1) The burden of a tariff would not fall entirely or even mostly on foreign producers but rather mostly on American consumers in the form of higher prices. These higher prices would result both from foreign producers passing on the cost of the tariff and from reduced competitive pressures on domestic producers. A fact that is missed in a lot of discussion of economic policy is the fact that low prices increase standards of living just as surely as higher wages do. The downward pressure on prices from trade has been tremendously important of increasing the living standards of Americans. So, in my opinion, much of the benefit you assert of revenue from a tariff allowing for lower taxes would be swamped by the higher prices which would act as a de facto tax, and a regressive one at that. Additionally, it is likely to have additional costs such as retaliatory tariffs agaist our exports and the costs of collecting and enforcing the tariff, which may considerable as there may be complicated efforts to evade it.

2) (Addressing your Dearborn argument) Jobs are created and lost over time for countless reasons, many of which are beyond the reach of economic policy. Technological progress, changes in consumer taste, and changes in comparative advantage are all reasons why particular jobs may disappear in the American economy. In all of these case, it would be expensive and possibly futile to preserve particular jobs. Obviously the mix of jobs in the 1960s is different than the mix of jobs today for many reasons, and attempts to preserve the same mix that we had in the 1960s would be in my opinion be wrongheaded and damaging. Should there be policies to protect the jobs of the workers at the typewriter plant? (The government buying lots of typewriters, I guess) Or, consider the unfortunate results of fighting against the market’s signal to devote fewer resources to food production…hundreds of billions of dollars in subsidies, assorted price supports, payments to farmers not to farm in order to limit supply. The costs to the economy at large to to try to avoid the decline of the romantic life of the family farmer have been huge (and I haven’t mentioned the terrible costs borne by very poor farmers of underdeveloped countires) but yet the family farm declines. Fundamentally, protecting a job threatned by trade is not very different than protecting one threatened by changes in taste or technology. What if he had tried to defend textile jobs from foreign trade? The comparative advantage of other nations is so large that the tariffs (or other trade restrictions) required would have been huge and increasing, and clothes would be dramatically more expensive, to the detriment of virtually every American. Now certainly some human misery would have been avoided…I grew up in Southwestern Virginia and remember the sad tales of factories closing down and workers who had known nothing but that industry, that company, being laid off. I have to believe, though, that at some point it is just too expensive to the rest of us to gear policies towards preventing these sorts of changes. Rather, it seems to me that a public education system that creates a more skilled, adaptable work force and programs to provide direct aid and/or training to displaced workers are preferable. I will conceed that we have seen a phenomenon that since America tends not to have a comparative advantage where unskilled labor is concerned, the costs of trade fall disproportionately on the unskilled, and we see the troubling phenomenon of those not fortunate enough to be endowed with marketable skills or opportunities for education being left with little opportunity for a dignified career. This is a real problem and a legitimate argument for certain protectionist policies, but at least in most cases I don’t think it carries the day, at least in my opinion.

3) Except in certain strategic goods I find the self sufficiency argument to be essentially a value judgment. That doesn’t mean you are wrong; we just have different opinions on the intrinsic value of self sufficiency. We might as a society choose to sacrifice efficiency for self sufficiency; I would myself prefer not to in most cases but I can’t say that others’ preferences are wrong. I am very skeptical, however, that the sort of tariffs you suggest are really going to provide us great security from international uncertainty.

Finally I want to add that:
-My expertise in economics is not particularly in trade matters so my opinions should not be weighted as coming from someone with great expertise. I know you’ve thought about these matters a great deal and it may be on some points your analysis is more correct than mine. I know you said you would give me the last word but feel free to respond if you wish. Thanks for letting me participate here, and kudos again for the level of discourse on your site.

-Steve Reed

Your concise questions deserve commensurately concise answers, which I may struggle to provide but let me try. You ask whether and on what basis I disagree that macroeconomic productivity is maximized when producers produce at greatest comparative advantage. I do not disagree. It is far preferable to import black pepper from Brunei than to try to grow the stuff in greenhouses in Idaho. Bruneians for their part would probably be ill served to try to develop their own supply chain for computer memory chips, when Idaho provides high quality chips in large quantity at relatively low cost. The trade in black pepper and computer memory chips benefits both Bruneians and Idahoans, because, without the trade, both too little pepper and too few chips would be produced for the use of all concerned.

Why do you feel the pareto-exchange theory is too widely applied when used as an argument for free trade?

Because when so used, it implies at least two unwarranted assumptions in my view:

(1) that the welfare of the United States and her people depends largely on maximizing global productivity; and

(2) (readers’ indulgence is requested here for a little necessary mathematical jargon) that the theory’s second-order effects are predictively equally as valid as its first-order effects — that is, that the second-order effects are not swamped by practical factors for which the theory simply does not account.

There is also a third reason. People are not mere numbers in an equation, and I think that far too many economists forget this. When Keynes famously said, “In the very long run, we are all dead,” he expressed a wisdom far deeper than support for mere monetarism. When globalization throws out of work a Ford union factory machinist in Dearborn, Mich., who was paying a mortgage and his son’s college costs in East Lansing, it isn’t funny. That man and his family are fellow Americans; yet few if any professional American economists are personally threatened by cheap foreign labor, and, Dr. Reed, I think that the attitude shows.

Now, I do not wish for a moment to imply that you personally disregard anybody. One supposes that you would hardly spare the time for such a blog as this if you did! My hope on the contrary is that, like Gomory and Baumol, you will consider applying your expertise to contribute to the development of a more suitable, more realistic, more empirical, more correct theoretical trade framework than Pareto’s and Say’s.

What is so great about self sufficiency? Do you like it for its own sake or is it a means to some particular end?

Regrettably, perhaps not to an end the mainstream of professional economic thought recognizes as valid; but let me offer a few scattered points from among many, then you can decide for yourself.

(1) German U-boat warfare brought Britain to the brink of starvation in 1916 because Britain before 1914 had grown dependent on overseas food supplies. It was only timely American support which kept Britain fed.

(2) Japan attacked Pearl Harbor in 1941 in no small measure because Japan had predicated her imperial expansion plans on access to American petroleum, which the Roosevelt administration cut off precipitously the previous year. You and I will hardly approve of Japanese imperial expansion, of course, but that is not the point. The point is that, from the imperial Japanese point of view, Japan must have planned its conquest more prudently and self-reliantly from the start, had it factored in the political unreliability of U.S. oil.

(3) Today, no American really knows how to manufacture the flat-panel display on which you may be reading these words. The senior design engineer from the Samsung/Sony flat-panel plant who retires to academia is likely to pass his knowledge on to the rising generation of engineers, not at the U. of Illinois in English, but at Ajou U. in Korean.

(4) From Pat Buchanan’s The Great Betrayal, 1998: “[H]ow farsighted is such global interdependence? During the Bush era it was said that the United States could not take a tough stand in trade talks with Tokyo, lest an angry Japan dump its hoard of U.S. debt onto the world market, forcing up U.S. interest rates and thereby inducing an American recession. In the name of national security, what benefit are we reaping from trade with Japan, to justify this vulnerability to Japanese retribution?”

A moderate, practical self-sufficiency is a traditional American frontier value which has long served our nation well. Of course, few if any American families today can or should be as self-sufficient as our 19th-century pioneer forebears were, but there is still something to the good old American shotgun ethic which provides for itself and relies on its own. Excessive dependence on foreigners for things we Americans can, should and recently did produce for ourselves, excessive economic vulnerability to unpredictable overseas events, seem to me serious, fundamentally unwise risks to take.

Your colleagues who disagree ought in my view to explain why — in order to insulate the nation substantially from global instability and foreign economic threats, in order to broaden America’s engineering and technological capability — the theoretical, second-order Pareto inefficiency a traditional American tariff might cause is not an acceptable price to pay. Remember our countryman in Dearborn, Dr. Reed. He matters.

At the very minimum, the conventional Pareto model probably needs to acquire a term or two which acknowledge the inherent value of national self-sufficiency, of family-oriented job stability, of diverse engineering capability, and of the recompartmentalization of the global economy against global economic shock. Add to the revised model a federal revenue-neutral constraint which substitutes a tariff for part of the income tax, and let your colleagues run the numbers again and see what they get. Gomory’s and Baumol’s production-factor idea may be wrong, but their attempt to fix the broken Pareto model is not wrong-headed; if Gomory and Baumol really are wrong, let your colleagues explain why, and then let them search for a better alternative. But more than these: let your colleagues stop believing their own infernal models so much, and let them open their eyes, ears and hearts to what actually, empirically is happening to our country. American industry is dying. American self-sufficiency is disappearing. American fathers who had rationally expected to earn a solid middle-class family wage, no longer can. American big business is no longer truly, reliably, patriotically American. These things matter. These evils are self-inflicted, unnecessary. To ameliorate them, Americans do not have to stop trading with the world; we need only to find the old, balanced, conservative trade policy we once had. The lynchpin of that fine old policy is the tariff.

I’ll say up front I’m a free trade enthusiast, and an economist who probably typifies what you fight against.

Your courtesy is acknowledged and appreciated, but I do not wish at all to fight against you. On the contrary, the cause of economic nationalism needs you on its side — and you more than most people, because you are a professional economist.

There is of course much more one could write for or against each of these points, but I hope that their general thrust seems clear. If you ask further questions I shall try to answer. Otherwise the blog would be pleased to include your rebuttal (or even your concurrence, if one might hope) as the last word.

HJH

“Macroeconomic productivity is maximized when producers produce at greatest comparative advantage.”

Do you disagree? On what basis?

Why do you feel the pareto-exchange theory is too widely applied when used as an argument for free trade?

What is so great about self sufficiency? (If you have answered this in other posts feel free to just point me to them) Do you like it for its own sake or is it a means to some particular end?

Class snobbery.

I have noticed a genuine contempt for non college educated, blue collar people among supporters for free trade, all of whom enjoy identifying with elites.