrying about Joe, consider that he might figure out that he can't continue to compete as an engine manufacturer, and decide to quit that business, and because of his extensive knowledge and experience with these engines, open up a speed shop where he could install these engines, improve performance with add on power options, and tune them for higher performance. He might find this to be a much better living than manufacturing engines. In that case he would be paying even more taxes than before. You would be OK with that, right?

 
At 1/14/2011 6:43 AM, Blogger James Fraasch said...

Ron,

Geez, apparently I am not the only one that doesn't read well.

How many times do I have to say the SAME product at the SAME price.

Do you buy the SAME product at the SAME price from your neighbor?

Or do you agree with Don Boudreaux that there is absolutely no difference between buying the SAME product at the SAME price from the guy in Oz?

The products are equivalent.

What do you do?

Do you disagree with my premise that buying the SAME product at the SAME price provides a better net benefit to you both morally and economically (in the form of tax revenues to your local government) than buying that product from Oz?

Taxes are benefits in as much as if you buy the product from your neighbor and Pennsylvania has a balanced budget, then when it comes time for the next budget, the PA legislature could lower YOUR VERY OWN TAXES by the $6 paid by Joe for selling his product to you. If Pennsylvania was made up of two people, you and Joe, then that is $6 that you personally will not have to pay in taxes to Pennsylvania. Your decision to reward your friendly neighbor with your business creates these kind of, let's call them "efficiencies" all around.

So yes, buying the product from Joe would reduce your tax bill (assuming a balanced budget). From the federal, state, and local level those would be dollars that the government agencies would not seek out from you.

The premise that it doesn't matter if you buy from your neighbor or from Oz is simply wrong.

If you admit that buying the SAME product at the SAME price from your neighbor is the better choice, then you have to admit that borders matter.

It doesn't matter if the product is an engine, windows, bubble gum, toothpicks, widgets, or pins.


James

 
At 1/14/2011 9:40 AM, Blogger James Fraasch said...

Mark, I don't know how I missed your response earlier.

My point is that if Joe gets my money, he is going to have to at the very least owe $6 to my State for income tax purposes. On that point alone, it means that is $6 less that the rest of us Pennsylvanians would have to pay.

If I purchase from Jose, I forgo the guarantee of lowering my tax bill. Instead, Jose pays taxes to his government agency. He builds Mexico's infrastructure. Or Oz's or whoever.

There is a net benefit to me to buy from my neighbor. He is not going to go to China to shop for groceries. He is not going to go to Brazil to get his haircut. He will use some of his profit to benefit my other neighbors.

I will read your link on Backyard Economics. As a quick question, do you take into account these types of benefits in your "Backward Economics" discussion?

I am all for free trade. I just don't agree that there is no difference between buying from China versus your neighbor. There are very measurable differences.

 
At 1/14/2011 12:09 PM, Blogger VangelV said...

You have given me my point. Borders matter even to you.

No. Value is subjective.

When choosing you pick the factors that mean the most to you over those that are far less important to you.

Because your most important factor when choosing products is the nationality of the producer you assume that everyone else should feel the same way and that therefore it is important. But it obviously isn't important to may people or we would not have had so many Americans exchange their Fords and GMs with foreign vehicles.

This is counter to the original point from Don Boudreaux where he argues that "economically and morally speaking there is absolutely no difference between Suxy trading with Joe her next-door neighbor and Suzy trading with Jose in Mexico, Josef, or Javu".

Don is right. There is no moral, economic or ethical difference.

It matters BOTH economically and morally.

You don't read well or don't understand logic well. It seems to be a common affliction on many of these blogs.

I guess that means you are a protectionist as much as I am.

The only thing I am protecting is the consumer's right to choose. As I said, when a local producer makes the best product at the best cost it makes sense to buy from him and people will buy from him. He will not need any protection.

 
At 1/14/2011 12:13 PM, Blogger VangelV said...

This is all I am arguing about the point made by Boudreaux. To suggest that there is "absolutely no difference" is ridiculous on its face. Of course there is a difference. There is a difference in revenues to ones government, to ones morality, and much more.

Dan did not assume that you would not understand his very clear argument. He knows that value is subjective and that for some people there will be a 'difference'. But his argument is valid. There is no economic or moral difference between buying products from Jose or Joe. The person who satisfies your demands as a consumer the best should get your business regardless of ethnicity, gender, religion, etc.

For the same cost (the premise of my argument) one should morally and economically choose the neighbor to do business with instead of the foreigner.

Aren't you missing the point? Your neighbour needs no protection if he can offer the product at the same cost. And what if you don't like him and prefer Jose instead? Should you be forced to act against your own wishes?

 
At 1/14/2011 1:02 PM, Blogger VangelV said...

How many times do I have to say the SAME product at the SAME price.

How many times do you have to be reminded to live in the real world?

Where have you seen the SAME product from one manufacturer than from another? Is the Apple iPhone 4 the same as the Samsung Epic 4G? Is the Chevy Volt the same as the Nissan Leaf?

Do you buy the SAME product at the SAME price from your neighbor?

If I could it would depend on which neighbour.

Or do you agree with Don Boudreaux that there is absolutely no difference between buying the SAME product at the SAME price from the guy in Oz?

Where did Don say that exactly? Don simply wrote that, "economically and morally speaking, there is absolutely no difference between Suzy trading with Joe her next-door neighbor and Suzy trading with Jose in Mexico, Josef in Austria, or Javu in China."

Taxes are benefits in as much as if you buy the product from your neighbor and Pennsylvania has a balanced budget, then when it comes time for the next budget, the PA legislature could lower YOUR VERY OWN TAXES by the $6 paid by Joe for selling his product to you.

On what planet do you live? When has your government decided to slim down and cut your taxes? Wouldn't you be far better off with lower prices and lower taxes and using the surplus to purchase your own services from the best provider?

 
At 1/14/2011 7:20 PM, Blogger James Fraasch said...

VangelV
I'll give up the ghost on this one. We seem to be talking past one another and that doesn't benefit anyone.

I am going to give some more thought on my own blog to this and give some more consideration to the links given by Perry in his response. Obviously, you see where my initial stance is.

Seriously though, thank you for carrying on the conversation this long despite your frustration. I like the debate and the challenge.

James

 

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