Republicans, Tariffs, "Free Trade," and Economics in an Easy-to-Understand Nutshell

The estimable Pat Buchanan writes:

As for “protectionism,” Harding did approve the Fordney-McCumber Tariff Act of 1922, doubling rates to 38 percent. But he also slashed Woodrow Wilson’s income tax rates by two-thirds, back to 25 percent.

Result: Unemployment, 12 percent when Harding took office, was 3 percent when Calvin Coolidge left. Manufacturing output rose 64 percent in the Roaring Twenties. Between 1923 and 1927, U.S. growth was 7 percent a year. At decade’s end, America produced 42 percent of the world’s goods.

Compare this economic triumph with the fruits of W’s free-trade policy that wiped out 6 million U.S. manufacturing jobs, one of every three we had, and put America in hock to China.

The protectionism Bush calls “evil” was the policy of 12 Republican presidents from Abraham Lincoln to Coolidge, who made the GOP America’s Party and converted this country into the industrial marvel of mankind.

Is Bush oblivious to this? Did someone at Phillips Academy, Yale or Harvard Business School tell him Lincoln, William McKinley and Theodore Roosevelt were free-traders?

Now, don't waste my time pointing out the negatives of tariffs. Of course there are negatives. Every kind of tax has negatives. Income taxes have negatives, too. I am only contending, as always, that on balance, tariffs are better than income taxes. I think the track record is there.

Again, There is No Such Thing as "Free Trade"

Phyllis Schafly gives an example of what actually goes on whilst people talk about "free trade":

Although China is called a major trading partner, it treats U.S. companies like suckers, cheating them coming and going. China even intimidates U.S. businessmen so they don't dare to criticize China's unfair trade tactics.

Take, for example, the attitude of CEO Jeffrey R. Immelt of General Electric, the company now laying off hundreds of U.S. workers and giving those jobs making light bulbs to Chinese workers. He won't comment about the current U.S. case in the World Trade Organization accusing China of giving illegal subsidies to Chinese wind-turbine makers.

A few years ago, GE caved in to the Chinese government's demand that it build a large wind-turbine factory in China. Since GE owns a crucial patent for wind turbines, this demand was based on the Chinese anti-free trade policy called indigenous innovation (which China expert James McGregor calls "a blueprint for technology theft on a scale the world has never seen before").

China then developed its own wind-turbine manufacturers and is now directing purchasers to buy from those Chinese firms instead of from GE. That's the reality in what free traders naively believe is the world's fast-growing market for U.S. goods.

China wants to be the world's biggest exporter based on stealing U.S. know-how and subsidizing local manufacturers. China blatantly violates international trade laws and has no plans to be a market for U.S. products; China's principal imports are and will continue to be U.S. jobs.

[snip]

Some people foolishly call our relationship with China "free trade." But there is nothing free or fair about it. It is trade war between an aggressively protectionist communist government and a U.S. that is shackled by foolish and out-of-date illusions about free trade.

I'll put it very succinctly, for the umpteenth time: there is no such thing as free trade, despite what some libertarian-leaning economists (You can scarcely get a libertarian to admit that the government has a legitimate power to tax at all, let alone get them to admit that tariffs are legitimate.) will tell you, despite what libertarians who would love for you to believe that free trade is a "bedrock conservative principle" will tell you. Other countries find ways to protect their markets. That's the reality.

The American Thinker on Free Trade Again

I really enjoyed this post. The author puts objections to free trade into a small, well-managed space. You really ought to go read the whole thing, but since I know you're not actually like to do so, here's a sample, with my comments interspersed:

Free trade sounds nice. Protectionism sounds ugly. Free trade sounds capitalist. Protectionism sounds Marxist. So it is worthy of note that free trade was actually viewed by Karl Marx as a strategic force, a tool with which to undermine capitalism as an economic model:

But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen that I vote in favor of free trade [i].

Marx was not far from wrong. After nearly fifty years of progressive tariff reductions, America has suffered significant economic losses. This comes as a surprise to many Americans, for years inebriated with the free trade mantra.

This is because America does the "free" while the rest of the world does something else. China, for example, manipulates its currency and engages in persistent dumping, driving down Chinese prices and displacing domestic American industries.

