"Well, then please educate us..."
this post is only intended for you. i'm not here as an educator. i'm simply making my case.
this is a long post and i don't have high hopes that you'll take the time to read it. if you want to see further support after you read this, i can supply it for you.
=====
Why Trade Deficits Don't Matter by Robert W. McGee*
This paper takes the position that trade deficits are irrelevant from a policy perspective and that any attempt to reduce them is counterproductive and violative of individual rights. Hardly a day goes by that the media do not mention some international trade problem such as the trade deficit.
The general tenor of the story is usually that trade deficits are bad for the U.S. national economy, with the implied or express conclusion that something should be done to reduce them. The choice of terms used to describe trade -- voluntary exchange -- makes it sound like trading with foreigners results in disaster: we are being "invaded" with foreign goods; foreign goods are "flooding" the market; foreigners are "dumping" their products. Senator Donald Reigle has been quoted as saying: "The continuing Japanese attack on our basic industries is another Pearl Harbor. The time has come to close America's door to the flood of Japanese imported products."(Ekelund and Tollison, 875)
Are Trade Deficits Bad?
"Nothing...can be more absurd than this whole doctrine of the balance of trade...When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses, and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false...that trade which, without force or constraint, is naturally carried on between any two places, is always advantageous...to both."(Smith, Bk. IV, ch. III, part 2, para. 2)
The author decided to test this view - that trade deficits are bad - by constructing a series of examples using elementary accounting principles.
Case No. 1
Situation A: Assume that Joe Consumer needs an automobile and has $10,000 to spend. After shopping around for the best buy, he decides to purchase a Japanese model for $7,000. His second choice would have been to purchase a Chevrolet for $10,000. With the $3,000 he has left over, he decides to hire a local carpenter to make $3,000 worth of improvements on his home, something he wanted to have done for several years.
Situation B: Assume the same facts as in Situation A, except that the federal government imposes a $5,000 tariff on the importation of Japanese motor vehicles, so Joe decides to buy the Chevrolet instead. Also assume that the American and Japanese manufacturers each have a 20% gross margin, as do the carpenter and the automobile dealers. Is America better off as a result of the tariff? Who benefits and who loses? The following is an analysis of the two options:
Situation A: Joe Consumer has an automobile (his first choice) and $3,000 worth of home improvements. The carpenter makes a sale as well as the Japanese auto manufacturer and the American auto dealer who sells Joe the automobile.
American Auto Dealer (who sells Japanese cars)
Sales........................................................................$7,000
Cost of Goods Sold (80% of $7,000)........................-5,600
Gross profit..............................................................$1,400
Japanese Auto Manufacturer
Sales.........................................................................$5,600
Cost of Goods Sold (80% of $5,600).........................-4,480
Gross profit...............................................................$1,120
Carpenter
Sales.........................................................................$3,000
Cost of Goods Sold (80% of $3,000).........................-2,400
Gross profit..................................................................$600
Situation B: Joe has an automobile (his second choice) and no home improvements. The carpenter does not make a sale. The American motor vehicle manufacturer and the American dealer make a sale.
American Auto Dealer (who sells Chevrolets)
Sales.........................................................................$10,000
Cost of Goods Sold (80% of $10,000).........................-8,000
Gross profit.................................................................$2,000
American Auto Manufacturer
Sales...........................................................................$8,000
Cost of Goods Sold (80% of $8,000)...........................-6,400
Gross profit.................................................................$1,600
The next question to be answered: who is better off and who is worse off (and by how much) if Joe buys the Japanese automobile instead of the American one? Is there a net loss to the American economy if Joe buys Japanese?
Party to the transaction Better off Worse off
Joe Consumer................................................$3,000
Chevrolet dealer - U.S..............................................................................$2,000
U.S. auto dealer - Japanese autos.................$1,400
Auto manufacturer - in U.S.,.....................................................................$1,600
Auto manufacturer - in Japan.........................$1,120
Carpenter..........................................................$600
....................................................................._________......................._________
Totals..............................................................$6,120...............................$3,600
Net gain (betteroffness) = $6,120 - $3,600 = $2,520
These are only the "first round" effects. Extending this analysis to the economy's total structure of production would reveal further "betteroffness" throughout the U.S. economy. Some economists might argue that differing propensities might alter this result but the propensity and multiplier effects theories have been refuted for more than a generation and need not be discussed here (See Hazlitt, 1959, 1960; Hutt, 1963, 1979).
