Friday, 2 December 2016

Trump's Views Against Free Trade are Dumb

Now that the election is over Donald Trump is fair game for criticism even to those among my network who supported his election (or voted for him) because of their certainty that Hilary Clinton was a worse option on immigration, foreign policy, economics, or for any other reason. And I will be criticising. It's nothing personal, it's just business. Trump is clickbait, I have important things to teach about economics, and if I can get interest by breaking down his policies then I see no reason why I should not invoke his name.

Trump is not a libertarian candidate on any of our three platforms (foreign policy, civil liberties or economics); but as this is an economics blog its only his economic platform I will discuss. If Trump's supporters (and even his detractors) can see clearly on these issues than perhaps they can influence him by assimilation. The fact is, for the main part, your average person - whether they are a Trump supporter or hater - doesn't know why these policies don't work and so I figure it's well worth an explanation.

Trump's economic policies seem to comprise of a strange mix right-wing nationalism and left-wing opposition to free market capitalism on the dubious grounds that it is "bad for workers." (Slip in "American" before workers and you get the combination of the two.)

I think Trump largely made these appeals on the campaign trail because they are populist in nature and can win votes by an age old method. Identify an external enemy and decry them, then declare your ability to combat and defeat them. In Trump's case, this enemy has been China, and while I am glad that he chose a trade rival rather than a military one (so glad!) I really hope that he does not start a trade-war with China when he takes The Oval Office.

Despite Trump's protestations, it does not damage a nation when jobs are moved abroad because that nation can import those products from nations where they are produced cheaper. In economics this is called the principle of Comparative Advantage. Each nation is particularly proficient or well suited to producing certain types of goods and services - and each can benefit from trading with others for that reason. This applies even if one nation is better at producing more or even all goods than the other. (Rather than reinvent the wheel by explaining this allow me to signpost you to an article that does it sufficiently well.) (also see:

Each nation can benefit from specialisation and producing what they are best at, and the free market will naturally tend to flow towards them doing that through the incentives that it offers. (The more nations do this the richer they will become, the less they do this the poorer they will become.) The incontrovertible fact is that labour costs are particularly high in America as compared to poorer countries and therefore their comparative advantage is not largely in manufacturing at the moment. What this requires of America, as a nation, is that they move more towards a skills economy and away from a manufacturing one. America is frankly too rich for most manufacturing jobs, and it doesn't make any sense for most of them to be done in the USA. If those jobs are allowed to be moved abroad to poorer countries over a period of transition, in the long term everyone stands to gain. As those goods will become cheaper, Americans will be able to benefit from lower living costs and will have more left over to spend on other products (American or otherwise.)  Poorer nation will also benefit from the influx of American dollars which they can then spend on goods that will increase their own living standards. Trump has decried trade deficits, but the big secret is that dollars can only be spent on American products and so must find their way back to America eventually in the form of increased imports.

What is more, as those countries become richer and develop, more people in those countries - too - will move away from agricultural and manufacturing jobs into thinking professions. When they do this will be a boon for the entire world; those populations will themselves begin inventing all sorts of ideas and devices that will benefit Americans.

America should kiss most manufacturing goodbye and focus on creating a dynamic, diverse, highly intellectual and skilled workforce. That will require reforming the schools, and abolishing all minimum wage laws restricting internships so that people can take low paying jobs to learn skills that lead to high paying jobs. This would also allow the movement of manufacturing to be phased out rather than removed all at once as lower wages will encourage businesses to stick around longer.  (Note Trump has said nothing about freezing or reversing minimum wage, in fact he said it should be raised to $10 an hour. If you think the minimum wage is a good thing let me signpost you to this article which explains in detail why it is not.)

Trump appears to think that other countries dumping cheap Steel in America is bad for Americans, because it undercuts American-produced steel, but that is not the case either. The very idea was satirised by Frederic Bastiat in his essay Candle Stick Makers Petition, where the candle-makers claim that it is unfair that they have to compete with the sun which is giving out free light and so the government should blot it out. When foreign steel is dumped in America. it is going to benefit every industry that uses steel. Even if the domestic steel industry suffers for a while, of what consequence is that to the wider economy? That's like saying it's unfair to the fridge-makers if your neighbour offers you his spare fridge for free. The value of steel is only going to increase in the long term as it becomes more scarce - and at the time when it becomes profitable for the domestic industries open up again later their product will sell for a higher price. Saying this is bad is like saying that someone paying half the price of your car for you is bad. It is only nominally bad to some small number of individuals, it is not bad over the economy as a whole.

