Cafe Hayek

Peru, Trade, and Growth

The Wall Street Journal's Mary Anastasia O'Grady is always worth reading -- and this recent essay that she penned is no exception to this rule.  It's entitled "Peru Takes the Other Path."  Here's a selection:

Yet price stability on its own would have left the country [Peru] well below its potential. Far more impressive is the restructuring of the economy, which has led both to growth and to a more equal distribution of opportunity. While a boom in commodity prices has certainly fueled development of late, Peru is also sprouting entrepreneurs in a variety of nontraditional industries. And these innovators are making their way onto the global stage.

The key reform that has made all this possible is the opening of the economy, which until 1990 had very high tariffs designed to protect local industries.

Peruvian journalist Jaime Althaus documents the effects of the opening in his 2007 book (Spanish only) titled "The Capitalist Revolution in Peru." Far from "deindustrializing" the country, Mr. Althaus argues, trade liberalization has strengthened Peruvian manufacturing. Under high tariffs, the industrial sector served mainly as an auto and electronics assembler, using inputs from abroad. But when protection ended, local manufacturing began to discover its comparative advantages.

There were plenty. High growth rates – averaging 11% a year from 1990-2002 – have occurred in sectors that make china, porcelain, knitted fabrics, plastic products and basic chemicals, to mention a few.

The story of the "cluster" of small metallurgical companies that has emerged in Lima is especially compelling. In recent years, these entrepreneurs have been competitive in bidding for work that was previously dominated by important international firms. They have also become exporting powerhouses.

Happy 109th, Fritz!

F.A. Hayek was born on this day in 1899.  To mark this occasion, I offer a brief passage from page 104 of Hayek's 1973 book Law, Legislation, and Liberty, Vol. 1: Rules and Order:

Maintaining the overall flow of results in a complex system of production requires great elasticity of the actions of the elements of the system, and it will only be through unforeseeable changes in the particulars that a high degree of predictability of the overall results can be achieved.

Interfering with trade and technological advances in order to protect certain producers from disappointment (and, hence, from the need to adjust to changes) not only makes the economy less productive over time, but also infuses it with greater uncertainty.

Nye on wine (and war and taxes)

The latest EconTalk is John Nye talking about his book, War, Wine, and Taxes. John has many interesting insights into the political economy of trade, the history of trade policy, and why Ricardo's canonical example of comparative advantage is particularly weird.

Unreasonable Reasonableness

Here's a letter that I sent today to the Wall Street Journal:

Adhering to the general practice of saying that free trade has both winners and losers, you introduce two letters on Nafta with the heading "Nafta Has Helped Some, Hurt Some" (Letters, May 2).  But this familiar endeavor to appear reasonable misleadingly implies that trade across political boundaries has a unique propensity to help some and hurt others.  In fact, any economic change helps some and hurts others.

Would you introduce letters on the polio vaccine with "Vaccine Has Helped Some, Hurt Some"?  After all, the vaccine eliminated jobs for workers who made crutches, wheel chairs, and iron-lung machines.  Of course, the benefits of the vaccine - especially over the long run - far outweigh the costs.  Likewise with consumers' freedom to spend their incomes as they choose.  And free trade is nothing more than consistently allowing consumers to spend their incomes as they choose.

Sincerely,
Donald J. Boudreaux

This earlier post of mine addresses the same point in a slightly different way.

The Globalization of U.S. Business Investment

In this very careful, data-rich, and important new paper from the Dallas Fed -- entitled "The Globalization of U.S. Business Investment" -- economists Mark Wynne and Erasmus Kersting document recent trends in U.S. FDI (both incoming and outgoing).  Here's the abstract:

This paper documents some key facts about foreign direct investment flows by U.S. businesses overseas and foreign businesses in the United States. We show how the pattern of flows has evolved, examine the sources and destination of these flows, document associated employment and productivity gains, and show how investment-related sales compare with traditional exports. While the United States is a net debtor to the rest of the world, direct overseas by U.S. businesses exceeds direct investment in the U.S. by foreign businesses. Furthermore, U.S. businesses seem to earn more on their foreign investments than foreign firms earn on their U.S. investments. The globalization of business investment is a long-standing phenomenon, but it has accelerated in recent years and become a source of concern for some, as it is intimately related to the debate on offshore outsourcing. Yet contrary to what some think, the bulk of U.S. investment overseas is in other high-income countries. And foreign investment in the U.S. has been an important source of employment growth in recent years. [emphasis added]

Bernstein on trade

This week's EconTalk is William Bernstein talking about the history of trade. Learn how the first Jews got to Manhattan, why Christopher Columbus was really lucky and the political economy of the Corn Laws. The conversation ends with the modern political economy of trade.

