Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Paul Krugman, a Nobel Prize winner and a former Princeton University Professor of Economics in an opinion piece entitled “Trade, Labor and Politics” in the New York Times (3/28/2016) and Alan Blinder, currently a Professor of Economics and Public Affairs at Princeton in an opinion piece entitled “Five Big Truths about Trade” in the Wall Street Journal (4/22/2016), urge doing nothing to eliminate the trade deficits the U.S. has been experiencing for over two decades. Princeton was the home of Woodrow Wilson, who created the League of Nations, the beginning of globalization, which is relevant because both are globalists which may explain why they wrote the nonsense we criticize. It is to be hoped that they are not representative of the economics faculty at Princeton.
Krugman begins by writing that the “Republicans, who claim to stand for free markets, are likely to nominate a crude protectionist…” Donald Trump is hardly a crude protectionist. He has said he wants to end the huge chronic trade surplus China has had with us for nearly two decades and will take action to prevent American firms moving their factories abroad. That makes him a wise protectionist because these are actions we need to take. Was Keynes a crude protectionist when he said decades ago that Britain should take retaliatory action against mercantilist “beggar-thy-neighbor” policies pursued by its trading partners? And am I, a University of Chicago Ph. D. in Economics, a crude protectionist for pointing out that economics as a science does not justify “free” trade at all. All that economics has to say is that balanced trade is always beneficial to trading partners. Trade does not need to be balanced with every country but a country’s trade should be balanced overall with its many trading partners. Free trade as a policy could only be recommended by economists when the trading partners 1) have a common currency, 2) there is free movement of labor and capital between them, and 3) neither partner can impose barriers to trade, restrictions imposed on the States by our Constitution. The European Union has similar conditions.
Krugman admits that “for the past few decades globalization has probably been, on net, a depressing force for the majority of U.S. workers.” What an understatement! Millions of American workers have lost good jobs in manufacturing which is the cause of the economic malaise afflicting this country. But Krugman talks about “globalization” as the cause. It was not globalization but the ideology of free trade and the trade treaties that accompanied globalization that produced the unintended consequence of U.S. trade deficits. The United Nations, the World Bank, the International Monetary Fund, the International Labor Organization, the World Health Organization, and hundreds of other agencies were created in the process of globalization but none of them have had a depressing effect on American workers. Only the trade deficits have done that. Krugman ought to stick to economics. Globalization is not economics, trade deficits are. ...
Journalists and Their Economic Illiteracy I.
The editorial page of the Trib-Review in its Saturday edition 4/16/1016 illustrates what is wrong with the media today. First, the editorial on the page criticizes the Republican Party for not opposing the Export-Import Bank created by the Truman administration in 1945. The editorial calls the X-Im Bank crony capitalism because the bulk of its loans go to large companies like Boeing and GE, but in 2015 the bank made more than 2,300 transactions that helped U.S. small businesses export their products. The Ex-Im bank guarantees to keep U.S. banks harmless on loans they make to foreigners to purchase U.S. goods but requires them to use sound economic criteria when they make such loans. The Ex-Im Bank has been entirely self-funded since 2007 and cost the government very little over its life as a bank. It adds nothing to the budget deficit at all. Surely there are better things to cut. There are, according to the EX-Im Bank 85 foreign countries that have export credit agencies. It is not an example of “Crony capitalism”. The latter is evidenced by government grants, subsidies, and tax breaks to favored companies. Examples are the huge subsidies and guarantees given companies producing electricity from wind and solar sources and the tax credits given to buyers of hybrid and electric vehicles which line the pockets of the companies that produce such vehicles. Given the fact that the U.S. imported $500 billion worth of goods and services in 2015 than it exported, there is good reason for its continued existence. The editorial would have been more appropriate when the U.S. was the leading creditor nation in the 1950s and 1960s but today it is the leading debtor nation.
