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.

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.

Short and Sweet on "Free Trade"

Pat Buchanan's column today is on "free trade." Again, if you're not familiar with the subject, don't confuse "free trade" with "free markets." They are not at all the same thing. "Free trade" is the policy of having low or nonexistent tariffs on imported goods. Used to be that the federal government was financed almost entirely by tariffs. Ran surpluses, too. The United States rose to be an economic colossus during this period.

You cut tariffs, you have to raise other taxes, or create new ones. Tariffs are a consumption-type tax. In their absence, you get income taxes--basically, taxes on economic productivity and success. Brilliant.

Now, as I often say for the benefit of those who, when tariffs are brought up, automatically shout "Smoot-Hawley and the Great Depression!" A) That's hogwash, we had a decades-long history of high tariffs without having a decades-long history of "great depression," and B) I'm not unaware that tariffs are not perfect. I favor the Fair Tax, which is not perfect either, but seems to me to be a better system that has some of the same salutatory effects as tariffs, that is, it creates a tremendous tax advantage to manufacturing and doing business in the United States. However, if I can't get the Fair Tax, I definitely want more tariffs and less income tax, capisce?

Now, on to the Patmeister's remarks--and I do recommend you go read the whole thing. Emphasis is mine and in bold:

How many know that every modern nation that rose to world power did so by sheltering and nurturing its manufacturing and industrial base -- from Britain under the Acts of Navigation to 1850, to protectionist America from the Civil War to the Roaring Twenties, to Bismarck's Germany before World War I, to Stalin's Russia, to postwar Japan, to China today?

No nation rose to world power on free trade. From Britain after 1860 to America after 1960, free trade has been the policy of powers that put consumption before production and today before tomorrow.

Nations rise on economic nationalism; they descend on free trade.

What is more, other nations practice economic warfare on us already. Somebody always brings up "retaliation." If there is a question of "retaliation," the question is when are we going to retaliate. Other nations protect their markets, either via their own tariffs, or through such mechanisms as rebating their VATs on exports. This global free-trade zone that some utopians envision does not actually exist, never has existed, and never will exist.

As Pat points out, the pitiful part is that our current crop of Republicans simply don't get this. It's pitiful because, if you didn't know, the same period of time that the United States was rising to manufacturing and national preeminence was also a period of time when the United States was under an almost uninterrupted string of Republican presidents, all of whom favored high tariffs. The Republican Party used to be the party of high tariffs; now, they won't touch 'em, despite the lessons of history.

It's a stinkin' pity.

A Faint Glimmer of Sense

Not that I expect that it proceeded from a real understanding of what is going on, but I was still gratified to see this:

U.S. to Impose Tariff on Tires From China

Oh, I know. You've been taught that tariffs are protectionism, and protectionism is evil.

It also happens to be one of the principle means by which economic empires are built, jobs--jobs worth having, as opposed to service jobs--are created, and real wages made to rise.

Real wages--adjusted for inflation--have been steadily declining since this country decided to go the "free trade" route. Seeing some move, almost any move, away from that policy is music to my ears.

Oh, but--oooooh! The article said we risked

...angering the nation's second-largest trading partner.

So (badword) what? China protects her own markets already. If anyone's retaliating in this scenario, it's us.

Ticks me off every time I think about it. Chinese workers are notoriously badly paid (though that pay is rising), safety is not a concern, pollution is not a concern, etc., and when U.S. firms have a hard time competing with companies that have little or nothing to worry about in terms of worker pay, worker safety, pollution, and so forth, and seek a protective tariff, we get all huffy and tell them to get "competitive." They get "competitive," alright; they move their manufacturing overseas. It's insane.

Tariffs, friends, were the principle means by which the U.S. government was financed right up 'til the time of the first World War, and remained important up 'til the seventies. Are you blind to the fact that this was the period of time during which the United States became the world's foremost economic power? Tariffs are a perfectly legitimate means of financing a government, every bit as legitimate as the hideous income tax, and they have a far better track record. They made an economic colossus out of Great Britain (which they then lost when they went the free trade route), they made an economic colossus out of the United States (which is suffering greatly by having gone the free trade route), and they brought Japan back from the economic death of World War II.

Admittedly, tariffs are not without their flaws. Even better would be enacting the Fair Tax, which, of course, has a very similar effect to tariffs in one way, that is, it creates an enormous tax advantage to manufacturing in this country.

If you're interested in more on the subject, read Pat Buchanan's The Great Betrayal and The Fair Tax Book and its sequel.

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.

A Fly in the Apothecary's Ointment

In an otherwise excellent and highly recommended column (Truthfully; Dr. Adams is one of my favorite writers, and in this column, save for this one thing, I think he is spot-on), Dr. Adams wrote:

Herbert Hoover made FDR’s New Deal possible with protectionist policies following the stock market crash of 1929.

Why, you ask, might I say that this is a fly in the ointment? Because, very simply, high tariffs--protectionism--was the policy of every Republican president before Hoover, as well, right on back to Lincoln. To say that Hoover's protectionism was somehow "unprincipled" and paved the way for the New Deal is absurd, unless you want to similarly charge all those other Republicans as well, and somehow the idea that it took from from the 1860s to the late 1920s for that pavement to be laid and the New Deal to come to fruition seems less than tenable to me.

Not coincidentally, in my opinion, that same period of time saw the United States grow from a principally agricultural nation to the mightiest industrial power the world has ever known.

Once, high tariffs were an integral part of Republican policy. Starting with the Eisenhower administration, they were gradually repudiated, until now, many Republicans react as though they were being whacked with a red-hot poker if you so much as mention the idea of, say, withdrawing from NAFTA. I do not know why, unless it's that they've been convinced that the Smoot-Hawley tariffs were somehow responsible for the Great Depression. But that idea doesn't hold much water, either, and for similar reasons. To my mind, the hive-mind of opinion on Smoot-Hawley seems to be the result of decades of indoctrination rather than of reasoned analysis. Again, for those interested, peruse the relevant chapter of The Great Betrayal. It's available used for such a low price that there's no excuse for not buying it, even if all you do is read that one chapter.

Fortunately for all of us, there is an excellent alternative to both the income tax (the only real alternative to consumption taxes, that is, it's pretty much consumption taxes--tariffs and the Fair Tax--or income taxes: take your pick) and tariffs: The Fair Tax, which I happen to know Dr. Adams supports. I can't help but note that the Fair Tax achieves one of the principal objectives of a tariff, though--that is, they both create a tremendous tax advantage to manufacturing in the United States--and find it slightly amusing that the Fair Tax is gaining ground amongst conservatives, whilst tariffs have an undeservedly miserable reputation.

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.