Fuller Bellies With Freer Trade

My GMU colleague (and, of course, Marginal Revolution's own) Tyler Cowen explains, in yesterday's edition of the New York Times, how freer trade could fill the world's rice bowl.

Current-Account Deficit = Capital-Account Surplus

I sent this letter this morning to the Wall Street Journal:

John Engler rightly defends NAFTA against political-candidates' misrepresentations of this trade agreement ("What Nafta Trade Deficit?" April 21).  But he stumbles into a common error when he asserts that much of the U.S. trade deficit is caused by U.S. imports of oil.

A trade deficit reflects decisions made by persons on both sides of a border.  If foreign suppliers of oil to America spent all of their dollars on goods and services produced in the U.S., Americans' imports of oil would not raise the size of the U.S. trade deficit.  America's trade deficit grows not just because Americans import lots of things (including oil), but also because foreigners choose to invest their dollar earnings in the U.S.  For this reason, Mr. Engler's conclusion that it would be "good" if America's trade deficit were lower is questionable.  I, for one, welcome capital inflows into the U.S.  Such inflows of capital not only directly fund private investments in America, but help to lower Americans' cost of financing Uncle Sam's reckless habit of spending beyond his means.

Sincerely,
Donald J. Boudreaux

If it's true that Americans save too little, we Americans should be especially pleased that foreigners save and invest much of their savings in the United States.

Globalization Podcasts

In these two Cato Institute Daily Podcasts, I discuss globalization with Cato's Caleb Brown.  The first is here; the second is here.  Both are quite brief.

The Goal Is Consumption

I sent this letter a few days ago to the Washington Post:

Emily DeRocco complains that "The April 9 Business article 'Don't Blame NAFTA for Downturn, Many Economists Say' quoted politicians, economists and labor representatives but not a single manufacturer - those at the heart of this wrenching debate" (Letters, April 12).

She's mistaken. Those at the heart of this debate aren't manufacturers (or politicians, economists, or labor representatives).  Those at the heart of this debate are consumers.  Or, those at the heart of this debate should be consumers.  Unfortunately, consumers are too large in number and too disparate in interests to organize effectively for political purposes.  The result is that consumers' interests in trade discussions are largely ignored, even though an economy's success is measured not by how well that economy satisfies the wishes of producers, but exclusively by how well, over time, it satisfies the demands of consumers.

Sincerely,
Donald J. Boudreaux

Producers exist to satisfy consumers; production is the means and consumption is the end.  Protectionism is a policy built on the premise that consumers exist to satisfy producers.

The Strange World of Harold Meyerson

Harold Meyerson in the Washington Post wants America's trade policy to help Americans. An interesting idea. And how should it do that? Harold wants to save manufacturing jobs, the key to prosperity in his view. He argues that because of foolish free trade policies such as NAFTA and other increases in trade:

...America has gone from being a nation that manufactured things to a nation that manufactures debt. Manufacturing (as Kevin Phillips points out in the forthcoming issue of the American Prospect, which I edit) accounted for 25 percent of America's gross domestic product in the 1970s but just 12 percent in 2006. Finance, which amounted to 12 percent of GDP in the '70s, amounted to 20 percent in 2006.

If you read that quickly, it does sound pretty scary. It looks like our manufacturing output has been cut in half! Actually, manufacturing output since 1970 has roughly tripled. TRIPLED. I feel like writing the word again but I'll refrain. But "TRIPLED" is a good word to remember when you keep hearing that America's manufacturing sector is being hollowed out and we don't make anything anymore and soon we're going to be sitting around doing each other's laundry.

The reason manufacturing has become a smaller proportion of GDP is because other sectors have grown even more. The reason other sectors have grown even more is because we have such high productivity in manufacturing over the last 40 years. That's freed up people and resources to make other stuff.

In Harold's world, that's a bad thing, because that means losing high-paying manufacturing jobs for low-paying service jobs.

