One of the critiques of any trade deal of late is that there should be penalties for countries guilty of “currency manipulation.” The concern is that countries will devalue their currency in an effort to make their own exports cheaper to other nations while making it harder for other countries to export back to them. As an example, if the Chinese were to do something that cuts the value of the Yuan in half vs. the dollar, their products look very cheap to American consumers while American-produced goods suddenly look a lot more expensive to Chinese consumers.
I have two brief responses to this:
- I find it hilarious that anyone in the United States government, which has a Federal Reserve that has added nearly $2 trillion to its balance sheet in the service of cramming down the value of the dollar, can with a straight face accuse other nations of currency manipulation. In practice in today’s QEconomy, currency manipulation means another country is doing exactly what we are doing, but just doing it faster.
- As an American consumer, to such currency manipulation by other countries I say, Bring it On! If China wants to hammer its own citizens with higher prices and lower purchasing power just to subsidize lower prices for me, I am happy to let them do it. Yes, a few specific politically-connected export businesses lose revenues, but trying to prop them up is pure cronyism. Which is one reason I think Elizabeth Warren is a total hypocrite. The constituency of the poor and lower middle class she presumes to speak for are the exact folks who shop at Walmart and need very price break on everyday goods they can get. Senator Warren’s preferences for protectionist trade policies and a weak dollar will hurt these folks the most.
Warren Meyer, “Currency Manipulation”, Coyote Blog, 2015-05-26.
January 1, 2017
July 30, 2016
In the New York Review of Books, Jonathan Freedland looks at some of the significant factions of the Republican party who have not embraced Il Donalduce:
Yet this is not solely a revolt of “values conservatives” against the brash, thrice-married vulgarian from Queens — a battle of Iowa against New York, as Cruz likes to frame it. There are other fault-lines. Neoconservatives such as Bill Kristol (or Robert Kagan, who says he will vote for Hillary Clinton) oppose Trump too, as do foreign policy realists such as Brent Scowcroft. Some of this is personal: Scowcroft and others feel a strong loyalty to the Bush family, whose animus toward Trump is incandescent thanks to the billionaire’s trashing of Jeb. But policy substance has also played its part in Trump’s improbable achievement: he has managed to turn many disparate Republican strands — Log Cabin types and evangelicals, neocons and Bush 41 stalwarts, Wall Streeters and military brass — against him. (That these different elements have not been able to cohere around an alternative candidate or program helps, in part, to explain Trump’s success, but it does not make their opposition any less real.)
Trade is a crucial example. The GOP has long been the party of free trade; in 1993, Bill Clinton could only pass NAFTA with Republican votes. But now its nominee denounces such trade as a destroyer of American jobs, apparently seeing commerce as something the US should do to, rather than with, other countries. The result was the astonishing sight of a Republican presidential nominee, in his acceptance speech, bidding for the voters of an avowed socialist, Bernie Sanders, “because,” as Trump put it, “we will fix his biggest issue, trade deals.” The issue was hardly debated in Cleveland, but the shift is remarkable all the same. Trump has refashioned the GOP as the party of protectionism, advocating an approach Republicans previously denounced as a threat to American prosperity.
Similarly, Republicans have for decades enjoyed an advantage on national security, obliging the Democrats to match them on strength and military commitment. Trump has broken from that too. He implies a rupture not only from the neocon, democracy-spreading policies associated with Bush the son, but also with the engaged internationalism of Bush the father. Trump is seemingly uninterested in America’s traditional status as sheet-anchor of the international system, central in a series of interlocking alliances that have maintained relative order and stability since 1945. Instead, he took time out from Cleveland to tell The New York Times he did not believe in the cardinal principle underpinning NATO — that an attack on one member is an attack on all — and that, as president, he would only defend one of the Baltic states from hypothetical Russian invasion if he deemed that state to have been paying its proper dues. Put aside the huge implications of such a shift for global security. Trump is turning his back on decades of Republican Party doctrine.
That’s true on the scale of government, too, with Trump implicitly advocating gargantuan powers for an imperial presidency: “I alone can fix this problem,” he says of crime, ISIS, immigration and much else. That’s quite a change for a party that has long regarded it as an article of faith that government is the problem and never the solution.
Republicans alarmed at these developments are not quite sure what will be worse: for Trump to lose or for Trump to win. Some have persuaded themselves that a Trump victory is best for America, simply because Hillary Clinton must not be president. (One Utah delegate, anguished about Trump’s “rough edges,” told me he believed Clinton was “evil.”)
But others are terrified by the possibility of a Trump victory. If that happens, they fear, the upheaval of 2016 will become permanent: the Republican Party will be reshaped in Trump’s image. It will be protectionist, nativist, authoritarian, and the vehicle for an exclusively white rage. Richard Tafel recoils so sharply from that prospect, he is talking seriously of forming a new party of the center-right. He’s already had conversations with “some of the wealthiest” CEOs and others, worried that Trumpism does not respect the prudent, cautious, free-market conservatism they value. For millennials especially, Tafel says, Trump is making the Republican Party a “toxic brand.”
The biggest challenge to forming a new political party is that the current system is completely rigged in favour of the two big parties to the extent that even long-established third parties like the Libertarians and the Greens still have to spend vastly disproportional efforts (and funds) just trying to get their candidates onto the ballot. A new “centre-right” party would face the same problem — and neither of the two big beneficiaries of the current system will be eager to see their institutional advantages eroded.
July 21, 2016
At the heart of [Trump’s] argument is the belief that selling to countries is good and buying from them is bad, the crude mercantilist fallacy that Adam Smith’s Wealth of Nations debunked in the same year that America embraced the Declaration of Independence. Smith, the brilliant British political economist, argued that unless people start eating gold bullion, the point of wealth is to buy not sell; to consume not produce. If China starts shipping free plasma TVs to America, a few American companies may be thrown out of business, but American consumers will be better off. What’s more, they’ll be able to spend their savings on goods from other companies. The only folks that protectionist policies benefit are crony capitalists who face less competition — the very thing that Trump says he’s fighting.
Shikha Dalmia, “Donald Trump’s free-trade follies”, The Week, 2016-06-30.
July 17, 2016
… at each tour we typically got the whole backstory of the business. And the consistent theme that ran through all of these discussions was the simply incredible level of regulation of the wine business that goes on in Napa. I have no idea what the public justification of all these rules and laws are, but the consistent theme of them is that they all serve to make it very hard for small competitors or new entrants to do business in the county. There is a board, likely populated by the largest and most powerful entrenched wine makers, that seems to control the whole regulatory structure, making this a classic case of an industry where you have to ask permission of your competitors to compete against them. There are minimum sizes, in acres, one must have to start a new winery, and this size keeps increasing. Recently, large winemakers have started trying to substantially raise this number again to a size greater than the acreage of any possible available parcel of land, effectively ending all new entrants for good. I forget the exact numbers, but one has to have something like 40 acres of land as a minimum to build a structure on the land, and one must have over 300 acres to build a second structure. You want to buy ten acres and build a small house and winery to try your hand at winemaking? — forget it in Napa.
It took a couple of days and a bunch of questions to put this together. Time and again the guide would say that the (wealthy) owners had to look and wait for a long time to find a piece of land with a house on it. I couldn’t figure out why the hell this was a criteria — if you are paying millions for the land, why are you scared to build a house? But it turned out that they couldn’t build a house. We were at this beautiful little place called Gargiulo and they said they bought their land sight-unseen on 3 hours notice for millions of dollars because it had a house AND a separate barn on it grandfathered. Today, it was impossible to get acreage of the size they have and build two structures on it, but since they had the barn, they could add on to it (about 10x the original size of the barn) to build the winery and still have a separate house to live in.