Trump is not all bad on economics, he has spoken out against trade deals like "NAFTA." But is it for the right reasons? Free Trade agreements should be written on less than one page. They should simply say "Lets trade." It seems that Trump is angling at "a better deal for American workers" as if such a thing could exist. The best deal is the deal that says anyone can trade with anyone at any time. Any restrictions mean that a small group may be profiting at the expense of everyone else. The agreement to trade is a private agreement between two individuals that government should have no involvement in whatsoever.

Trump stresses that income tax was not an original mandate of government, and that is good. But he wants to replace it with tariffs on "foreign goods." Perhaps tariffs are better than income tax, but that is not the final judgement on the matter: being punched is also better than being stabbed.

Now I defer to the words of a facebook user, who gives a great explanation:
"In understanding the benefits of division of labor, we first understand that wealth is not measured in currency accumulation - wealth is measured in time. The natural state of man is scarcity and poverty, it has been a recent phenomenon that we have been able to improve the standard quality of life for human beings on this planet. We can relate this to the amount of time or labor now required for the average person to acquire basic necessities for existence - food, shelter, clothing. Without division of labor, I would be left to make my own clothes, to hunt for my own food and to build my own shelter with my labor alone. When we engage in trade, markets emerge which then allow specialization so that each individual can focus on providing his/her time towards the most efficient use of the world's scarce resources. Of course, we know this general process to be known as the free market, whereby all of human action works towards a spontaneous order in which profits reward those that satisfy consumers by their responsible and efficient use of our precious resources, and losses ensure that those who fail to deliver these means to the proper ends either learn from the errors of their ways or move on to find an alternate use of their time. The key to understand is that the spontaneous order of the market is constantly at work to ensure that scarce resources are allocated to their most efficient ends. Over time, savings and investment lead us to improved capital structures, which lengthen the structure of production, but increase efficiency and output. Increased output makes it so that purchasing power is increased by greater abundance of goods and thus general welfare is increased.

So if time has a direct relationship to wealth, the more goods available to the market place, the richer we are. Trump frames the argument that China is taking our jobs by producing lower priced products and therefore China is winning, and we as Americans are losing. The fatal error with this logic is the failure to understand that not only are we all producers, but we are also all consumers. If able to create a product for lower price then that means that less of our income is needed to be spent on that particular good, meaning that less of our TIME is needed to be exchanged for purchase of that good. To this principal, a nation's borders have zero relevancy. To illustrate, if I earn $10 per hour and the average TV is $500, then I must work 50 hours in order to exchange my earnings for that TV set. If the TV is produced at a lower cost so that it is then sold for $250 then I am now more rich because I only have to work 25 hours to exchange my earnings for that same TV. Following the logic of Trump's argument, if we are to focus only on protecting my earnings as a producer, and not my purchasing power as a consumer, then the market scenario would be less favorable. In this anecdote, our ability to produce this TV in the US at a higher cost is granted by the government, by way of tariffs. In a narrow sense, on the margin, the producer of the TV benefits, but society as a whole is poorer. The TV producer keeps his job, but we must all spend more of our time to acquire this good. In the long run, because this protectionist policy will not be limited to just TVs, the TV producer will also be worse off because other goods will cost more under the same economic laws."

Ron Paul also wrote that Donald Trump promises to bring back jobs to America without understanding the major policies that led to their departure in the first place. The financing of America's warfare/welfare state through the printing of phony money by the Federal Reserve and distorted interest rates that encourage consumption and discourage saving and investment.

Trump is right that there aren't enough jobs in America, but the solution is deregulation rather than regulation of international trade. He claims that American car manufacturers are suffering, but the solution for that is not to tax the import of goods from abroad, but to make better stuff. No one wants an American car, because - frankly - American cars suck. Once upon a time, under Hoover, America manufactured watches that counted a 58 minute hour. Rather than allow people to continue to buying superior watches from Switzerland, the government decided to put a tariff on Swiss watches and provoked the Swiss into boycotting American products like cars, typewriters, air conditioning, and so forth. The policy is as stupid now as it was back then.

Hopefully Trump will deliver better economic policies than his rhetoric suggests, he has for example spoken about the importance of deregulation and making it easy for people to start businesses and employ people. Perhaps his patriotic protectionist parlance was just pitching to the crowd.

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