After all, doesn't a steel worker earn more than someone working at the cosmetics counter at the department store at the mall? Well, yes, some service jobs pay less than some manufacturing jobs. But some pay a lot more. Like the jobs in the finance sector that Harold cites. He cites finance, I suppose, because it invokes the image of speculators moving pieces of paper around, doing nothing as real as making a car. But of course finance jobs pay very well.

Unfortunately for Harold, in the same edition of the Washington Post, we find a story with the line:

Median household income increased 41 percent from 1970 to 2006, though it never returned to its 1999 peak.

The story is about a recent survey of Americans' financial situation. The story has some bizarre interpretations of the survey findings and I hope to blog on it later. But just look at that one number. A 41% increase in median income. It's corrected for inflation. Because of flaws in how inflation is calculated it probably understates the growth in real income. It may not measure benefits correctly, another reason it may be understating the increase. But just taking it as it is, it sure makes Harold's argument look pretty silly. And of course, the standard Census Bureau numbers on median income tell the same story.

America's standard of living has been thriving at the same time that manufacturing is falling as a proportion of GDP.

You can find more on America's trade deficit and manufacturing jobs here.

The Monster That Is Mercantilism

The Washington Times recently published this letter by William Hawkins.  It's proof that the monster that is mercantilism remains alive, kicking, and screaming.

Today's edition of the Washington Times published a letter that I sent in response.  Here it is:

Not only does William Hawkins misunderstand the principle of comparative advantage, but he incorrectly suggests that it is the lone pillar supporting the case for free trade ("Economic theory ignores reality," Letters, Monday).

Adam Smith didn't know about comparative advantage when he wrote "The Wealth of Nations," but his case for free trade remains powerful. Smith explained that free trade expands the size of markets, making possible capital investments and greater specialization of workers.

These investments, along with the improved skills that highly specialized workers learn, increase output and wages. Confining economic activity to the nation keeps the market artificially small and, thereby, reduces opportunities for output-expanding investment and specialization.

Smith also explained a danger that Mr. Hawkins who wants government to pick economic "champions" overlooks: "The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."

DONALD J. BOUDREAUX

Making Americans Poorer

"Clinton Proposes Plan to Make Firms Inefficient" would have been a more accurate headline to this report at Newsweek.com.  I sent this letter in response:

Courting blue-collar votes, Hillary Clinton promises to use "tax incentives to persuade companies to 'insource' jobs in the United States" ("Clinton proposes plan to keep jobs in US," April 2).  Because firms 'outsource' jobs only when doing so lowers firms' costs of production, Mrs. Clinton's proposal amounts to bribing American firms not to lower production costs whenever possible.  She wants to encourage American firms to produce inefficiently, which is to say wastefully.  In short, she wants us to be poorer than we would otherwise be.

Mrs. Clinton's proposal is further evidence that good politics typically is bad economics.

Sincerely,
Donald J. Boudreaux

I [Heart] America's Trade Deficit!

In his brilliant book, The Myth of the Rational Voter, my colleague (and EconLog's) Bryan Caplan identifies the "anti-foreign bias" as a major impediment to economic enlightenment.  That bias is real and ubiquitous -- see, for example, this recent essay by Peter Morici at Forbes.com.

I sent the following letter in response to Mr. Morici's essay:

Peter Morici unloads a riotous barrage of accusations against free trade: Free trade caused, among other misfortunes, the collapse of the market for adjustable-rate mortgages, excessively high CEO compensation, inflationary monetary policy, and Uncle Sam's inexcusable bailout of Bear Stearns ("It's Time To Cut The Trade Deficit," March 26).  Mr. Morici, however, doesn't explain how allowing consumers to take advantage of bargains from abroad caused these calamities.  He simply assumes it to be self-evident that America's growing trade deficit proves that free trade triggers countless system-wide maladies.

Alas, Mr. Morici doesn't know what he's talking about.  America's trade deficit represents capital flowing into the U.S.  True, some of this inflow finances Uncle Sam's Eliot-Spitzer-party-like spending.  But that spending is caused by reckless politicians, not consumers.  Nearly all the rest of the trade deficit represents positive investments in America - investments that not only signal continued investor confidence in the U.S. economy but, more importantly, investments that finance R&D, product development, worker training, new firms, factory modernization, and other activities that promote economic growth.  Does Mr. Morici really think that such investments harm Americans?

Sincerely,
Donald J. Boudreaux

Nothing Unbalanced About So-called "Trade Deficits"

In this recent Wall Street Journal op-ed, Dartmouth economist Matthew Slaughter describes some of the benefits of foreign direct investment (FDI).  Here's an important part of his essay:

Foreign direct investment (FDI) has long been a source of strength for the American economy. In 2005, insourcing companies employed nearly 5.1 million Americans, 4.4% of the private-sector labor force. Beyond their employment, insourcing companies perform large amounts of the crucial activities that make their workers and the overall economy more productive. They invest in physical capital and in research and development, and they help connect the U.S. to the global economy through international trade. The bottom line is larger paychecks. In 2005, compensation per worker at insourcing companies was $66,042 -- 31.8% above the average for the rest of the private sector of $50,124.

I do, though, pick one (admittedly small) nit with Mr. Slaughter's exposition, as I explain in this letter that I sent to the WSJ:

Bravo for Matthew Slaughter's outstanding explanation of the pattern and enormous benefits of foreign direct investment (FDI) in the United States ("What Tata Tells Us," March 27).

I've one nit to pick: Mr. Slaughter incautiously aids and comforts protectionists when he writes that FDI today is driven by "the evolving pattern of global imbalances." While incoming FDI does indeed increase America's current-account deficit and many other countries' current-account surpluses, there's nothing unbalanced - either in the sense of being unsustainable or of being harmful - about America's attractiveness to investors, or about foreigners being especially keen to invest their dollars in the U.S. rather than spend these dollars on American-produced goods and services.  Indeed, as Mr. Slaughter ably explains, such actions by foreigners are a great boon to foreigners and Americans alike.

Sincerely,
Donald J. Boudreaux

Trade and National Defense

Retired Rear Admiral (USN) Paul Rohrer has a letter in today's Wall Street Journal.  I sent this letter in reply:

Admiral Paul Rohrer argues that U.S. national defense is compromised by the Air Force's award of a tanker contract to EADS, an aerospace company in Europe (Letters, March 25).  The bulk of Adm. Rohrer's case, however, is mere standard-issue protectionism.  And the facts of which he complains strengthen, not weaken, U.S. national defense.

For example, Adm. Rohrer gripes that "EADS has received tens of billions of dollars in illegal subsidies from the French and other European governments." Translation: European taxpayers now foot part of the bill for Uncle Sam's weaponry, giving Americans more resources to spend (if they wish) on national defense and European governments fewer such resources. Likewise for the Admiral's complaint that "European defense acquisition policies are already highly protectionist."  Translation: European governments pay unnecessarily high prices for their weapons, giving those governments less bang for the buck (or, explosion for the euro). The end result is that America's defense capacity is strengthened both absolutely and relative to Europe's.

Sincerely,
Donald J. Boudreaux

It's always possible, of course, to argue that the duty of each government to provide reliable national defense requires that no foreign suppliers be relied upon for any military supplies -- or, indeed, for supplies of any sort (such as food, clothing, electronics, and pharmaceuticals) that might be used by the military.  Reliance upon foreign suppliers means that if "we" go to war, "our" military might no longer have access to some materials and outputs necessary for fighting a war.  "We" would then be at the mercy of foreign governments whose troops and tanks and terrorists stand ready to humiliate and conquer "us."

Apart from emphasizing the fact that as a country grows more prosperous, the government of that country enjoys greater capacity to arm its military with the latest weaponry, I'll say no more here about the alleged national-defense exception to the case for free trade.  But I will recommend that you read the relevant sections (on national defense) in this brilliant 1954 monograph by Leland Yeager.  (See especially, on national defense, Chapter 4.)  Here is one paragraph from Yeager's monograph:

The assumption is false that a government can know in advance just which weapons and industries will be most important in some possible future war. Constant technological change is a leading feature both of modern war and modern industry. Furthermore, modern industry has proved itself remarkably able to convert and reconvert between peacetime and wartime production. Incidentally, among the industries that, so far, have been most easily convertible are those in which the United States has a Comparative Advantage, such as automobiles, electronics, elaborate office equipment, and industrial machinery. These strategic industries typically do not need tariff Protection, and Free Trade would enlarge their peacetime markets. (By contrast, the industries that typically clamor for continued or increased Protection—handbags, pottery, fish, nuts, cheese, hats, wine, toys, and so on—can turn much less readily to war production.) The moral is that the United States should not partially freeze its industry by Protectionist policies into a pattern that might well prove, if war finally came, to be out of date—and all at the cost of a sure loss in real national income. Even from considerations of national defense, it would probably be wiser to adopt Free Trade and other policies contributing to general economic strength and to rely, if war cut off foreign supplies, on the conversion of peacetime industry to wartime purposes that would in any case be necessary.

