Rober Shiller writes How to Protect Workers Without Trade Tariffs.
According to a Washington Post/Schar School poll of Americans published on July 11, only 39% of respondents approved of US President Donald Trump’s imposition of tariffs on foreign countries, while 56% were opposed. But, while it’s good news that a majority of Americans oppose their president on this key issue, Trump is plunging ahead, apparently thinking the public will like the tariffs better when they are in place.
It is a puzzle why even 39% support these policies. Ever since the Great Depression and World War II, and the 1947 General Agreement on Tariffs and Trade, the United States – both its government and its people – has been squarely in support of free trade.
In his 1776 book The Wealth of Nations, Adam Smith provided an eloquent and convincing argument for free trade, instead of trade distorted by tariffs. With free trade, the economy prospers because goods and services are sourced from the countries that are most productive in creating them.
Shiller should have stopped right there. That is all one needs to know. Instead, Shilled dove straight into government intervention of another kind.
Free Stuff
The problem today is that, with increased globalization an apparently permanent new condition, and with inequality within countries widening, people tend to feel that their long-term economic situation is getting riskier. We need to find a way to insure people against the risks of the global market without in any way demeaning them.
Fortunately, there is abundant precedent for in-kind government redistribution that does not seem like charity for society’s losers. When the government spends tax money on universal public education and health care, it does not strike many as redistribution, because the services are offered to everyone, and accepting them appears more patriotic than abject. As long as most people use the government schools and doctors, redistribution does not look like charity.
Another solution is to have the government encourage private livelihood insurance by subsidizing it to help cover the cost of jobs lost because of foreign trade.
Half-Right
Trump’s trade war is an international tragedy. But it could have a happy ending if it eventually reminds us of the risks that free trade imposes on people, and if we improve our insurance mechanisms to help them.
Yes, Trump’s trade war is an international tragedy. The second sentence is ridiculous.
Deep Silliness
One who accepts Adam Smith ought not be proposing government solutions and free stuff as the solution.
Good Grief!
The price of medical care and college education are both through the roof for one reason and one reason only: government intervention in the free market.
Mike “Mish” Shedlock
It is either correct or it isn’t and its correctness does not depend on how many scarce resources other countries waste on subsidies. Moreover, the low wages workers get elsewhere are mainly a result of their far lower labor productivity. Labor is not a resource that is magically exempted from the laws of demand and supply.
Those who praise socialistic health care systems based on (suspicious) aggregate statistics often tend to overlook this. The horrible waiting times are ubiquitous in these systems, and the frequency of botched procedures is probably very high. Also, a truly insane number of unnecessary procedures is undertaken in order to milk the system, which ties up scarce resources and keeps them from being allocated to more urgent tasks.
The opposite may also be true. If the State were to abolish the market economy worldwide (such as was attempted in the Soviet Bloc of yore), economic calculation would become impossible and the division of labor would quickly fall apart. We would rapidly revert to a hand-in-mouth existence of scattered groups engaged in subsistence farming and hunting and gathering – which in turn would destroy central control by the State and lead to its downfall as well.
This may well be true – I agree we should wait and see what his real goals are before going overboard with criticism aimed at him; it should be understood by now that he employs negotiation tactics that often mask his true intentions. But that doesn’t mean that this is not a good opportunity to discuss the merits of free trade. If not now, when?
Trade does not need to be “fair”, it only needs to be free. It is erroneous to believe that a trade deficit is somehow a disadvantage. Countries that pursue mercantilistic policies to “protect” their domestic industries only harm their own economies and impoverish their own consumers. Even if one drops all tariffs unilaterally, one will come out ahead, as investment from all over the world will eagerly flow in, one’s consumers will be getting the best deals on everything and one’s industries will be among the most competitive in the world. All of this is endangered by introducing tariffs in a vain attempt to allegedly make trade more “fair”. As an example, Hong Kong is right at the top of the list of the countries with the highest economic output per capita. It has no tariffs, regardless of the policies of other countries. According to protectionists, it should be impoverished, but the exact opposite is true. The US also has quite high per capita GDP – and the main reason for this is that the US itself is a giant free trade area. No-one cares whether there is a trade deficit between Los Angeles and New York or between Illinois and Nebraska – and rightly so, because there is simply nothing about it that is “bad” – despite the fact that many US states and municipalities have large differences in regulations and taxation levels. The same economic laws governing both absolute and comparative advantage that enrich the huge free trade area known as the United States do not magically disappear on account of national borders. They are universally and time-independently valid. Read Bastiat’s monograph “That Which is Seen and That Which is Not Seen” – it is available for free on the internet (e.g. here: link to bastiat.org ). It very elegantly explains by way of simple examples why free trade is always advantageous and why those who impose tariffs only shoot themselves into the foot (trade in particular is discussed in section 7 on Restrictions, but the monograph is quite short, so I would recommend reading it in its entirety).
Moreover, I would submit that statistics purporting to “prove” the superiority of fully socialistic health care systems should be viewed with the greatest distrust. It is very easy to mislead with statistics.
Correct, it can all be traced back to government intervention to the benefit of big business and politically well-connected elites. The evil trifecta of taxation, regulation and money printing. Blaming free trade may be superficially alluring, but it is simply based on economic ignorance.
I am a big proponent of subsidized high level education and at least some base albeit low level state medical coverage. In terms of both allowing the general public be able to participate in our system, and at same time select the best talent, one must allow for merit based competition from everyone.
Otherwise education naturally becomes ever more of a function of family wealth and competitiveness of the nation will decline. It will also inevitably result in a caste system in America. The University of California system, at least back when I went through it is proof enough government subsidies work very well in this case. Saying expanding competition between private institutions of education and medicine is all society needs to drive costs down is just a wealthy man’s rationalization for a greedy outcome. In these cases the “deregulation solution” will simply result in competition for the richest clients, and the abandonment of education/medicine for the poor.
Either way we are screwed don’t ya think?
You know you are turned on by a shirtless Putin Mish! Just remember that you better check yo self before you wreck yoself, because dicks in the ass is bad for your health. Or is it? You tell us Mish, since you are an expert on EVERY subject, LOL!!!!
All true except for the sweeping statement about the cost of health care and education. Clearly some elucidation is needed because rising costs can’t be solved by free-market economics, unless of course you simply discourage the sick and poor from using these facilities at all. The fact is that people live longer only because of medical intervention while employers demand more and more education from their employees. They are getting sicker overall because of a culture (sold to them by the sugar industry) of eating sugar, corn starch and corn syrup that makes them obese. They need higher levels of education because there are few job opportunities that don’t require some form of perfunctory certification and which can’t be done by automation. Free trade and free commerce would fail without controls in a world economy as warped as this one has become. Let it burn and disintegrate, disband the governments we erroneously call “democratic” and start again. Then we can talk free trade and free commerce.
I would think that Chinese workers probably have little say in their working conditions, rights, etc… Where workers get a lot more protections in western democracies. This is also a major cost disadvantage to western democracies. And US corporation top execs and major shareholders have profited very nicely over the last 30 yrs off the backs of near slave labor in many countries. I remember the factory that caved in killed a few thousand people in Bangladesh.
Free trade theory is correct – someone with lower factor of production should do the work!
The problem with free trade occurs when someone on the other side of the trade has sustainable, lasting, advantages in the production process. China has a significant advantage against the US – a 4x larger, educated workforce that is able to follow instructions to produce goods (BTW it does so by taking the tech from US manufacturers). If USA enters into free trade with such a large counterparty, there will always be one result – the complete destruction of every manufacturing job in the USA over a period of time.
The only areas where USA will continue to have an advantage in the future are services (for now; even this will go to China/ India sooner or later), areas where the government puts up a barrier (e.g. defence technology cannot be outsourced) or where USA has some raw materials/commodities that are not available to others.
Happy for someone to provide a counter-argument…
The lie that is sold as “free trade”. Don’t you know that nothing is free?
“The price of medical care and college education are both through the roof for one reason and one reason only: government intervention in the free market.”
…..I would add to the above to what makes health care and education astronomical: corporate lobbying, campaign donations to get favors, and corruption. There are tons of people at the top raking in money hand over foot in heath care and education. They will fight like hell that it doesn’t change. And they will fight via spending millions on lobbying congress, campaign donations, lawyers, etc…
Although I do not agree with your overall stance Mish that the US should have free trade with other countries that do NOT reciprocate that free trade, or play by the rules.
They’ll reap their harvest when the world plunges into recession…
My mom required an operation in a country with socialized medicine. Not only did she have to wait two weeks before they operated on her broken elbow, but the operation was botched. We’re now about $8000 into paying a private doctor to fix her the best he can.
“It is a puzzle why even 39% support these policies.”
60,000 U.S. factories have closed, costing numerous American jobs. It is not a puzzle at all.
The answer: It has monstrous taxes and government regulations to support subsidized medicine.
Why is France an economic basket case?
Trump’s tactics and his trade policy are both idiotic.
Sorry Bill, it’s complete silliness. If China is subsidizing the US with cheap goods and services then that is an overall benefit to the US and a net loss to China. That is all one needs to understand about the whole damn thing.
The free market is defenseless against the State.
Adam Smith gives some generally good advice in “Wealth of Nations” to pursue productivity based on one’s strongest skills. While such advice should lead to lower cost / higher quality products and services, there are observable human behaviors throughout history preventing complete specialization by nations.
Some humans have a tendency to want to conquer other humans. All it takes is one country to stockpile it’s imports from other countries to last through a war, and then acquire other specializations by force.
Smith implicitly assumes everyone within a country has the attitudes, aptitudes and skills that lead to their country’s specialization. This is measurably false.
Smith also implicitly assumes that demand for a product or service will always exist, and in a constant proportion to supply. We know the supply / demand curve is dynamic.
Adam Smith wasn’t as enlightened as we are taught in school.
The real SILLINESS is the constant confusing of tactics with policy. Trump is negotiating- trying to INCREASE trade and open markets in PROTECTIONIST countries.
This sounds good Mish, if there has actually been fair trade. I am by no means an expert, but I have read many folks who provide example after example of trade imbalances that favor other countries, especially China. It seems like something needs to be done to address the unfairness in trade, and the WTO seems helpless. As I said I am not really up in these matters, but if not tariffs, how do we address existing unfair trade practices?
It’s not only the citizens of fly-over states that have sealed their own demize. Most all of us are reaping what we sowed. If we know that govt intervention in the free market is the problem, why do so many keep voting for incumbents, have bank accounts at bankster banks, and continue to listen to establishment media? Why don’t people eat healthy in order to bankrupt the fraudulent food and health care industrial complexes? How many believe in global warming and reducing gun rights, when history proves they are wrong? The 5-Steps still hold true. As for Shiller, he is the establishment.
As for Shiller, maybe he did not understand “Wealth of Nations”.
“Why are the French, for example, paying a lot less as a percentage of their economy than the U.S. for healthcare and getting better results?”
Because their government intervenes less than the US one. For most Americans.
In the precious few segments of US medicine that is not completely overran by government rules, laws and mandates, often at several layers (Fed, State and sometimes local), US results are MUCH better than in any Euro country. Lazik being a prime example. But also in general medicine, for those wealthy enough to self insure, and who can hence make somewhat free-market decisions about where to go for what, based on cost-benefit. Rather than being put on hold and showed to the cheapest opoid peddler by their government mandated “feel-good-long-enough-to-vote-for-us-again” plan.
Compare results in the US vs France, or the Soviet Union, in 1950, if you want to compare “free market” (not really, but at least a tiny bit freer than current) to government managed.
Or, simply compare efficiency of provision, hence cost/price, development in “industries” with little, vs more, government intervention. Cell phones vs Manhattan housing being an illustrative one.
It’s not just happenstance that the areas where government intervenes the heaviest; banking, insurance, law, real estate, military, education/indoctrination, health care, happen to also be the areas where everything has been, and is, going to hell; while comparatively lower intervention areas like cell phones and internet porn, is doing a much better job of lowering cost and increasing access.
“The price of medical care and college education are both through the roof for one reason and one reason only: government intervention in the free market.”
Yet the costs of medical coverage in countries where the government provides it is far lower for better outcomes than the U.S.
Why are the French, for example, paying a lot less as a percentage of their economy than the U.S. for healthcare and getting better results?
“The price of medical care and college education are both through the roof for one reason and one reason only: government intervention in the free market. “
Yup! You can also add the cost of money has been distorted by the Fed intervention.
All in all, it can be safely said the government, politicians and central bankers have screwed free markets by constant intervention. It appears that citizens cannot do anything about this and the option is to wail about this cabal.
Looks like even Nobel Laureates can get so caught up with their prowess that they lose their common sense.
Opponents of trade would do much better to look at the actual causes of American heartland decline, namely financialization, corruption, and a Byzantine tax code meant to benefit large corporations and stifle competition from small businesses.
In the QE era of America, the cheap money only needs to flow through NY, DC, and a few select areas. It rarely touches flyover country, which is why so many of its residents were fools for bowing down to the Fed and Wall St. Also, think of the last big business to set up shop in many of these towns, Wal-Mart. When Wally World came to town, most places gave them huge incentives like free land, massive tax breaks for many years, etc. How’s a small business supposed to compete with that? How’s a small business supposed to navigate the labyrinth of modern business taxes and regulations? These were done intentionally, the culmination of lobbying efforts from firms that didn’t want challenges from upstarts.
The propaganda runs deep in rural America. I’ve read accounts from people who actively cheered the decline of mom-and-pop stores, saying they only wanted to gouge customers. Yeah, the people who live and work in your town hate you, but the Walton kids and Jeff Bezos love you. Whatever. As a native of the Rust Belt I want to feel sympathy for these people, but they brought a lot of this agony onto themselves.
The 1%ers can’t figure out the support for DJT.