Amen, and amen! There are few things that annoy me more than listening to or reading someone extol the benefits of free trade without so much as noticing the elephant in the room: free trade does not actually exist! Other nations protect their markets.

The results of such one-sided free trade have been catastrophic for America. Consider that in the last fifty years, U.S. tariffs have gone from 40 percent of the price of goods to 5 percent [iv]. Over the same period, manufacturing as a share of employment has fallen from 30 percent to 11 percent and is still falling.

I swear, as God is my witness, every free trade economist that I have read writes as though any idiot can do manufacturing, or as if it is somehow a low-class form of employment.

My ***. Look, I've done manufacturing. I rather like it. I started at one factory by running a large set of industrial sheet-metal shears, then operating a CNC laser cutter, then moving on to a machine shop where I spent my days operating CNC mills and lathes and my nights learning more about how it's done. When I was laid off and moved into other fields, I wasn't even close to being a full-fledged machinist, despite having been in the field for close to two years and going to school for most of that time. It takes time, time and experience, to be a good manufacturing employee. Oh, anybody, or almost anybody, can drive a small forklift, to be sure, but to be a machinist? A fab (fabrication) worker? A welder? A tool-and-die maker? Those guys don't just fall off the trees. When we lose manufacturing jobs, those guys eventually have to move on to something else. Their skills deteriorate, and for the most part, are lost to the country.

God forbid we should have to rebuild our manufacturing in a big-*** hurry. I'm not sure we could do it.

The late Milton Friedman was a committed free trade proponent. In a stunning dismissal of traditional economic theory, Friedman once remarked, "Who is hurt and who benefits ... U.S. consumers benefit. They get cheap TV sets or automobiles ... Should we complain about such a program of reverse foreign aid?"

That may sound good for the short-term, but, as classic economist Friedrich List wrote,

The forces of production are the tree on which wealth grows...The tree which bears the fruit is of itself of greater value than the fruit itself...The prosperity of a nation is not...greater in the proportion in which it has amassed more wealth (i.e. values of exchange), but in the proportion with which it has more developed its powers of production.

Manufacturing matters. Service jobs, the primary source of U.S. employment, depend on capital inputs from manufacturing even if said manufacturing is foreign. This presents problems should foreign manufacturing undergo shocks or disturbances that disrupt supply lines and, by extension, the sole source of employment for most Americans. Dependence on foreign manufacturing is inherently dangerous, since it is out of U.S. control.

The loss of manufacturing is not a trivial matter, and it has national security implications. It must be the ultimate oxymoron that Communist China is now the "arsenal of democracy." China is a strategic enemy and has threatened open nuclear war on America's homeland, and yet CFIUS has cleared the sale of factories to China responsible for producing the rare-earth magnets used in American laser-guided munitions. What happens if America ever needs to fight China?

Or, what if, God forbid, America ever needs to fight some country with which China is at all friendly?

Service economies can't issue ultimatums; only industrial economies can do that.

It is on this basis that free trade arguments fall apart. In a world with no nations, where national governments are not accountable for the economic and political security of their people, doctrines like "comparative advantage" would have validity.

Again, amen, and amen! As long as nations exist, trade wars will be just that--trade wars. And nations that refuse to protect their own people are derelict in their duties.

Refusing to protect the American economy when other nations are using manipulative "protectionist" devices is not competition, but economic suicide.

Free trade cannot work when some play by the rules and others do not. While competition and openness are desirable in ideal circumstances, reasonable protectionism has proven effective and is indeed necessary to preserve American economic strength.

This whole subject is one of the things that genuinely concerns me about the crop of "conservatives" that we are about to send to Congress. I flatly guarantee you that the vast majority of them know next to nothing about this subject and will back free trade most of the time because, if they have heard anything about it at all, they have heard it from the open-borders/free trade/free-movement-of-goods-and-people, libertarian-leaning economists that dominate most of the economic discussion in the Republican Party. You would not believe the number of "conservative" writers who pen such inanities as "free trade is a bedrock conservative principle," when it is no such thing. It might well be a bedrock libertarian principle, but whilst libertarianism and conservatism do have their areas of overlap, they are not the same thing. It is sheer idiocy to tell a nation that grew to greatness, in part, by protecting its markets, that doing the opposite is somehow "conservative," yet we have more than a few conservatives who will do just that. It's mind-boggling.

Lastly, I must point out--again--that yes, I'm aware that tariffs are not perfect and do have their flaws and negative effects. Personally, I favor the Fair Tax, which, like a tariff, is a consumption tax and will have much the same effect as a tariff, though it is likely to eliminate some of the negative effects associated with tariffs. However, if I can't get the Fair Tax, bringing back tariffs, coupled with a great lowering of income tax rates, would be something I completely support.

Buchanan's Diagnosis and the MOTW Prescription

Pat Buchanan saith this morning:

Referring to the white working-class voters in the industrial towns decimated by job losses, Obama said: "They get bitter, they cling to guns or religion or antipathy to people who aren't like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations."

Yet, we had seen these folks before. They were Perotistas in 1992, opposed NAFTA in 1993 and blocked the Bush-Kennedy McCain amnesty in 2007.

In their lifetimes, they have seen their Christian faith purged from schools their taxes paid for, and mocked in movies and on TV. They have seen their factories shuttered in the thousands and their jobs outsourced in the millions to Mexico and China. They have seen trillions of tax dollars go for Great Society programs, but have seen no Great Society, only rising crime, illegitimacy, drug use and dropout rates.

They watch on cable TV as illegal aliens walk into their country, are rewarded with free educations and health care and take jobs at lower pay than American families can live on – then carry Mexican flags in American cities and demand U.S. citizenship.

They see Wall Street banks bailed out as they sweat their next paycheck, then read that bank profits are soaring, and the big bonuses for the brilliant bankers are back. Neither they nor their kids ever benefited from affirmative action, unlike Barack and Michelle Obama.

They see a government in Washington that cannot balance its books, win our wars or protect our borders. The government shovels out trillions to Fortune 500 corporations and banks to rescue the country from a crisis created by the government and Fortune 500 corporations and banks.

America was once their country. They sense they are losing it. And they are right.

To which rather a lot of people are saying, "Amen, and amen."

As I have noted repeatedly, I do not have a particularly big axe to grind when it comes to race (see my thoughts on the subject here); I am far more interested in what a person thinks than in his quantity of melanin. But I am old enough to know that Buchanan is right; this country has undergone an enormous demographic change since I was a child. I was born in 1962. Immigration law was changed, courtesy of "The Swimmer," in the mid-60s. When I was a child, the country was about ten percent black, and everyone else that you saw in Oklahoma was either white or Native American or a mixture of the two (as am I, at least a wee bit). You rarely saw Latinos.

Now, to reiterate, since I know beyond any shadow ever cast by any doubt, that some will take what I am saying here and try to make it out as though I hate brown people, there's not a darn thing in the world wrong with Latinos. I served with many in the USMC Reserve; my wife is half-Mexican by heritage, etc. All I am trying to point out is that prior to those immigration reforms and the flood of immigration, both legal and illegal, but especially illegal, there was a greater degree of cultural homogeneity than there is today. The most graphic illustration of the point is the presence of bilingual labels on darn near everything you buy. When I was a child and a teenager, no one even thought of such a thing. It was completely unnecessary. By the time I had become a young adult, you occasionally saw a bilingual label, and it was the object of mockery. Now--it is de rigeur.

We have carried a desire for diversity and tolerance to the point where we are being threatened with balkanization and civil strife. We have, out of a desire for "fairness," (you can make Americans absolutely hose themselves by accusing them of being "unfair," so highly do they prize the concept of fairness), allowed what is, historically, overwhelmingly the dominant faith of the land, the faith whose precepts and concepts undergird our conception of man's rights and our system of government, to be marginalized and sometimes even ostracized. A misplaced faith in "free trade" (again, not the same thing at all as "free markets") has resulted in the mass exportation of our manufacturing capacity (and this is actually cheered by fools who have never so much as operated a lathe and have no idea how much mental and physical labor is involved, and how impossible it would be to rebuild our manufacturing base on short notice, should war, for example, ever make it necessary). The brainless idea that we can spend poverty out of existence has created only more poverty and a wave of seriously bad attitudes on the part of people we are allegedly trying to help.