Finally -- and please forgive my unforgivable vanity -- I discuss the national-defense issue in Chapter Five of my book Globalization.

How do we know what we know about economics?

I was asked the other day by a reporter if NAFTA had been a good thing or a bad thing for America. I said that both the proponents and opponents of NAFTA had no legitimate, unassailable or even suggestive, statistical evidence on their side. I said it was absurd to think that in a $14 trillion economy, you could tease out the impact of increased trade with Mexico and Canada and disentangle it from the thousands of other changes going on.

I suggested that anyone who provided an empirical case for or against the agreement was essentially being dishonest--using statistics selectively to make the case for a pre-existing world-view.

The reporter found this viewpoint unacceptable. Surely, he said, economics can help us answer the question of whether NAFTA has been good for America or bad. Or at least good or bad, for say Ohio.

I said no, there was no empirical evidence that would be decisive. It isn't just that it's hard to measure the net impact precisely. I argued that it can't be measured.

He refused to accept this answer. Surely I could answer the question of NAFTA's worth. I was just ducking the question.

I said, no, I wasn't ducking the question. I was answering the question. He just didn't like my answer.

But he couldn't accept the answer as being "I don't know," or more accurately, we can't know if by "know," you mean some kind of defensible statistical evidence.

The most well-known think tank that views NAFTA negatively, the Economic Policy Institute, argues that between 1993 and 2004, Ohio lost 49,886 jobs because of NAFTA.

Not 50,000, but 49,886.

For the U.S. as a whole, EPI estimates that 1,015,290 jobs have been lost. Not a million, but 1,015,290.

But it's not just the precision of the estimate that makes the calculation ridiculous. It's the methodology that measures jobs displaced (the verb the EPI study usually uses) by assuming that imports destroy jobs and exports create jobs. With this methodology, a trade deficit reduces the number of jobs.

By this logic, America would have fewer jobs if foreigners suddenly decided to give us cars rather than selling them to us. Free foreign cars would destroy jobs in the American car industry. Inexpensive foreign cars do the same thing. So do cars made by Americans that are produced with robots instead of human welders. If you believe that imports destroy American jobs, so does better technology that makes workers more productive.

If the EPI was as anti-technology as they are anti-trade deficit, they could go out and measure the number of buggy manufacturing jobs destroyed by the auto industry and the number of eyeglass manufacturing jobs destroyed by lasik surgery or the number of jobs in the medical profession destroyed by pharmaceutical innovation. Surely those numbers could be estimated with some rough accuracy.

And surely they would tell us nothing about whether the world is a better place because of those innovations. And they would tell us nothing about the impact of those innovations on total employment.

But most of us understand that higher productivity doesn't mean fewer jobs in the United States overall. There are two ways to see it. One is to see the increase in the total number of jobs over time as we have replaced people with machines in every corner of the economy where it's possible. So this suggests that technology doesn't destroy jobs.

The same is true of the apparent effect of trade deficits. Manufacturing employment was shrinking as a share of the total employment between 1950 and 1975 when the trade deficit was essentially zero. We run a trade surplus in agriculture. Yet agricultural employment shrinks rather than rises.

There appears to be no relationship between the number of jobs in America (or in Ohio for that matter) and the trade deficit or increased productivity.

But the opponents of technology or trade could argue that the failure to observe a negative correlation between jobs and technology or jobs and trade deficits is spurious. True, the number of jobs in America has grown while technology has gotten better and better. But if we hadn't had technology we'd have even more jobs. So we have to control for the other factors that might have made jobs increase rather than decrease.

That's very hard to do. I'd settle for hearing a list of the factors that might plausibly be offsetting the alleged effects of trade and technology. In the absence of that list, I'm pretty comfortable arguing that trade deficits and technology have little effect on the total number of jobs (rather than the number of jobs in particular industries). And the reason I feel that way is partly because of the total number of jobs rising but mainly, I suspect, because I have a belief about how the world works.

I use the word "belief" which might lead some to dismiss my views as simply a matter of ideology. But my faith in my view of how the world works has empirical support for its tenets. It's not just a fantasy or a dogma or convenient. I just don't have holistic empirical evidence on trade having no impact on the number of jobs.

My view of the world is that when we widen the ability of our fellow citizens and ourselves to trade with people other than just our own kind or nationality or religion or color, that that in turn allows trade to take place more productively. That in turn creates wealth, a higher standard of living. And that in turn creates new opportunities for employment that come along and replace the old.

This view of the world is supported by logic and lots of empirical evidence. But again, it's not the empirical evidence of an overarching kind that let's me evaluate one corner of increased specialization, say the overall impact of NAFTA.

When I told the reporter that the net job loss numbers of the EPI are meaningless because they miss many of the jobs that are created, he said, so tell me where to look for those new jobs. And again, I had to disappoint him. I said that I couldn't tell him where to look.

Why?

Because when we trade more with each other and use our limited resources more effectively, two kinds of new opportunities get created. We take the wealth and resources that have been freed up by more efficient trade (or the same effect when productivity increases) and we use those extra resources to produce more of what we like and to get some new stuff we couldn't have had before. And yes, we also get an expansion of export-related jobs.

But the export-related jobs can't capture all the job gains from having a more effective use of our skills and time and energy that comes from trading more widely. Especially if you run a trade deficit. That means that a lot of the new jobs that are going to be created aren't going to have anything to do with trade. Just like finding ways to make steel with fewer people and more machines leads to new jobs in the steel-machinery making business but in lots of other industries that you can't identify, that come from people being able to spend less on steel and having more resources to spend on other things.

So I can't tell the reporter where to look. He has to look everywhere. It doesn't make for a very good feature story.

So I'm sorry I can't be more helpful. But I do think economics has a lot to say in helping us understand the effects of increased trade. It just doesn't come from the bottom line of an empirical study.

P.S. I am ignoring any bureaucratic complications that occur in a real-world trade agreement. I wish we would just eliminate our tariffs and quotas rather than do all the bureaucratic and legal compliance wrangling involved in NAFTA.

P.P.S. For a pictorial version of these ideas with the data alluded to in the discussion, go here.

Hooray for America's Trade Deficit

The Financial Times published this letter of mine yesterday:

From Mr Donald J. Boudreaux.

Sir, Pat Buchanan's hostility to free trade (Letters, March 5) reflects his misunderstanding of fundamental concepts. He complains that "since Nafta . . . we have run $5,000bn in trade deficits". For Mr Buchanan, this fact is clear evidence of the dangers of freer trade. But let us reword his complaint: "Since Nafta, we have run $5,000bn in investment surpluses." Putting it like this - which is simply another way of reporting the fact that Mr Buchanan finds so troubling - reveals that, since Nafta, $5,000bn worth of capital has flowed into the US.

This capital helped to create and modernise many US companies, to fund research and development, to train workers, and to ease the burden imposed on Americans by Uncle Sam's profligacy. Does Mr Buchanan really lament this capital inflow?

It is worth pointing out, too, that this inflow of capital is precisely the opposite of what Ross "Giant Sucking Sound" Perot predicted would happen if Nafta were passed.

Donald J. Boudreaux,
Chairman,
Department of Economics,
George Mason University,
Fairfax, VA 22030, US

The Practicality of Free Trade

One of the most intellectually shallow arguments against free trade is the one that motivates this op-ed in today's New York Times by Robert E. Lighthizer.  In short, the argument is that free traders are impractically principled; a better policy (the argument implies) is one that recognizes that trade is sometimes good and sometimes not so good.  Here are two letters that I sent to the NYT in response.

Robert Lighthizer dismisses principled free-traders as dogmatists who impractically stick to their guns "no matter how many jobs are lost, how high the trade deficit rises or how low the dollar falls" ("Grand Old Protectionists," March 6).  Alas, the impractical dogmatists are Mr. Lighthizer and his fellow trade "pragmatists."

There is no credible evidence - none, nada - that free trade causes net job losses.  Moreover, far from being undesirable, a higher U.S. trade deficit means increased foreign investment in the American economy.  And a falling dollar generally reflects worsening U.S. domestic policies, such as inflationary money-supply growth, the likelihood of higher taxes or more command-and-control regulations, and, indeed, an increased probability of U.S. protectionism - protectionism that, by stifling entrepreneurial dynamism, makes America a less attractive place for foreigners to do business.

Sincerely,
Donald J. