The Newest Protectionist
Wanting To Be President In The Worst Possible Way
By Pejman Yousefzadeh Posted in Economy | Featured Stories — Comments (14) / Email this page » / Leave a comment »
In the wake of the 400 point stock market drop on Wednesday, Senator Hillary Clinton has decided that the best response is a protectionist one.
Watch it and weep. It's Smoot-Hawley on TV.
Read on . . .
The press release from Senator Clinton's office highlights the sense of economic antediluvianism Senator Clinton so eagerly seeks to bring to the debate over the shape and future of our economy:
"When it comes to the fiscal recklessness and economic fatalism of the current administration, the writing might not be on the wall but yesterday the writing was on the Big Board. The economic policies of the last six years have contributed to an erosion of US economic sovereignty and have made us more dependent on the economic decisions of other nations," said Senator Clinton. "We need to take steps to restore fiscal responsibility and sound economic policies based on the facts not ideology," said Senator Clinton in remarks on the Senate floor.
Code words concerning "economic sovereignty" are nothing more than efforts to mask a primitive and hopeless protectionist policy--as evidenced by Senator Clinton's call for a "firewall" to protect us not from dangerous viruses or contagions, but rather from imports that will help expand consumer choice and make our lives better. Senator Clinton may as well inveigh in favor of a "firewall" that protects us from products manufactured in the United States, but containing foreign parts--products like your iPod, as Larry Kudlow remarked on his show in dissecting Senator Clinton's bizarre remarks. She won't of course, which means that about the kindest thing we can say about Senator Clinton is that she is inconsistent in the application of her utterly antiquated and suicidal trade policy.
Senator Clinton terms reliance on free markets as "fatalism," all the while failing utterly and completely to understand the complicated and brilliant workings of the free market. As indicated in the excerpt below, Don Boudreaux has Senator Clinton beat on the knowledge front:
Saying "Let the market handle it" is to reject a one-size-fits-all, centralized rule of experts. It is to endorse an unfathomably complex arrangement for dealing with the issue at hand. Recommending the market over government intervention is to recognize that neither he who recommends the market nor anyone else possesses sufficient information and knowledge to determine, or even to foresee, what particular methods are best for dealing with the problem.
To recommend the market, in fact, is to recommend letting millions of creative people, each with different perspectives and different bits of knowledge and insights, each voluntarily contribute his own ideas and efforts toward dealing with the problem. It is to recommend not a single solution but, instead, a decentralized process that calls forth many competing experiments and, then, discovers the solutions that work best under the circumstances.
To recommend the market is to understand, or at least to cooperate with, the wisdom of James Buchanan's important insight that "order is defined in the process of its emergence." It is to understand, at some level, Vernon Smith's awareness that "ecological rationality" is greater than individual or "constructivist" rationality.
This process is flexible and it encourages creativity. It also denies to anyone the power to unilaterally impose his own vision on others.
In brief, to advise "Let the market handle it" is a shorthand way of saying, "I have no simplistic plan for dealing with this problem; indeed, I reject all simplistic plans. Only a competitive, decentralized institution interlaced with dependable feedback loops -- the market -- can be relied upon to discover and implement a sufficiently detailed way to handle the problem in question."
Read it all, especially if you are a certain junior Senator from New York. Of course, if Professor Boudreaux's commentary was read before Senator Clinton's speech, the effect simply did not register.
Senator Clinton comes out in favor of legislation that "rings an alarm bell" when American foreign-owned debt reaches 25% of GDP or when the trade deficit reaches 5% of GDP. No one on this Earth knows why Senator Clinton chose the figures she did; doubtless, not even Senator Clinton is aware of why she chose the figures that she did. Foreign-owned debt merely constitutes an investment in the economic performance of the United States. Foreigners are betting that our economy will do well. We should encourage such investments and I am old enough to remember when politicians and pundits muttered sonorously in the 1980's that Japanese foreign investment was surely the end of us. How did that turn out? As for the trade deficit . . . well . . . it has been written more times than I can count--this is surely not an exhaustive list of links--that the trade deficit is an utterly meaningless metric and should not be employed as a method for policy analysis. Don't believe me? Then believe Adam Smith:
Nothing, however, can be more absurd than this whole doctrine of the balance of trade.
Again, read the whole thing. I certainly intend to later on this year, if only to refresh my recollections. But it's never too late to read it for the first time . . . especially if you are seen as a plausible candidate for President of the United States.
And hey, the plausible candidate for President of the United States should read this too. She should just remember the following: It's a parody. Not the inspiration for further protectionist and economically suicidal legislation. A parody. And its lease on life is ensured because there are so many public officials--including a certain plausible candidate for President of the United States--who appear ever so willing to make themselves targets for the parody. Hillary Clinton most certainly exists. But Frédéric Bastiat still invented her type over 160 years ago.
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The Newest Protectionist 14 Comments (0 topical, 14 editorial, 0 hidden) Post a comment »
HRC is an economic fashion idiot! She throws economic policies out as bones to her idiot base. Whatever the loses at dKos or DU clamor for, Hillary gets into a soundbyte.
Kyoto Now! (Because only pollution from the US hurts the planet)
You're assuming the American populace in general is good with economics, when it is manifestly obvious that the opposite is true (keep in mind the massive public support for government-imposed price controls on labor!). She can typically get away with saying some economically crazy stuff when, in all reality, most people lack the faculties to call her out on it. Mencken's quote about how democracy can work when the majority of people are fools comes to mind.
My father has told me on more than a few occasions that, were it not for the fact that it would be considered unconstitutional, he's like to see a requirement that, in order to vote, one must first pass a test on the fundamentals of economics. I used to always chuckle and roll my eyes, but, after declaring an Economics major (to go along with my Mathematics and Political Science ones) and hearing what passes for political discourse from the likes of Hillary Clinton, Sherrod Brown, and the rest of the Congressional Remedial Economics class... I'm wondering if he was on to something.
"I could explain, but that would be very long, very convoluted, and make you look very stupid. Nobody wants that... except maybe me."
Some otherwise intelligent people buy into some really stupid things. I wonder if people only buy the law of gravity because they see its obvious effects.
Kyoto Now! (Because only pollution from the US hurts the planet)
is that free trade is probably the single thing her husband got closest to getting right, and which contributed enormously to the economic boom on his watch. Heck, remember Al Gore mopping the floor with H. Ross on this issue (the single greatest moment in Gore's career?). Somebody bring back that Al Gore to give Her Majesty a lesson on Hoovernomics. Instead, he's too busy playing Dr. Frankenstein in his basement or whatever it is that sucks up all that electricity, Bill is off raising campaign cash one lonely lady at a time, and we're left with "bubble, bubble, economic trouble."
"No compromise with the main purpose, no peace till victory, no pact with unrepentant wrong." - Winston Churchill
So Greenspan speaks, the market listens; China falls 9% and US traders react, therefore President Bush and his policies caused a market correction. Of course I'm sure Ms. Clinton or Rodham-Clinton whichever she's going by these days thinks that the recent record highs on the Dow were only a result of what the Democrats have done to keep the evil Bush admin at bay. The only thing better than Ms. Clinton uttering the words free-market when she doesn't understand the concept is the talking heads screaming how the "system failed" Tuesday. Glitch yes, system failure, not quite. The Dow had to fall 1250 points before trading was to be halted per the post 1987 rules, 500 and 1250 are miles apart.
But we print the money.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
How do we know she's referrencing Hawley-Smoot? Maybe she prefers the many tarrifs enacted by America's conservative leaders, such as antebellum conservatives Calhoun and Clay, the high tarriffs restored by Lincoln, or those put forward by McKinley and Harding? After all, the conservative party in American politics was generally pro-tariff from the nation's inception all the way up to the WWII period. The same period where the US transformed from an agrarian economy to the world's biggest industrial powerhouse.
Tariffs are not bad. Excessive and punitive tariffs can be. Stop making free trade a religion, and accept it as a good goal, an ideal state of affairs when it's reciprocal and fair.
I think you're a little too sophisticated to believe that Hawley-Smoot was the sole or even main cause of the Great Depression. It may have deepened it some, but the huge loss of wealth that put the nation into a downward spiral of bank runs and margin calls pre-dated the tariff. Stating that Hawley-Smoot is the bogey-man is kind of like me saying the Panic of 1857 proved free-trade is a bad idea.