Joe Consumer is better off because he pays only $7,000 for a motor vehicle rather than $10,000. Also, he gets his first rather than second choice, a gain that is intangible and thus not measurable. He also gets $3,000 worth of home improvements. The carpenter benefits, too, as well as the Japanese manufacturer and dealer (who is a local American). The "losers" are the U.S. automobile manufacturer and the dealer who sells American automobiles.
The ethnocentric, protectionist (patriotic?) view is that we should not be looking at the entire transaction, but only at the American side. Are Americans better off or worse off as a result of allowing Americans to buy the car of their choice? Below is the analysis from that perspective:
Party to the transaction Better off Worse off
Joe Consumer...............................................$3,000
Auto dealer - U.S............................................................................$2,000
Auto dealer - Japanese (a local American)...$1,400
Auto manufacturer - U.S.,...............................................................$1,600
Carpenter.........................................................$600
..................................................................._________..............._________
Totals $5,000 $3,600
Net gain (betteroffness) = $5,000 - $3,600 = $1,400
Conclusion: Even if we exclude the Japanese manufacturer's gain, Americans are better off, in total, if consumers are allowed to buy the product of their choice, even if it happens to be made in Japan. And if Joe Consumer decides to buy Japanese electronics products rather than hire the services of an American carpenter, the result does not change. The American carpenter loses $600, which reduces the net gain to $800 ($1,400 - $600), but Joe gains because he gets his first choice rather than some lower choice on the hierarchical scale of preferences, and the American electronics store owner benefits by the sale as well.
There is another, less obvious factor to consider as well. What happens to the dollars that flow into the accounts of the Japanese businesses that sell their products to Americans? A number of things can happen. The Japanese can use the dollars to purchase American products (or services). They can lend the money to Americans. They can invest in American business, which creates jobs for Americans. Whatever they do with the dollars, the dollars eventually flow back into the United States, benefitting some American somewhere. The amount and timing of the benefit are impossible to measure, but a benefit does exist. American dollars cannot be used in Japan so they must eventually find their way back to the United States. Yet this basic fact is ignored by the vast majority of commentators who profess concern over the U.S. trade deficit. And it is not necessary to be able to measure the effects to know that there must be certain effects (Mises, 1978, 1981; Hoppe).
If America is better off, in total, by allowing free trade, then why do so many Americans want to restrict consumer choices?1 As the above analysis shows, some groups gain and some lose as a result of free trade. The groups who lost in the first case were American automobile manufacturers (and the United Auto Workers Union) and the dealer who sells American cars.2 But their loss was more than offset by the gains made by Joe Consumer, the carpenter and the American dealer who sells Japanese cars. Free trade is not a zero-sum game. The gains exceed the losses. The problem is that the parties who lose by free trade also have powerful lobbies in Washington, whereas Joe Consumer does not. The Public Choice School of Economics has spent a generation analyzing this phenomenon.3 The carpenter, who fails to make a sale if Joe buys an American car, does not even know Joe, and cannot possibly see that he is losing a sale. What is seen is an American automaker losing business. What is not seen is the gain Joe makes by buying a Japanese car and the gain the carpenter stands to make if Joe is allowed to buy the car of his choice.
Walter Williams points out that advocating tariffs is really just a scam on the American public (Williams, 66). Politicians can show how their trade policies benefit one political constituency, while the many other constituencies that are harmed by erecting barriers to trade do not even know that they are being harmed. Williams suggests that a more honest approach would be for the affected unions and companies to come to Washington each year for a handout rather than try to hide their subsidy in the form of trade restrictions. At least that way, the amount of the subsidy could be measured directly rather than hiding it from the taxpayers (and consumers) who must ultimately pay the price of government intervention. Congressmen who favor subsidizing the steel industry, for example, could ask their colleagues to vote for Aid to Dependent Steel Companies. Of course, if they tried this approach, many of the subsidies that are hidden at present would disappear, since they could not survive the light of day. It is difficult to justify protecting the job of a steelworker who earns $23 an hour in wages and fringe benefits when the average consumer who must subsidize this job earns only $11 an hour.
Case No. 2
Situation A: An American automobile manufacturer buys $8,000 of steel from a Japanese producer. Since the American automobile manufacturer's factory needs repairs, it also spends $2,000 to make them.
Situation B: Because of import quotas, tariffs or antidumping laws, the automobile manufacturer finds that it is cheaper to purchase its steel from an American steelmaker for $10,000. Because it has to spend an extra $2,000 for steel, it is not able to make repairs to its plant facility. Assume in both cases that each steel company has a 20% gross margin, as does the construction company that would make the repairs, if hired.
Japanese Steel Company
Sales...........................................................$8,000
Cost of Goods Sold (80% of $8,000)...........-6,400
Gross profit.................................................$1,600
American Steel Company
Sales.........................................................$10,000
Cost of Goods Sold (80% of $10,000).........-8,000
Gross profit.................................................$2,000
Construction Company
Sales...........................................................$2,000
Cost of Goods Sold (80% of $2,000)...........-1,600
Gross profit....................................................$400
Who is better off and who is worse off (and by how much) if the U.S. automobile manufacturer buys the domestically produced steel instead of the Japanese? Is there a net loss to the American economy if the automobile company buys Japanese steel?
Party to the transaction Better off Worse off
American auto company................................$2,000
Japanese steel company...............................$1,600
American steel company..................................................................$2,000
American construction company......................$400
________ ________
Totals.............................................................$4,000........................$2,000
Net gain (betteroffness) = $4,000 - $2,000 = $2,000
Conclusion: On a worldwide basis, the companies that are parties (or potential parties) to the transaction are $2,000 better off, in total, when the U.S. auto company purchases Japanese steel. However, some individuals are concerned only with "what's good for America." As it turns out, "America" is also better off when an American auto company is free to buy Japanese steel.
Party to the transaction Better off Worse off
American auto company...................................$2,000
American steel company.....................................................................$2,000
American construction company.........................$400
.......................................................................________..................________
Totals $2,400 $2,000
Net gain (betteroffness) = $2,400 - $2,000 = $400
Again, there are other benefits that are less easy to see. The Japanese steel company has to do something with those dollars. It cannot keep them in Japan indefinitely. When they return to the United States, some American benefits. The dollars may be used to buy American products or to build factories that create jobs for Americans. Even if the dollars are merely invested in certificates of deposit in US banks, more loanable funds thus become available to American businesses or consumers, so some American benefits somewhere down the line. As Milton and Rose Friedman point out, the best thing that could happen would be for American consumers to trade dollars for Japanese automobiles and have the transaction end there. The Japanese could burn or bury the dollars and Americans would never have to give up any goods or services for those green pieces of paper because they would never return to the United States. But trade does not work that way. The dollars eventually flow back to the United States (Milton and Rose Friedman, 42).
An additional point needs to be made. While the above examples regarding Japanese and American automobile and steel companies may be acceptable from an accounting standpoint, they are philosophically flawed. When an American consumer decides to buy a Japanese rather than an American vehicle, it cannot be said that the American automobile manufacturer loses, because the American producer has no legal or ethical right to the consumer's money. To say that an American manufacturer loses every time an American consumer decides to buy a Japanese product is comparable to asserting that I lose $40 million because Walt Disney Company decides to pay Michael D. Eisner to be its chairman rather than me.4 I do not lose, I just do not gain. Similarly, American companies do not lose if consumers choose to purchase foreign goods and services. Consumers have decided that they (American companies) are not entitled to the sale.
Consumers gain if they are free to buy the goods and services of their choice at a price that is not raised artificially by coercive government trade policy. They lose something if they must settle for their second or third choice because government trade policy prevents them from making what would be their first choice in the absence of intervention.
An Accounting Analysis of Trade Deficits:
Those who think that trade deficits are always bad and trade surpluses are always good need a lesson in basic accounting. Fortunately, Frédéric Bastiat provided such a lesson in the 1840s. Unfortunately, he provided it in French, and the 1964 English-language translation of his example has been all but ignored by economists (and journalists, who are partly responsible for spreading this economic fallacy).5 Although his example related to France and the United States, I will use a similar example that pertains to the United States and Japan, since there is a good deal of Japan-bashing going on in today's press (and the halls of Congress).
Let's say that a ship left Los Angeles for Tokyo, loaded with American products, totalling $200,000. Upon arrival in Tokyo, a 10% shipping charge and a 30% tariff were paid, bringing the total cost to $280,000. The cargo was sold at a $40,000 profit, or a total price of $320,000. The proceeds were used to purchase Japanese electronic equipment. Another 10% had to be paid for transportation, insurance, and so forth, so that by the time the shipment arrived in Los Angeles, the total cost amounted to $352,000. This cargo was sold for $422,400, or a 20% profit, $70,400 above cost.
Two profits have been made -- $40,000 and $70,400. Yet the books of the customshouse show that exports were $200,000 and imports were $352,000 -- a $152,000 trade deficit!
Example 2: A few weeks later, the same American exporter sent another ship to Japan with a cargo worth $200,000. But this ship sank shortly after leaving the harbor. The American exporter has incurred a $200,000 loss. Yet the books of the customhouse show exports of $200,000 and imports of $0. Obviously, the United States has gained by this event to the extent of $200,000!
Such accounting is simple and straightforward -- and wrong. The way trade deficits are measured, the obvious solution would be to load all our ships to the hilt, then sink them before they reach their destination. That way, we would have massive exports and no imports -- a large trade surplus! The correct way to measure profits and losses is to focus on the difference between what has been sold and the cost of what has been sold. In the first example, the American exporter made profits of $40,000 one way and $70,400 on the return trip. In the second example, he incurred a $200,000 loss. Yet those of the trade deficit mentality would have us believe that America lost on the first series of transactions and gained on the second.
A simplified, correct accounting presentation of the first example would be as follows, assuming the merchant started operations with nothing but $500,000 cash and $500,000 common stock:
====
Common Retained Cash + Inventory = Stock + Earnings Start $500,000 $500,000 Purchase American products -200,000 +200,000 Totals 300,000 200,000 500,000 Pay shipping & tariff -80,000 +80,000 Totals 220,000 280,000 500,000 Sell American goods +320,000 -280,000 +40,000 Totals 540,000 0 500,000 40,000 Purchase electronic equipment -320,000 +320,000 _______ Totals 220,000 320,000 500,000 40,000 Pay shipping -32,000 +32,000 _______ Totals 188,000 352,000 500,000 40,000 Sell electronic equipment +422,400 -352,000 ________ +70,400 Totals $610,400 $ 0 $500,000 $110,400
this part was too difficult to format, but it does show he did the work.
====
Assets and retained earnings have both increased by $110,400. Obviously, the American merchant has profited by the transactions. And if the American merchant benefits, so does America.
Philosophical Flaws and Interventionism
If trade deficits are so bad, the obvious solution would be to annex Japan and make it the fifty-first state. Our trade deficit with Japan would be eliminated immediately by this shuffling of papers. Yet if a trade deficit can be eliminated by a mere shuffling of papers, how bad can it be to begin with? New Jersey may have a trade deficit with Montana, yet nobody complains. I have a trade deficit with my local grocery store because I buy more from it than it buys from me. Yet saying that I am worse off by dealing with my local grocery store is absurd. So is the argument that trading with Japan makes us worse off.
Ironically, the trade deficit with Japan is at least partially caused by America's protectionist trade policies. Special interest groups such as the seamen's unions and domestic shipbuilders convinced Congress to pass legislation requiring Alaskan oil producers to use high-cost U.S. tankers to carry their cargo to uneconomic U.S. ports, thus cutting off Japanese consumers (who must import 99% of their oil) from our Alaskan oil fields. Had the Alaskan oil producers been allowed to trade directly with the Japanese using the ships of their choice, the amount of oil shipped to Japan would be more than enough to wipe out the entire merchandise trade deficit we have with Japan! But because Alaskan oil producers had to use high-cost shipping and had to ship the oil to Western and Gulf ports, the Japanese found it less expensive to buy their oil from the Middle-East and Africa rather than from Alaska, which would otherwise have been the lowest cost producer (deHamel, et. al.; Hanke, 761-764; Sennholz, 71-72).
Domestic lumber producers are in a similar predicament. Japan would love to buy American logs but a law passed in 1968 makes it illegal to export logs cut on federal land (65% of all logs) unless they are first processed in an American mill. Japan has 20,000 mills of its own, so it does not need its logs processed. So rather than buying American logs, it buys from Canada and other countries (Sennholz, 72; Dowdle and Hanke; Hanke, 764-768; Larson). Timber companies that own private plots of timber support the ban because they are not subject to it. Mills like the ban because they think the ban on unprocessed logs will increase their business. Environmentalists like the ban in the mistaken belief that limiting the cutting of logs will preserve natural resources (Hanke, 768; Olson).
Those who are concerned with trade deficits take the narrow view that all trade is bilateral, when in fact it is multilateral. I buy more from the grocery store than it buys from me, but the grocery store buys more from wholesalers than the wholesalers buy from it. If I work for a wholesaler, I sell my labor to the wholesaler and buy nothing from it in return. The grocery store, the wholesaler and I each run a trade deficit, yet we are all better off for it. Japan runs a trade surplus with the United States, yet it runs a trade deficit with Western Europe (McKenzie, 1985, 176). The United States has a trade surplus with Western Europe (or did until recently, anyway) and a deficit with Japan (Weidenbaum, 778-779). So what?
Those who are alarmed by a trade deficit are looking at only one side of the transaction. An elementary knowledge of double-entry bookkeeping would clear up the confusion immediately. Any merchandise trade deficit must be exactly offset by a surplus in capital flows or services. Otherwise, the transaction does not balance, which means the transaction is being recorded improperly.
Which brings us to another point. The accounting for trade accounts is faulty and violates generally accepted accounting principles. For example, in 1984, when U.S. merchandise exports were measured at $220 billion, the balance of payments statement was out of balance by an unexplained $30 billion (Truett and Truett, 692). The statement was made to balance by "plugging" it with a $30 billion account called "statistical discrepancy." This practice was not limited to the 1984 statement, however. It is common practice to force a balance. If a corporation used this technique for such a large imbalance, it would not be able to get its financial statements certified by any reputable accounting firm and any firm that did certify the statements could be sued for malpractice. If the company were publicly traded, its stock would be taken off the stock exchange by the Securities and Exchange Commission. Yet government officials can get away with the practice because there are no generally accepted accounting principles for the federal government. The principles are whatever government officials say they are.
Jacques Rueff, the eminent French economist, went so far as to suggest that foreign trade statistics be abolished.
"...the duty of governments is to remain blind to trade statistics, never to worry about them, and never to take any steps with a view to altering them...I would not hesitate to recommend the elimination of foreign trade statistics if the question were put to me, in view of all the harm that they have done in the past, that they are still doing and, I am very much afraid, will continue to do in the future." (Rueff, 128)
Other economists have also pointed out the problems inherent in foreign trade statistics (Machlup; Shapiro). The figures announced one day are subject to change the next and in some cases, the figures first announced as a surplus can be revised to reveal a deficit later. For example, in 1951, 20 reports reveal 20 different balance of payment figures, ranging from a surplus of $5 billion to a deficit of $1 billion (Machlup, 145). And not all changes are the result of new information. Some changes "represent changes of mind rather than changes of information."(Machlup, 142) Furthermore, the balance of payment figures reported by the International Monetary Fund are always different than those reported by the Department of Commerce because the groups classify certain items differently (Machlup, 143).
Those who view trade as a zero-sum game also fall prey to another fallacy. All economic values are subjective. No trade can take place unless the parties to the trade value the objects in question differently. I would rather have a widget than $5 and the widget manufacturer would rather have my $5 than one of its widgets. A trade is indeed possible under such circumstances if we each communicate our wishes and if no one prevents us from making the trade. We both gain because we give up something we value less for something we value more. If I choose to buy my widget from Widget Company A rather than Widget Company B, Company B does not lose; it just does not gain. If Company A is Japanese and Company B is American, the result does not change. I (an American) gain and so does the Japanese company. The American company does not lose; it just does not gain. If I trade with a Japanese company, one American gains (me). If I trade with an American company, two Americans gain. In either case, America benefits by the trade. If a law is passed that prevents me from trading with the Japanese company, the American company gets a sale it would not otherwise get, but I lose something because I am not able to choose the widget I want. I must settle for a less desirable widget. If it costs more to buy an American widget, my standard of living is reduced because I now have less money to spend on other goods and services. The sellers of the products I cannot now buy also lose because they are unable to sell me their products or services. Even if the price of an American widget is identical to that of the Japanese widget, I still lose if I am not able to purchase the widget of my choice because I must settle for a widget that is not my first choice.
The way Gross National Product (GNP) is measured contributes to this faulty logic -- that trade surpluses are good and trade deficits are bad. GNP measures the value of goods and services produced in the economy for a given quarter or year. Increases in GNP (supposedly) indicate that the economy is growing while declines indicate that the economy is doing poorly. Exports increase GNP and imports decrease it. Thus, it can be concluded that exports are good and imports are bad, the same conclusion the mercantilists reached in the eighteenth century. Yet Americans benefit by both imports and exports, so this conclusion is faulty.7 Furthermore, imports often exceed exports during periods of economic expansion.8
Another problem with the trade deficit mentality is that it totally ignores the effect of measuring bilateral trade between countries of different sizes (Gable, 11). For example, Japan has about half the population of the United States. Even if the Japanese buy the same amount of products from the United States, per capita, as the United States buys from Japan, there will be a trade deficit because the United States has twice the population of Japan. Yet both sides benefit by voluntary trade, so even though there is a trade "deficit," there is no cause for concern.
Richard B. McKenzie suggests that a trade deficit can be a sign of health rather than sickness (McKenzie, 1988, 136-141). Jacques Rueff makes the same point.
"...notwithstanding the commonly accepted opinion, a trade deficit -- which is the essential feature of the situation of all the countries that are both long-established and rich -- is a sign of wealth, whereas an excess of exports over imports is nearly always the hallmark of real poverty." (Rueff, 129)
McKenzie points out that the trade deficit is simply the excess of imports over exports. Real imports grew by more than 50% between 1981 and 1986 while real exports fell by more than 13%, thus increasing the trade deficit. But part of the decline in exports is attributable to the fact that the U.S. economy was expanding during this period of time and manufacturers sold their products to other Americans rather than to foreigners. Domestic demand grew more rapidly than foreign demand, which is a sign of a healthy economy. Thus, the healthy economy helped to produce the trade deficit.
Concluding Comments
Trade is not a zero-sum game where one party benefits and the other loses. Both parties benefit by trade. Otherwise, no trades would be made, since individuals do not enter into trade with the idea of making themselves worse off. Whether or not a country's exports exceed its imports is completely irrelevant as far as determining whether the economy benefits by trading with foreigners. Trade deficits "matter" only in the sense that those who are concerned with them might make incorrect policy decisions if they attempt to reduce imports, since such a move will also reduce exports (Heyne).
Those who worry about the U.S. trade deficit are only looking at one side of the coin. They see dollars leaving the country but they do not see them returning to create jobs and economic growth. They see foreigners getting dollars in the mistaken belief that Americans should get those dollars even though consumers have decided otherwise. What is more difficult to see is the harm that is caused when consumers are not free to choose the goods and services of their choice because of some governmentally constructed barrier, which either increases the cost they must pay to obtain their first choice or prevents them from getting their first choice. When government interferes with consumer choice, it benefits some special interest at the expense of the consumer. It commits an act that would be illegal if done by an individual. If an individual prevented a consumer from purchasing a foreign automobile unless the consumer paid a $2,500 bribe, that individual would be both acting unethically and breaking the law. Yet when the government slaps a tariff or quota on foreign automobiles, that act is viewed as being perfectly legitimate or even beneficial. The government is doing the job of the extortionist, in effect, since it is preventing consumers from making the purchases of their choice unless they are willing to pay something extra. Some special interest (in this case, the auto industry) benefits at the expense of consumers, who must pay more because the government (which is supposed to represent them and protect their property rights) has chosen to force them to subsidize the auto industry. It would not be too farfetched to say that protectionism necessarily violates someone's property and contract rights (Block and McGee). Unless and until this form of interventionism is stopped and trade barriers are removed, government will continue to reduce our standard of living and force us to subsidize special interests.
............................................Footnotes *.....................................
I would like to thank Murray Sabrin and Fernando Alvarez, who made many helpful suggestions to early drafts of this paper. An earlier version of this paper appeared in the MidAtlantic Journal of Business, Vol. 25, No. 6, April, 1989, pp. 67-81. 1. About 300 protectionist pieces of legislation were introduced in Congress in 1985 (Gable, 1). 2. According to one estimate, auto import quotas add about 5% to the price of a car and the annual cost per job saved is about $160,000 (Crandall, 1984, 16). Another author states that lack of a free market costs auto buyers an extra $2,000 per car, or $250,000 for each domestic job saved (Wells, 140). It would be cheaper just to give each job loser $20,000 or $40,000 and tell them to go find another job rather than subsidizing their present positions at such a high cost. However, even this solution, while better than a subsidy for inefficiency, would violate the property rights of anyone called upon to contribute the $20,000 or $40,000. 3. For an early treatise on this topic, see James M. Buchanan and Gordon Tullock (1962). For a more recent analysis, see James D. Gwartney and Richard E. Wagner (1988). 4. "Is the Boss Getting Paid Too Much?" BusinessWeek (May 1, 1989), 46-93. 5. The example, in the original French, may be found in Oeuvres Complètes de Frédéric Bastiat, Volume I, fourth edition (Paris: Guillaumin et Cie, 1878), 52-57. The English translation is in Bastiat's Economic Sophisms (Irvington-on-Hudson, NY: Foundation for Economic Education, 1964), 51-55. A similar example is given in Bastiat's Selected Essays on Political Economy (Irvington-on-Hudson, NY: Foundation for Economic Education, 1964), 321-324. These examples were first given in 1845 and 1850, respectively. 6. The actual accounting is somewhat more distorted than this. Since the early 1980s, shipping costs have been included in the cost of imports but excluded from the cost of exports, thus giving a bias weighted toward imports. See Lawrence W. Reed (1985). 7. The mercantilist mentality leads to many interesting paradoxes. For example, at the start of the American Civil War, the North attempted to blockade Southern ports to prevent imports from coming into the country. At the same time, Congress was erecting high tariff barriers to protect Northern industry from destructive foreign competition. If free trade destroys the domestic economy, wouldn't the North have been better off calling off the blockade of Southern ports and just let free trade destroy the Southern economy? William L Baker makes this point (1978). 8. Murray N. Rothbard suggests that GNP is a faulty statistic and that a better way to measure economic growth would be to deduct government spending from GNP and adjust for taxation, thus leaving us with a figure that represents actual growth rather than government bloat. See Murray N. Rothbard (1963), 224-226 and 296-304. For an exposition on Rothbard's proposal, see Robert Batemarco (1987). References Aristotle, The Politics, I, VII chapter 4. Baker, William L. "Native Pottery Only," The Freeman (December, 1978), reprinted in Joan Kennedy Taylor (ed.), Free Trade: The Necessary Foundation for World Peace (Irvingtonon-Hudson, NY: Foundation for Economic Education, 1986), 52-55. Bastiat, Frederic. Sophismes Économiques, in Volume I of Oeuvres Complètes de Frédéric Bastiat, fourth edition (Paris: Guillaumin et Cie, 1878). Bastiat, Frederic. Economic Sophisms (Irvington-on-Hudson, NY: Foundation for Economic Education, 1964). Bastiat, Frederic. Selected Essays on Political Economy (Irvington-on-Hudson, NY: Foundation for Economic Education, 1964). Batemarco, Robert. "GNP, PPR, and the Standard of Living," The Review of Austrian Economics 1(1987), 181-186. Block, Walter. I would like to thank Walter Block for providing me with this example. Block, Walter and Robert W. McGee, "Must Protectionism Always Violate Rights?" International Journal of Social Economics, forthcoming. Buchanan, James M. and Gordon Tullock. The Calculus of Consent (Ann Arbor: University of Michigan Press, 1962). Crandall, Robert W. "Import Quotas and the Automobile Industry: The Costs of Protectionism," The Brookings Review 2(Summer, 1984), 8-16. deHamel, Beth; James R. Ferry, William W. Hogan and Joseph S. Nie, Jr. The Export of Alaskan Crude Oil: An Analysis of the Economic and National Security Benefits (Cambridge, MA: Putnam, Hayes and Bartlett, Inc., 1983). Dowdle, Barney and Steve H. Hanke, "Public Timber Policy and the Wood-Products Industry," in M. Bruce Johnson and Robert Deacon (eds.), Forest Lands, Public and Private (Cambridge, MA: Ballinger Publishing Company, 1984). Ekelund, Robert B., Jr. and Robert D. Tollison. Economics, second edition (Glenview, IL: Scott, Foresman and Company, 1988). The quote was taken from "Uno's Surprise: Uncertainty About Auto Imports," Time (July 11, 1983), 19. Friedman, Milton