Second, in a column on the editorial page John Stossell,
The Law of Diminishing Returns; How we Escaped Its Consequences
Most of us do not understand the economic Law of Diminishing Returns. Parson Malthus, who gave economics its reputation as the dismal science, postulated that given the fact that the earth’s surface is limited, as population grows the product that each additional worker adds to land’s output of productive land would eventually begin to diminish and that if growth of population were left unchecked, earnings in agriculture per person would diminish to below the level needed to sustain the population. What Malthus and all the classical economists, including Karl Marx, failed to realize was that land was not the only resource employing labor. Most of our labor is employed in producing non-agricultural products and services, combining labor not with land alone but will growing amounts of physical capital. Since the time when Malthus wrote, the end of the 18th century, the U.S. and Europe have experienced rising wage rates as capital per worker increased. But there is some evidence that we have begun to experience diminishing returns again, the result of forgetting that for wages to rise wage-increasing capital investment must grow relative to labor input.
Not many decades ago, after World War II, Japan began to experience rapid economic growth so rapid in fact that a colleague of mine at the University of Pittsburgh predicted it would catch up to the U.S., just as many have been predicting that China’s rapid growth would make it the number one economic power exceeding the U.S. But even economic growth is subject to the law of diminishing returns.ot surprising to economists familiar with the law of diminishing marginal productivity, China’s rate of growth slowed down just as Japan’s had before it. The returns to capital are high when there are lots of new investment opportunities. But new investment opportunities often grow slower that savings, the source of investment capital. Marx thought that savings would always rise faster than investment opportunities. Marx was the real economic pessimist. Marxism is the real dismal science.
Knowledgeable readers may have already guessed that the law of diminishing marginal productivity is merely an application of the economic Law of Supply and Demand. The supply of land being relatively fixed combining it with an ever-increasing supply of labor reduces the amount of product eventually that each additional unit of labor produces, hence the law of diminishing returns. But Malthus did not anticipate the extensive growth of non-agricultural industries over the next two centuries. The production of new products increases the demand for labor causing wages to rise. He never expected the incredible rise in productivity in the industrial and commercial sectors. ...
Recent polling data on trade
Public opinion on trade policy continues to be at substantial odds with most U.S. public policy.
A mid-March Bloomberg poll asked the following question: "Turning now to trade, generally speaking, do you think U.S. trade policy should have more restrictions on imported foreign goods to protect American jobs, or have fewer restrictions to enable American consumers to have the most choices and the lowest prices?" 65 percent supported more restrictions. 22 percent supported fewer restrictions.
Another question asked "Overall, do you think NAFTA, the North American Free Trade Agreement, has been good or bad for the U.S. economy?" 44 percent said it had been bad for the U.S. economy, and 29 percent said it had been good.
Bloomberg's analysis of the poll can be found here. They titled it "Free-Trade Opposition Unites Political Parties...
Who's got the trade policy delusions?
The counter-attack by the "free-traders" is under way. It's unfortunate for them that they have little more to sell than lies, distortions, and delusions.
Case in point is a recent piece on trade in The Daily Beast by Will Marshal and Ed Gerwin (http://www.thedailybeast.com/articles/2016/04/11/donald-trump-and-bernie-sanders-are-delusional-on-trade-policy.html).
The U.S. exports half as many cars as it imports. Imposing tariffs on countries like China and Japan that have worked hard to exclude U.S. made cars from their markets might well move trade toward balance. Tariffs on imports from Mexico would perhaps change Ford's calculus about its newest shipment of U.S. auto-production to that country.
Such a tariff would also provide valuable incentives for some re-shoring of production to the US if maintained....
If the tariffs were imposed by means of the balanced trade "scaled tariff" then retaliation would only further hurt these country's exports. Their better policy would be to begin taking down trade barriers, stop manipulating their currencies, and start finding ways to buy more U.S. products....
Here's how we begin:
To read it, go to:
Journal of Economic Literature:
Atlantic Economic Journal: