Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Much Ado About Trade Wars
The media are all hyped up about trade wars. Where were they when USA factories were shutting down and moving overseas costing millions of Americans good-paying manufacturing jobs and when the trade deficits showed up endlessly in the Gross Domestic Products accounts causing slow economic growth? They still do not mention them except to deride Pres. Trump when he mentions it. Nor are economists free of blame. Balanced trade is easy to achieve but not by tariffs on particular products but by scaled tariffs, variable-single-country-tariffs that work like devaluing a currency, the traditional method of achieving balanced trade.
Nearly all economists are strong advocates of free trade. That is a hangover from the decades before WWII when the U.S. was the leading trade surplus country. When the U.S. became the world’s leading trade deficit country, economists did not change their outlook and economists were silent about the harm those deficits were doing to our basic manufacturing industries. They still are.
Prof. Martin Feldstein of Harvard wrote in a recent issue of the Wall Street Journal (7/6/2018) that he is a “strong advocate of free trade” and writes that, “If the U.S. reduces the trade deficit with one country, it must increase the net trade deficit with others to keep the total unchanged.” Notice his qualifying phrase “to keep the total unchanged.” That phrase hidden in his rhetoric is a non-sequitur; keeping the total trade unchanged is not a policy objective. He is saying that tariffs and subsidies and exchange rates do not have any effect on the trade deficits which is utterly false. Our trade objective should be to increase the total welfare of Americans by specializing in the production of goods that we have comparative advantage in producing and trading them for an equal value of goods that our trading partners have a comparative advantage in producing.
Balanced trade is always beneficial for both trade partners. When a country has a trade deficit with one of its trading partners and with the rest of the world, economists cannot show that the trade is beneficial to both trading partners.
Unfortunately, the conditions for a free trade policy do not exist in the real world. No economist should be in favor of free trade unless the following conditions are satisfied by the trading partners: a common currency, absence of any artificial barriers to trade, and free movement of capital and labor. Those conditions are imposed on the States by the U.S. Constitution. But they do not exists internationally. Being for free trade in the international community has no rational basis. Formal (tariffs) and informal barriers (especially in countries which lack free markets), industries are subsidized, artificially low foreign exchange rates are maintained vis-à-vis the USA, and barriers to the free movement of capital and labor are the rule, not the exception. Several countries have large chronic surpluses with the U.S. They acquire huge amounts of U.S. government and corporate debt, and often use the funds to acquired business assets in the U.S. The U.S. has a huge chronic trade deficit with the rest of the world....
When European Union commissioner Juncker meets with Trump in the White House today, the $5 billion fine that he just leveled against Google (which Trump tweeted about last week) will be on the agenda. The EU claims jurisdiction over the entire world in that the fines are determined as a percentage of worldwide revenue. Furthermore these companies are being fined for benefiting the consumer and for causing economic growth.
The top 4 payers of fines under this statute were American companies:
"Make no mistake, this statute is being used to punish American companies for being big and American. It is designed to shackle American companies so that European producers can steal their market share."
To read the entire posting on the American Thinker website:
Wasteful spending will sink our country - Ray was published in American Thinker
To read it, go to:
The Laws of Diminishing Returns and Increasing Cost Apply to Government Expenditures
Congress appears to be unwilling to eliminate any program which has been in existence for years if any citizen’s group supports it. Congress appears to be unwilling to eliminate instances of wasteful spending even when they are reported in the media and are well-known. Even worse is the overspending on ongoing programs because of Congress’s failure to control legitimate spending.
The most grievous policy mistake is to neglect two of the most important economic laws, the Law of Diminishing Returns, and its related Law of Increasing Cost. Over-spending on existing programs is probably the rule rather than the exception. The former says that given the fact that all factors are limited, e.g. capital and labor, increasing the employment of one factor relative to another to produce a particular product will result in less than proportional increase in output. Increasing costs means that, given the fact that total resources are in limited supply, to produce more of one product requires giving up more and more of another or other products.
The reasons we don’t see these effects is that the economy is too complex and too dynamic. There are so many sectors and industries, some of which are affected without calling our attention to them. And over time, there will be invention of new products, improved methods of production, technological change, innovations, and other changes. But we are better able to discern their effects as government grows and its subsidies increase. The need for subsidies is evidence of diminishing returns and of increasing costs. If we were able to calculate benefits and costs of new government expenditure programs, we would observe that most of them are due to the diminishing returns and increasing cost of existing programs.
These require increasing diversion of funds from the private sector. For example, increased defense spending is at the expense of increased costs of goods in the private sector. When government spends more money on global warming projects, it is at the expense of increased costs of other goods people buy. Since electricity produced by wind and solar power is more costly than electricity produced from fossil fuels, the increased cost effect reduces private purchasing power twice, as private sector costs increase and second by the law of diminishing returns as government expenditures on climate change increase.
Failure to pay attention to diminishing returns means that government expenditures on many if not most programs exceeds the amount that cost-benefit would justify and many expenditure programs should not have been initiated at all. Government would get increasing returns by reducing expenditures and the private sector would enjoy increasing returns and reduced costs as government expenditures are reduced.
Admittedly, this makes a case for reducing the size of government. There can be little doubt that federal government spending is excessive on a wide range of programs in nearly every department and agency. ...
Journal of Economic Literature:
Atlantic Economic Journal: