Monday, December 5, 2016

How To Make America Worse

By Derek H. Franklin

By now, anyone not living in a cave or hiding under a rock, understands that Donald Trump will become this nation's 45th President.  Leftists and the main stream media are still in shock and are likely to continue to be so for the next four years, but they're hopeless, so, who cares.

During the run-up to the election, Trump advocated a populist message embodied by the campaign slogan: Make America Great Again!  The notion implied by his slogan is that, once upon a time, America was exceptional and indispensable – a shining city set on a hill; a beacon of light and hope to the world.  However, after 8 years of left, liberal policies (e.g. Obamacare), after 8 years of Hope & Change (national debt exceeding $18 billion; a recovery where employed Americans' real wages continue to decline at a time when every dollar they earn buys less and less), America is no longer great.  In fact, she has fallen and is in need of a restoration.  Not surprisingly, Donald Trump has positioned himself as the only one who is able to bring back America's glory days.

One of the ways president-elect Trump plans to Make America Great Again! is by making better trade deals with foreign nations and/or by preventing domestic companies from moving plants to foreign countries with lower taxes, fewer regulations, and cheaper labor.

For example, let’s take Carrier, a division of United Technologies that specializes in AC manufacturing.  During his campaign for the presidency, Donald Trump blasted the company for its plan to move its plant in Indiana to Mexico.   In fact, he stated that if Carrier went through with the relocation, he would institute a 35% tariff on AC units shipped from Mexico and sold in the US.  And all the Trump-fan boys, amazed and dazzled with his brilliance, said one to another: What manner of man is this?!?

For those of you who understand economics and the law of comparative advantage and free trade you understand that it's neither brilliant nor amazing to impose tariffs on imports.  In fact, the imposition of tariffs on imports will Make America Worse! not great.

Allow me to explain.  

First, we have to define a few terms.  Comparative advantage means an ability of one person to produce more units of one good "x" vs. another good "y" than another person can produce units of good "x" vs. good "y."  Adam Smith said this in 1776: "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the products of our own industry, employed in a way in which we have some advantage.  The general industry of the country will not therefore be diminished...but only left to find out the way in which it can be employed to the greater advantage."

A tariff is simply a tax levied on a foreign good.  One of the effects of a tariff is its propping up of special interests at the expense of consumers.  The Smoot-Hawley tariff bill was passed in 1930.  It imposed heavy tariffs on imports for the stated purpose of propping up or "protecting" U.S. companies and jobs.  Less than 12 months after this tariff was passed, major trading partners with the U.S. retaliated with their own tariffs on American goods.  World trade fell off the proverbial cliff, and brought on the Depression that began in 1929 and lasted 10+ years.

Let's assume Country A is more efficient at producing goods "x" and "y."  Let's also assume that Country A is most best at producing good "x" and Country B is better at producing good "y," but does not have as great a comparative advantage in making good "x."  Even though Country A is more efficient at producing goods "x" and "y," it will be more advantageous for Country A to produce good "x," in which it has a comparative advantage, and buy all of good "y" from Country B in which it has a greater comparative advantage than it does producing good "x".  Both countries benefit from free trade and the division of labor.  All are better off.

Enter the government.

Assume the government of Country A imposes a protective tariff on good "y," and it forcibly maintains an industry producing that same good.  As a result consumers are harmed.  Scarce resources are tied up in the inefficient production of good "y" causing consumers from Country A to pay a higher price for that good.  Efficient industries in Country A are also harmed because scarce resources are bid away from them and tied up in the inefficient production of good "y."  Overall, consumers in Country A are harmed, are made worse, have their standard of living lowered.  Country B is harmed because their production of good "y" has been rendered uncompetitive, due to the tariff, leaving them with fewer resources with which to purchase good "x."  Therefore, consumers in Country B are made worse off, and as a result, have their standard of living reduced.

Think about it. If we had to make everything we needed ourselves (e.g. food, clothes, houses, cars) we would live out our lives in grinding poverty, working 14- or 16-hour days, just to survive and then we'd die.

But if we all practiced what we had a comparative advantage in and left the farming to farmers, the building of houses to contractors, the production of clothes to tailors, and the manufacturing of cars to car manufacturers we would all be better off.  Labor and capital would flow to the areas where it would be most productive.  All would benefit through voluntary trade.  And people's standard of living would increase.

This principle works on a local, state, national, and world-wide scale.    

Surely a billionaire, New York real estate tycoon understands this; surely president-elect Donald Trump has enough economic intelligence to understand the harm he would visit upon Carrier and its employees if the tariff he proposed was implemented; surely the Donald understands that, constitutionally, he does not have the authority to impose tariffs on any company; surely he understands that Carrier has the right to move its operations anywhere it wants; surely Trump understands that free trade benefits everyone in the form of cheaper goods and a higher standard of living; surely deal-maker Trump understands that if he "saves" jobs at Carrier, an untold number of companies will threaten to move their operations to Mexico, China or wherever so as to extract incentives to their benefit while making the rest of us worse off.  Evidently not, or he would not have threatened Carrier in the first place.

Derek H Franklin is an ordained minister in a predominantly Black Church of Christ, a Banker at one of the largest banks in the nation, and a libertarian.