and Rose. Free To Choose (New York: Harcourt Brace, 1979/1980). Gable, Wayne. Myths about International Trade (Washington, DC: Citizens for a Sound Economy, n.d.). Gwartney, James D. and Richard E. Wagner (eds.). Public Choice and Constitutional Economics (Greenwich, CT: JAI Press, 1988). Hanke, Steve H. "U.S. - Japanese Trade: Myths and Realities," The Cato Journal 3:3(Winter, 1983-84), 757-769. Hazlitt, Henry. The Failure of the "New Economics": An Analysis of The Keynesian Fallacies (Princeton, NJ: D. Van Nostrand, 1959). Hazlitt, Henry (ed). The Critics of Keynesian Economics Princeton, NJ: D. Van Nostrand, 1960). Heyne, Paul. "Do Trade Deficits Matter?" The Cato Journal 3:3 (Winter, 1983/84), 705-716. Hirst, Francis W. (ed.) Free Trade and Other Fundamental Doctrines of the Manchester School (London and New York: Harper & Brothers, 1903). Reprinted by Augustus M. Kelley, New York, 1968. Hoppe, Hans-Hermann. Praxeology and Economic Science (Auburn, AL: The Ludwig von Mises Institute, 1988). Hutt, W.H. Keynesianism -- Retrospect and Prospect (Chicago: Henry Regnery Company, 1963). Hutt, W.H. The Keynesian Episode: A Reassessment (Indianapolis: Liberty Press, 1979). "Is the Boss Getting Paid Too Much?" BusinessWeek (May 1, 1989), 46-93. Larson, Erick. "Logging Sales," The Wall Street Journal (May 7, 1982). Machlup, Fritz. "The Mysterious Numbers Game of Balance-of-Payments Statistics," in Fritz Machlup, International Payments, Debts, and Gold: Collected Essays, second edition (New York: New York University Press, 1976), 140-166. McKenzie, Richard B. Competing Visions: The Political Conflict over America's Economic Future (Washington, DC: Cato Institute, 1985). McKenzie, Richard B. The American Job Machine (New York: Universe Books, 1988). Mises, Ludwig von. The Ultimate Foundation of Economic Science (Kansas City: Sheed, Andrews and McMeel, 1978). Mises, Ludwig von. Epistemological Problems of Economics (New York: New York University Press, 1981). Olson, Sherry H. The Depletion Myth: A History of Railroad Use of Timber (Cambridge, MA: Harvard University Press, 1971). Reed, Lawrence W. Free Trade or Protectionism? (Englewood, CO: Independence Press, 1985). Rothbard, Murray N. America's Great Depression (Kansas City: Sheed and Ward, 1963). Rueff, Jacques. "An All-Time Fallacy: The Trade Balance Argument," in Balance of Payments: Proposals for resolving the critical world economic problem of our time (New York: Macmillan, 1967), 116-129. This chapter was extracted from a lecture given at the new "Ecole de la Paix" on February 27, 1933, entitled: "De quelques hérésies économiques qui ravagent le monde." (A Few Economic Heresies that Plague the World). The original text was published in the Revue d'Economie politique (Librairie du Recueil Sirey), No. 2, 1933. Sennholz, Hans F. "Protectionism and Unemployment," The Freeman (March, 1985), reprinted in Joan Kennedy Taylor (ed.), Free Trade: The Necessary Foundation for World Peace (Irvington-on-Hudson, NY: Foundation for Economic Education, 1986), 63-74. Shapiro, Alan C. "Why the Trade Deficit Does Not Matter," Journal of Applied Corporate Finance 2:1 (Spring, 1989), 87-96. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Reprinted by Random House, Modern Library, 1937. Truett, Lila J. and Dale B.Truett. Economics (St. Louis: Times Mirror/Mosby College Publishing, 1987). Weidenbaum, Murray L. "The High Cost of Protectionism," The Cato Journal 3:3(Winter, 1983/84), 777-791. Wells, Sam. "The Myth of the Trade Deficit," in Llewellyn H. Rockwell, Jr. (ed.), The Free Market Reader (Burlingame, CA: The Ludwig von Mises Institute, 1988), 138-144. Williams, Walter. All It Takes Is Guts: A Minority View (Washington, DC: Regnery Books, 1987). ----------------------------------------------------------------------------------------------------------------- Nothing written here is to be construed as necessarily reflecting the views of the Dumont Institute or as an attempt to aid or hinder the passage of any bill before Congress. Robert W. McGee is president of the Dumont Institute for Public Policy Research and is a professor at the W. Paul Stillman School of Business, Seton Hall University in South Orange, New Jersey. He is a certified public accountant, attorney and economist and holds doctorates from several American and European universities. Dr. McGee has authored or edited more than 30 books and monographs and has written more than 300 articles and reviews for a variety of professional and scholarly journals in economics, law, accounting, taxation and philosophy.
For an electronic copy of this paper, please visit: ssrn.com 1 Policy Analysis No. 6 July, 1996 The Dumont Institute for Public Policy Research, 236 Johnson Avenue, Dumont, NJ 07628 Telephone: (201) 501-8574 e-mail: info@dumontinst.com dumontinst.com JEL Classification: D23, D63, F1, K1 |