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"Our job is to bash the president"
Newsweek's Evan Thomas, on the role of the MSM
You're basically right about Smoot-Hawley. But what about today? In 1928, the US accounted for fully half of global output. Today it's about one-quarter. And in 1928, the US was part of about 40% of total global trade.
I don't worry about tarriffs. They're too blunt an instrument to be used in the kind of economic warfare that Hillary Clinton and other Democrats (notably Schumer) seem interested on waging. I worry about things like capital controls, the proposal for a one-basis-point tax on currency transactions, regulation of derivatives trading (which no one even fully understands), etc.
Under what circumstances and for what objectives do you think tarriffs are a good idea?
There is a presumption that tariffs are universally inappropriate, which brought on my response. I would say the burden of proof falls on those who would stand by such a univeral statement, especially in the face of the historic evidence (many countries whose economies grew sharply despite the use of tariffs).
But I'll go along with your question anyway. "For what objectives do you think tariffs are a good idea"? Well, as we all know, one of the primary distinctions drawn in the 19th century tariff debate was between revenue tariffs and punitive/protectionist tariffs. Common sense dictated that at a certain level, foreign companies would still be willing to sell goods to the American consumer, even if they had to pay the US government for the privilege of doing so. I agree with this in principle: why should a company owned by Americans and employing Americans have to pay a (double) income tax and shoulder the cost of government, but not foreigners who seek to gain advantage by selling to our markets?
Of course, there is the question of, does the tariff merely lead to higher prices for the consumer? The answer to this question is usually given as "yes" by the universally-anti-tariff crowd, without much further explanation. The "yes" is usually closely followed by the "tax on the consumer" catchprase. In reality, it's a bit more complicated than that. It will have a lot to do with the goods in question, and price elasticity in the marketplace. In some situations, foreign producers will be able to pass on more of the cost, in some places less.
Even where more of the tariff's costs are being passed on to consumers, the "tax" is twice as effective as when the tax man confiscates your income. This tax not only puts revenue in the government's pocket, but raises the price of certain goods, making it more likely that domestic producers will be able to competitively enter the marketplace, or improve the financial situation of existing domestic firms.
In those situations where price elasticity prohibits the foreign firms from raising prices, they will be forced to determine if they can still satisfy their investors' cost of capital requirements at the lower prices, and either accept a reduced profit or leave the marketplace to domestic firms. Much like with the income tax, setting an appropriate revenue tariff level is more art than a science. Lower rates are usually better than higher rates, and Congress has to figure out how to get a little wool without killing the sheep.
Protective tariffs, in the 30-50% range, serve another purpose altogether. At this point, you're pretty much telling the foreign manufacturer to pack up and leave. I think these types of tariffs are extremely counterproductive, and the only reason to even consider it is if another nation has already enacted an aggressive policy towards you first. Even then, the goal is not to stop doing business with that country, but to help them see that a one-way street will cost them in the long run.
In the Cold War, Reagan's maxim "peace through strength" worked out: we never had to fight the Soviets (directly) because they knew we had the will and ability to win. If China knew that we had the will and ability to level the playing field with them, and mirror their practices (export subsidies, import tariffs, and I'll leave currency aside for the moment), my guess is their trading laws would become more liberal very quickly. Getting us to the place where, I think we both agree, we want to get to: trade with less government intervention than exists now.
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"Our job is to bash the president"
Newsweek's Evan Thomas, on the role of the MSM
How do we know she's referrencing Hawley-Smoot? Maybe she prefers the many tarrifs enacted by America's conservative leaders, such as antebellum conservatives Calhoun and Clay, the high tarriffs restored by Lincoln, or those put forward by McKinley and Harding? After all, the conservative party in American politics was generally pro-tariff from the nation's inception all the way up to the WWII period. The same period where the US transformed from an agrarian economy to the world's biggest industrial powerhouse.
To the extent that any other tariffs are being referenced here, I condemn the favorable reference just as surely as I condemn a favorable reference to Smoot-Hawley. I have blogged long enough to have condemned more times than I can count the employment of steel, lumber and shrimp tariffs during the first term of the Bush Administration. You have made precisely no attempt whatsoever to tie the transformation of the United States "from an agrarian economy to the world's biggest industrial powerhouse" to the employment of tariffs. A good move--such a tie cannot be made and we ought to remember that correlation does not constitute causation. Perhaps we should give credit instead to Alexander Hamilton's insistence in the favor of industrialization and urbanization (contrasted with Thomas Jefferson's insistence and advocacy in favor of agrarianism) and the triumph of that view, which helped lead the United States away from agrarianism and towards urbanization and industrialization. On this issue, I highly recommend this book, which tells the story of Hamilton's advocacy on this issue very well.
Tariffs are not bad. Excessive and punitive tariffs can be. Stop making free trade a religion, and accept it as a good goal, an ideal state of affairs when it's reciprocal and fair.
No one, of course, has made "free trade a religion." I view free trade as a theory--one that has as much empirical support in favor of its capacity to produce wealth and prosperity as does gravity concerning its capacity to cause objects to fall to Earth. And as blackhedd points out, you have done nothing whatsoever to show us what a good tariff might be. You will also forgive me when I say that those who argue in favor of "fair trade" are in fact, in favor of "little to no trade." Rhetorical fig leafs are notable for what they cover up. But they are only notable for that.
I think you're a little too sophisticated to believe that Hawley-Smoot was the sole or even main cause of the Great Depression. It may have deepened it some, but the huge loss of wealth that put the nation into a downward spiral of bank runs and margin calls pre-dated the tariff. Stating that Hawley-Smoot is the bogey-man is kind of like me saying the Panic of 1857 proved free-trade is a bad idea.
I said nothing about whether Smoot-Hawley was the "sole" or even "main" cause of the Great Depression. To be sure, it was a powerful influence, but this last paragraph only seeks to put words in my mouth
"At times one remains faithful to a cause only because its opponents do not cease to be insipid." --Friedrich Nietzsche
Aarggghh, so frustrating. I wrote a long response and it vanished into the machine. Forgive me for the short version.
1) Wierdly, I just bought Chernow's book last week. Haven't started it yet, but I'm looking forward to it.
2) I always appreciate your honesty, clarity of thought, and consistency, even though I have some differences with you on trade. And that's not just b.s. I really appreciate a forum like this, where someone like me has the opportunity to dialogue with someone as knowledgable as yourself.
3) The "religion" comment was a bit much. The point was that a mere theory is tested and adjusted as evidence rolls in. It seems like the evidence does not support the "all tariffs are always and in every situation wrong" theory, given the country's who have succeed wildly while using them, so that there is as much faith in theory involved with your universal approach as there is a reliance on objective data. Correlation is not causation, but neither is it not causation.
4) Hawley-Smoot was effectively demonized long before you started throwing it around as a pejorative. The great apart about invoking "Hawley-Smoot" is that you don't have to say how the tariff was related to the Depression: people make the link and that is enough. My main problem with the way Hawley-Smoot gets thrown (and not just by you) is that it (1) is seen as a proxy for all tariffs, and (2) is assigned a disproportionate share of the blame for the events of the 1930's.
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"Our job is to bash the president"
Newsweek's Evan Thomas, on the role of the MSM
I wrote a post here, when the Dow was down 200 points on the day it finished down 400+, in which I predicted that Chuck Schumer would jump out in front of the issue. I got the wrong New York Senator.
For this woman to come out and tell us we should respond to financial shocks by taking self-destructive actions in the real economy is disgusting but not really surprising.
Boudreaux's point about "reliable feedback loops" is the critical one. The big thing I worry about with Hillary Clinton is that, as President, there will be no one to stop her. That's because Congress doesn't have anyone who knows how stupid her protectionism is (the few that do know aren't making themselves heard). And also, trade protectionism is one of those things that whole hordes of ordinary people can be whipped up into supporting, by exploiting their fear and ignorance. No feedback loop.
The whole world is an interconnected and increasingly seamless web of economic activity. The willingness of Americans to generate final demand is the driver for the whole structure. If Hillary seriously proposes to throw sand in the works, she'd better come up with some plans for dealing with the economic dislocations she'll create here (as our consumption falls due to inability to satisfy it domestically, probably resulting in inflation), and abroad (as she throws millions of foreigners out of work).
The latter result will create significant international instabilities and increase the danger of war. Just as in the 1930s.
What scares me the very most about Hillary Clinton is that in a world of politicians who talk better than they achieve, she's one of the few who can be counted to really try to do what she says.
To Hillary: nice work, stupid.