This is why the Napa Valley, to my eye, has become a weird museum of rich people. It seems to be dominated by billionaires who create just fantastically lovely showplaces that produce a few thousand cases of wine that is sold on allocation for 100+ dollars a bottle to other rich people. It is spectacularly beautiful to visit — seriously, each tasting room and vineyard is like a post card, in large part because the owners are rich enough to care nothing about return on capital invested in their vineyards. The vineyards in Napa seem to have some sort of social signalling value which I don’t fully understand, but it is fun to visit for a few days. But in this set-piece, the last thing the folks who control the county want is for grubby little middle-class startups to mess up their carefully crafted stage, so they are effectively excluded.
I know zero about wines, but from other industries this seems to be a recipe for senescence. It would surprise me not at all to see articles get written 10 years from now about how Napa wines have fallen behind other, more innovative areas. I have never been there, but my friends say newer areas like Paso Robles has an entirely different vibe, with working owners on small plots trying to a) actually make a viable business of it and b) innovate and try new approaches.
Warren Meyer, “My Nomination for Corporate State of the Year: Napa County, California”, Coyote Blog, 2016-07-08.
July 7, 2016
Published on 18 Jun 2016
The British Empire’s grasp on the Americas was slipping right at the time when they needed those resources most. The massive amounts of tea they imported from China had created a huge trade deficit, but the Chinese were reluctant to let any Europeans trade outside of the Canton port strictly controlled by the Hong. So Britain sent a formal embassy led by Earl George Macartney.
In 1792, Great Britain had just come out of an expensive war that cost them their control over many of their colonies in North America. Other wars had also cost them their access to the silver mines of South America, which had been helping fund so much of their trade with the Qing Dynasty of China. European traders all wanted greater access to China, but the Emperor was wary of letting outsiders too far into his country and kept them all penned up at the port of Canton, which was strictly regulated by the Hong business group. A flourishing blackmarket trade grew, but Britain wanted more. One trader, acting on his own initiative, grew bold enough to approach Beijing and attempt to get a hearing over his trade grievances, but the Chinese considered this a huge breach of protocal and an offense to the Emperor. Britain had to do something, however: they imported over 10 million pounds of tea each year, equal to 10% of the government’s annual spending, and the fact that China did not have anywhere near as great an interest in British products meant that they were running an enormous trade deficit they could no longer sustain. The Crown appointed an official envoy, Earl George Macartney, with orders to end the Canton system, establish an embassy, and acquire rights to an island that would be under British control in the same way that the Porutuguese controlled Macao. The mission failed spectacularly. Although Macartney got permission to sail north and meet the Qianlong Emperor in his summer palace at Jehol, he refused to perform the traditional kowtow which was required upon meeting the Emperor. He presented gifts from the British court, but the Chinese interpreted these gifts as tribute, not trade enticements, and decided they had no need for nor interest in what he offered. Since he failed to get them to agree to any of his three requests, Britain wanted to find another way to address the trade imbalance with China. Soon, this would lead them to start bringing in opium.
June 25, 2016
At (of all places) the CBC, Neil Macdonald explains why the Canadian government maintains a ridiculously low limit on what Canadians can purchase from other countries without packages being subject to duty, tax, delay, and possible damage:
As any Canadian who’s ever naively bought anything on the American version of eBay (or, for that matter, any U.S. retail website) must by now know, Ottawa is determined to spoil your bargain.
If the purchase is a penny over $20 Cdn, a federal customs agent can intercept it, open it, delay it, add federal and provincial sales taxes, and, depending on the origin of the merchandise, perhaps pile on some duty charges — basically protectionist taxes.
By the time the government is done, the price of the package can easily rise by 50 per cent. And of course customs brokers usually have to wet their beaks, inflating the final cost of the average package by another 20, 30 or 40 per cent.
Basically, Ottawa has ensured that shipping across our border is such an expensive, paperwork-heavy pain that a lot of American merchants and eBay sellers simply don’t bother shipping to Canada.
