Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog



Review of Baumol and Gomory's book: Global Trade and Conflicting National Interests
Raymond Richman, 2/28/2010

[This review was origininally published on our old blog on July 14, 2009]

Among the relatively few economists who view the loss of American industry to foreign countries as a catastrophe in the making is Prof. Ralph Gomory, Research Professor at the Stern School of Business at New York University and President Emeritus of the Alfred P. Sloan Foundation. Prof. Gomory is no ordinary academic. His Ph. D. is in mathematics and he made his mark as Senior Vice President for Science and Technology at IBM.

He is the co-author with Prof. William Baumol, distinguished former Professor of Economics at Princeton University, of a seminal work published in 2000, Global Trade and Conflicting National Interests. In their book, they took issue with the theory of comparative advantage that explained what products nations specialize in and the gains from trade when countries specialize in producing what they do best.

They showed that countries can acquire a “comparative advantage” by specializing in any industry in which they can obtain economies of scale, a wide range of possibilities. With acquired advantages playing a decisive role, Japan could specialize in autos and the U.S. in airplanes or Japan could specialize in airplanes and the U.S. in autos. Who is first to achieve economies of scale in an industry is likely to continue specializing in that industry and potential foreign competitors have a high hurdle to overcome to compete successfully.

Their analysis, like the traditional analysis it displaced, presumes that in equilibrium, trade will be balanced. They do not discuss or analyze whether there can be chronic trade deficits such as the U.S. has been experiencing for more than two decades. Here is what they say in a footnote to chapter 6:

2. The reader may note that we do not explicitly include a balance of trade requirement for equilibrium, even though trade obviously cannot be in equilibrium if the value of imports is unequal to the value of exports. However, it is easily shown that if all of a country’s income is spent on the purchase of commodities,a set of outputs and prices that satisfies our equilibrium conditions must automatically make the value of each country’s exports equal to its imports: for then the value of the country’s income, which by definition, equals its domestic sales of its domestic products plus the value of its imports. Hence the value of the country’s exports must equal the value of its imports.

There is no discussion of capital flows in the analysis, no discussion of mercantilist practices, no discussion of exchange rates, and barriers to trade and subsidies. And no discussion of the chronic trade deficits the U.S. has experienced since 1985.

Prof. Gomory has now partially remedied that deficiency. In an article entitled Manufacturing and Comparative Advantage by Gomory in the July 8 Huffington Post, he wrote:

Ignored in all these discussions [of free trade] is the obvious fact that when you don't make for yourself the things you need, you will have to trade for them. If you have to import cars and all sorts of manufactured goods, you will be importing on a large scale; to trade for them you will need to create additional goods or services that you can export on an equally large scale....

If you give up large things and specialize in exporting small-scale things for which the demand is limited, you will not be able to buy many of the things that are needed on a large scale. If the things you are going to export don't add up to something big, you will be neither making nor importing what you need. You will simply not have them. You will be a poor nation.

Still no mention of the deficits which have decimated our industry and forced millions of industrial workers to take employment in lower-paid service sector jobs caused wage stagnation and caused a worsening of the distribution of income. But that is not all. No mention of the capital flows. The abundance of dollars she accumulated has made China the leading creditor nation and us the leading debtor. Foreign investments in China provided her with technology and management skills and made her in less than two decades an industrial power rivaling our own.

It has provided her with an enormous supply of dollars which she invested until recently by buying U.S. government bonds on the pretext that she was merely accumulating foreign exchange reserves. More recently, she has been using those dollars to augment at our expense her political power in Latin America, indeed all over the world. One is reminded of the statement attributed to Lenin when he justified his New Economic Plan (NEP) that allowed cooperation with capitalist enterprises, “The capitalists will sell us the rope to hang them with”.

As we have shown in our book, Trading Away Our Future (Ideal Taxes Assn, 2008), by buying U.S. financial assets, China kept the value of the dollar high and this perpetuated and augmented the trade deficits and contributed to the boom and bust of 1999. And we now add the housing boom which turned into a bust in 2006.

We cannot expect an economic stimulus package to have any success when it will not produce a single exportable good or service to produce a recovery. We have a huge trade deficit in petroleum while we prohibit drilling for oil on public lands and offshore and refuse to permit exploiting our huge petroleum reserves from shale, both estimated to exceed by far the oil reserves of Saudi Arabia. We cannot afford to spend trillions on developing energy from renewable sources while our trading partners are investing in low-cost energy from fossil fuels, e.g., Russia in the Arctic and China in Brazil.

Prof. Gomory agrees with us that we are on a suicidal course. In May, he advocated some version of Warren Buffett's Import Certificates plan to reverse that course. We advocate the same solution in our book and in this blog.

Your Name:

Post a Comment:


Comment by Sputte, 4/10/2010:

As long the as dollar is a world currency and gold, oil s.o is traded in dollars, the FED can print more and more without the risk of a weaker dollar. If sweden would print as much swedish kronas  as the us is printing dollars, The krona would probably collapse in hyper inflation and in lack of credibility.




  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Archive
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015
    Jun 2015
    May 2015
    Apr 2015
    Mar 2015
    Feb 2015
    Jan 2015
    Dec 2014
    Nov 2014
    Oct 2014
    Sep 2014
    Aug 2014
    Jul 2014
    Jun 2014
    May 2014
    Apr 2014
    Mar 2014
    Feb 2014
    Jan 2014
    Dec 2013
    Nov 2013
    Oct 2013
    Sep 2013
    Aug 2013
    Jul 2013
    Jun 2013
    May 2013
    Apr 2013
    Mar 2013
    Feb 2013
    Jan 2013
    Dec 2012
    Nov 2012
    Oct 2012
    Sep 2012
    Aug 2012
    Jul 2012
    Jun 2012
    May 2012
    Apr 2012
    Mar 2012
    Feb 2012
    Jan 2012
    Dec 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010

    January 2010

    Categories:
    Book Reviews

    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term
    Environmental Regulation
    Real Estate Taxation
    Trade
    Miscellaneous

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • TradeReform.org
  • Votersway Blog
  • Watt's Up With That


    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]