Now, what to do?

Knowing perfectly well that there is not a snowball's chance of this ever actually happening, this is what I suggest needs to happen. Here, for what it's worth, is the MOTW prescription:

1) America's Christians need to quit excusing themselves from talking about their faith on the grounds that they're afraid they might "screw it up" or "drive somebody away," which is the excuse I am continually hearing. All you have to do is read your Bible consistently, go to church and serve in church consistently, and talk about your spiritual life as consistently as you talk about your interest in NASCAR. Not that hard. I am constantly amazed at our situation. I just got the latest CBD catalog in the mail yesterday, and this country is awash in Bibles, study Bibles, Bible studies, commentaries, and the like, and yet nobody feels confident enough about what they believe to speak up and talk about it. What rubbish. Quit making excuses and open your mouths. I say again: America's fundamental political precepts are drawn from a Christian heritage. You will not see a renaissance of constitutional government in this country without first seeing Christianity again becoming the overwhelmingly dominant faith in the land. It matters not whether your Christian brothers and sisters are White, Black, Latino, Mestizo, Indian, or Asian--not as long as you preach and teach the Gospel. It is the Gospel, and the ideas it carries along with it, that are important. Those ideas underly what it means to be an American.

2) Trim or eliminate income taxes and replace them with consumption taxes, that is, with tariffs or--better yet--the Fair Tax. The bottom line is that you must create a tax advantage to manufacturing in this country and quit punishing success.

3) One of those tariffs needs to be on imported oil. It must be cheaper to drill here than to import oil. We have plenty of oil and coal. We have the technology to burn coal cleanly. Every year I read of more discoveries of oil locked up somewhere in this country. It may be in oil shale or oil sands (sometimes not) or offshore, but we have plenty of dadgum oil. We can be energy independent, and energy independence, in turn, will greatly diminish the capacity of jihadis to wage war, since waging war takes money, and, sad to say, it is our payments for foreign oil that indirectly supply the jihadis with money!

Need I add the obvious, that the Federal government needs to get out of the way of the drilling?

4) Congress must execute or get off the pot, so to speak. They either need to declare war in the places our troops are committed, or they need to cut off funding. That is Congress's job.

5) We have to give up the idea of nation-building in Islamic countries. Islam and totalitarianism go together, as I have said repeatedly, like peanut butter and jelly. You will never succeed in remaking Dar al Islam into a series of representative governments. Our objective, vis-a-vis the War on Terror, has to be to keep jihadis off-balance, on the defensive, on the run, deprived of leaders and of resources (see point no. 3).

6) We have to secure our borders. The much-discussed fence is a must. We have to end all the things that make this country attractive to illegal aliens. No more public money spent on illegals. Employers must be required to verify that their employees are in the country legally. Illegals, once caught, must be deported. Congress must clarify, in law, not subject to judicial review (they have this power), that babies born in this country to illegal aliens are not citizens. People that have immigrated legally must be encouraged and assisted to fully assimilate. There must be an end to "chain immigration," as well. We should allow, or not allow, immigration on the basis of whether or not the citizens of this country benefit from it.

7) Federal spending must be drawn back to objects allowed to it in the Constitution--which will immediately result in an end to entitlement spending, obviously. This should not be a problem if point 2 is enacted; the projection is that the first year the Fair Tax is in place, the economy will grow by about ten percent, so jobs should be plentiful and if point 1 is carried out, America's churches can fulfill their historic role of helping the genuinely needy, starting with those in their own congregations.

8) We must drop any military commitments overseas that have outlived their usefulness to us. Last time I read anything on the subject, the United States has multiple treaty commitments to go to war on behalf of other nations should they be attacked, whether our interests are at stake or not. We have, I believe, troops or military obligations in some seven-hundred-plus places around the world. This is madness. US troops should be used for defending the United States.

9) Missile defense, aka "Star Wars," has to be a priority. If points 2, 7, and 8 are carried out, there should be more than enough money to make this work even better than it has so far.

Hmmmm. I guess that's enough for one day. I've probably already offended half the known universe. And you can see why I don't bother running for office.

A Short Explanation of Mercantilism

Anyone who's read my writing for any length of time knows that I have certain favorite topics; as Sherlock said of Mycroft:

(He) has his rails and he runs on them.

One of my betes noire is "free trade," which, again, is not at all the same as "free markets," though I'm sure many will think that is what I am talking about.

The latest blogger to be added to my blogroll wrote an excellent short explanation of one of the classic alternatives to "free trade," mercantilism. There is much good and interesting material here, but this paragraph is representative and should intrigue you. Emphasis is mine:

A final, excellent example of this is Russia. From 1991 through 1999 there was not a single new automobile assembly plant built in Russia but used cars and cheaply built foreign productions were flooding the country. In 1999, then President Putin, got a 33% tariff passed on all imports. The pundents of Anglo economics were all screaming like one unholy chorus that this spelled the end of the Russian auto market. Instead, what this spelled was the opening of 7 new large automobile plants through out Russia. Russia, through low internal taxes and a pro-business environment, became one of the few profitable markets for the American Chevrolet and GM, even though they were now competing in Russia not only with Russian cars but with BMW, Ford, Mercedes, Hynda, Renault and Toyota. Ford even tripled the size of its main plant, while opening two other smaller plants. Thus Russian workers built the cars Russian workers drove, money stayed in Russia and was spent in Russia, driving the economy forward.

Does this situation sound at all familiar to you? It should (though of course there's more at work than the simple presence or absence of tariffs). Personally, I favor the Fair Tax. However, failing that, I would at least like to see some of our tariffs go up and our punitive income taxes go down. Please read Mr. Rodina's explanation as to why.

Edmund Burke Quote # 3

From "Speech Introducing a Motion for an Enquiry Into the Causes of the Late Disorders in America":

Is the folly of laying duties on your own manufactures a new discovery?

One of the things that constantly amazes me when people begin discussion of tax policy is that they so often approach the subject as though it were merely a matter of theory, as though tax policies have existed only since the introduction of the Sixteenth Amendment, as though differing policies have not a lengthy track record by which we may evaluate them.

"Free Trade"--it occurs to me that some people may not entirely understand what I mean by "free trade," and may be thinking that I am about to talk about "free markets." I am not. "Free Trade" and "free markets" are two entirely different animals. "Free Trade" is the policy of eliminating tariffs--taxes--on imported goods, especially manufactured goods, or lowering them to the point of being nearly non-existent. It has a track record. It is largely a track record of exporting manufacturing industries and the high-paying jobs and economic and military strength that go with them to countries with an abundance of human capital (which they often don't mind abusing) and a willingness to foul their own environment to the point of near-unlivability. It also has a track record of creating, in a way, confiscatory income taxes--it is basically always a choice between "tax consumption" (usually imports) or "tax income"--and big, intrusive government (the federal behemoth we now live with did not exist when the feds had to live with income from tariffs).

Tariffs also have a track record--and before someone weighs in with, "Yeah, Smoot-Hawley caused/prolonged the Great Depression!," let me note that this is in much dispute; no less an economic mind than Milton Friedman disputes it, and he is not alone. If you are interested in more, please read the relevant chapter in Patrick Buchanan's The Great Betrayal. It was during the time that the federal government was financed principally by tariffs and duties on imported goods that manufacturing in this country flourished, and the country rose to become an economic and industrial colossus recognized the world over.

It is partly because of this history, this track record, that I support the Fair Tax. It is a consumption tax, and amongst the elements of it I like are that it creates a tremendous tax advantage to manufacturing in this country--as, obviously, do tariffs. History gives every indication that a consumption tax that creates such a tax advantage will stimulate our economy far more than attempting to squeeze the so-called "rich" (always remember: to those consumed with envy, "rich" means only that you have a dollar more than they think you ought to have) ever will.

So why don't our leaders favor this idea? At bottom, I think that it's because for too many of them, tax policy has become far less about what will or will not work and far more about whom they can and cannot reward. With the Fair Tax, you cannot buy votes as easily as you can with a graduated income tax. And ultimately, buying votes with public money seems to be what it's all about.

And that, in a way, is the answer to Burke's question: they--lawmakers, that is--know full well how stupid some of their tax ideas are. They just don't give a rip unless it suits their own ends.