The system actually seems designed to be burdensome and sclerotic.
Normally, you’d assume it’s all about increasing the federal government’s tax revenues … the CRA must be raking in the bucks, right? Not at all:
… by keeping that purchase threshold at $20 instead of giving Canadian shoppers a break and raising it to $80, Ottawa spends about $166 million to collect $39 million in additional taxes and duties.
Think about that: Ottawa’s customs officials spend a net $127 million of taxpayers’ money annually, basically to keep Canadians trapped inside the Canadian retail corral.
H/T to SDA for the link.
June 18, 2016
Few policies have origins as ugly as that of the minimum wage. “Progressive” intellectuals in the early 20th century supported the minimum wage because they believed it to be an effective policy detergent to help cleanse the gene pool of ‘undesirables.’ By pricing low-skilled, ‘undesirable’ workers out of jobs, ‘undesirables’ are less likely to successfully pro-create and to immigrate. The fact that the minimum wage, by pricing ‘undesirables’ out of work, thereby artificially raises the incomes of white workers was considered to be an added benefit of this social-engineering device.
Business owners and labor unions in higher-wage regions of the United States supported the minimum wage because it would dampen the competition they were under from businesses and workers in lower-wage regions of the United States.
The ethics of these early supporters of the minimum wage were despicable. But say this much for these racist, protectionist creeps: they understood economics better than do many people today (including some economists) who believe either that the law of demand is uniquely inoperative in the market for low-skilled workers or that the American market for low-skilled workers is monopsonized.* Each belief is as inexplicable as it is unsupportable.
* And monopsonization of the labor market is only a necessary condition for a minimum wage to not destroy employment opportunities for some workers; it is not a sufficient condition.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-06-01.
June 13, 2016
In 2012, the Institute for Justice — a public-interest law firm advocating libertarian causes — looked at the number of occupations that require licensing. Specifically, the institute looked at occupations typically filled by lower- and middle-income workers. These are not your airline pilots, your certified public accountants and your neurosurgeons; they’re the nations interior decorators, auctioneers and florists. (Yes, you read that right: In at least one state, these occupations cannot be practiced without a license.)
Why, you might ask, is the state requiring a license to decorate an interior? Are customers at risk of death from collapsing piles of pillow shams? Must we fear that they will be blinded by the decorator’s decision to pair fuchsia chiffon drapes with a chartreuse brocade sofa? Do we worry that without the threat of losing their license to keep them on the straight and narrow, these fly-by-night operators might be tempted into purchasing furniture from unlicensed auctioneers, and sourcing their floral arrangements from black-market florists?
Well, no. Mostly, these regulations benefit folks who are already plying the trade. They get helpful state legislators to protect them from competition by instituting tough licensing requirements. Their income goes up; the consumer’s wallet suffers. And people who want to follow their dreams into the industry get shut out if they lack the time to study for the licensing exams, the capital to pay the licensing exam fees (which can run in to the hundreds of dollars), or the social capital to know how to work the system.
Megan McArdle, “You’re Gonna Need a License for That”, Bloomberg View, 2016-05-17.
April 2, 2016
Colby Cosh gently pokes fun at the latest outbreak of manufactured patriotic fervor:
An enterprising Toronto man wants to sell us all “Ketchup Patriot” T-shirts, so that the virtuous among us might assert the correct position on the hot issue of whether it is right to eat products made with dubious foreign tomatoes.
This presents me with a dilemma: I agree with the many words already written in this space, and in the Financial Post, about the preposterousness of tomato isolationism; on the other hand, I am pretty sure our future as a country has less to do with mid-grade agricultural products destined for pureeing than it does to do with insta-auto-robo-printing of faddish social-signalling paraphernalia. You have to admire the spirit of enterprise wherever it emerges. The best answer ever given to Che Guevara’s philosophy was the Che Guevara T-shirt.
The “Ketchup Patriot” view favours French’s brand ketchup, which is now made from tomatoes grown in the area around Leamington, Ont. Leamington is practically a creation of the H.J. Heinz Co., which was a major employer there for decades, but fled to the United States in 2014. Few Canadians are employed in the growing of tomatoes, mind you: migrant workers flown into local dormitories and paid around $10 an hour seem to do most of the hard work on Leamington-area farms and in greenhouses.
French’s, best known for selling mustard, is owned by the Reckitt Benckiser Group PLC of Slough, Berkshire. This “Ketchup Patriotism,” the closer you look at it, becomes more and more a matter solely of dream terroir. Canadians don’t get the profits, don’t pick the tomatoes and don’t even can the ketchup — that happens in Ohio, although French’s, obviously aware that it has a whole country by the tail, has hinted at plans to open a new cannery somewhere in Ontario. All we do, for the moment, is own the land. This ketchup has a mystical Canadian essence, one I defy anyone to detect in a blind taste test.
One may not detect the “distinctive Canadian ‘terroir'”, but having actually tasted Heinz and French’s products, there’s a reason that Heinz is the default ketchup for most people.
February 14, 2016
Until March 1933, these were the years of President Herbert Hoover — the man that anti-capitalists depict as a champion of non-interventionist, laissez-faire economics.
Did Hoover really subscribe to a “hands off the economy,” free-market philosophy? His opponent in the 1932 election, Franklin Roosevelt, didn’t think so. During the campaign, Roosevelt blasted Hoover for spending and taxing too much, boosting the national debt, choking off trade, and putting millions of people on the dole. He accused the president of “reckless and extravagant” spending, of thinking “that we ought to center control of everything in Washington as rapidly as possible,” and of presiding over “the greatest spending administration in peacetime in all of history.” Roosevelt’s running mate, John Nance Garner, charged that Hoover was “leading the country down the path of socialism.” Contrary to the modern myth about Hoover, Roosevelt and Garner were absolutely right.
The crowning folly of the Hoover administration was the Smoot-Hawley Tariff, passed in June 1930. It came on top of the Fordney-McCumber Tariff of 1922, which had already put American agriculture in a tailspin during the preceding decade. The most protectionist legislation in U.S. history, Smoot-Hawley virtually closed the borders to foreign goods and ignited a vicious international trade war.
Officials in the administration and in Congress believed that raising trade barriers would force Americans to buy more goods made at home, which would solve the nagging unemployment problem. They ignored an important principle of international commerce: trade is ultimately a two-way street; if foreigners cannot sell their goods here, then they cannot earn the dollars they need to buy here.
Foreign companies and their workers were flattened by Smoot-Hawley’s steep tariff rates, and foreign governments soon retaliated with trade barriers of their own. With their ability to sell in the American market severely hampered, they curtailed their purchases of American goods. American agriculture was particularly hard hit. With a stroke of the presidential pen, farmers in this country lost nearly a third of their markets. Farm prices plummeted and tens of thousands of farmers went bankrupt. With the collapse of agriculture, rural banks failed in record numbers, dragging down hundreds of thousands of their customers.
Hoover dramatically increased government spending for subsidy and relief schemes. In the space of one year alone, from 1930 to 1931, the federal government’s share of GNP increased by about one-third.
Hoover’s agricultural bureaucracy doled out hundreds of millions of dollars to wheat and cotton farmers even as the new tariffs wiped out their markets. His Reconstruction Finance Corporation ladled out billions more in business subsidies. Commenting decades later on Hoover’s administration, Rexford Guy Tugwell, one of the architects of Franklin Roosevelt’s policies of the 1930s, explained, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”
To compound the folly of high tariffs and huge subsidies, Congress then passed and Hoover signed the Revenue Act of 1932. It doubled the income tax for most Americans; the top bracket more than doubled, going from 24 percent to 63 percent. Exemptions were lowered; the earned income credit was abolished; corporate and estate taxes were raised; new gift, gasoline, and auto taxes were imposed; and postal rates were sharply hiked.
Can any serious scholar observe the Hoover administration’s massive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets?
Lawrence W. Reed, “The Great Depression was a Calamity of Unfettered Capitalism”, The Freeman, 2014-11-28.
November 18, 2015
Published on 22 Feb 2015
Adam Smith was one of the first men who explored economic connections in England and made clear, in a time when Mercantilism reigned, that the demands of the market should determine the economy and not the state. In his books Smith was a strong advocator of the free market economy. Today we give you the biography of the man behind the classic economic liberalism and how his ideas would change the world forever.
October 7, 2015
We don’t know what’s in it, so it could be a multi-national version of “we have to pass it to find out what’s in it”. Megan McArdle manages to raise one cheer for the agreement:
I’ve spent the morning reading about the Trans-Pacific Partnership. I went in prepared to deliver a column full of details, winners and losers, strong opinions about the good provisions and the bad. But what really comes to mind is a dismal thought: “Is this the best we can do?”
Oh, yes, I know the statistics. Forty percent of the world’s economy. Thousands of tariffs falling. I know the opposition points too, about giveaways to business, intellectual property rules, outsourcing jobs. No one is talking about the larger story, though, which is that the biggest trade news in a decade involves a regional deal of relatively limited impact.
It was not always thus. When I was a fledgling journalist, a wee slip of a thing, we economics writers looked to major global trade negotiations to advance the cause of freer markets, and not incidentally, the material progress of mankind. We looked down on regional side-deals because they were such weak tea compared with the robust brew of a global agreement. Regional deals distorted the flow of trade, encouraging people not to exploit comparative advantage and production capabilities, but rather to seek the best combination of tariff rules from among competing regional frameworks. I have heard arguments that such deals, by distorting trade and weakening the pressure to make global deals, were actually worse than doing nothing. Indeed, I may have made such arguments.
You don’t hear those arguments any more, and that’s because we free-traders have largely given up on global trade agreements. The Doha round of World Trade Organization talks collapsed in the face of European agricultural protectionism and intransigence among countries with large numbers of subsistence farmers. Nativism, protectionism, nationalism seem to be rising as a political force in many countries. Global trade volumes are looking anemic. In this climate, regional agreements seem attractive, in much the same way that the remaining bar patrons assume a winsome glow around closing time.
How have things come to such an unpretty pass?
September 7, 2015
Published on 25 Feb 2015
In this video, we discuss some of the most common arguments against international trade. Does trade harm workers by reducing the number of jobs in the U.S.? Is it wrong to trade with countries that use child labor? Is it important to keep a certain number of jobs at home for national security reasons? Can strategic protectionism increase well-being in the U.S.? Join us as we discuss these common concerns.
September 2, 2015
Published on 25 Feb 2015
We’ll look at the costs and consequences of tariffs, quotas, and protectionism. How do tariffs affect consumers? What about producers? Who wins and who loses? Find out with this video.
We’ll apply the fundamentals we learned in the supply, demand, and equilibrium section of this course to real-world examples — like that of protectionism in the U.S. sugar industry — to determine lost gains from trade or deadweight loss, the tariff equilibrium vs. the free trade equilibrium, and the value of wasted resources as a result of tariffs.
May 11, 2015
For another example, consider trade barriers such as tariffs. There are good economic arguments to show that we would be better off if we went to complete free trade. That seems puzzling — if we would be, why don’t we?
The answer is provided by public choice theory, the branch of economics that deals with the workings of the political market. A tariff makes the inhabitants of the country that imposes it worse off but the politicians who pass the tariff better off, since it benefits a concentrated interest group at the cost of dispersed interest groups. More concentrated interest groups are better able to pay politicians to do things for them. Trade policy is optimized, but for the wrong objective.
David D. Friedman, “Why Improving Things Is Hard”, Ideas, 2014-07-08.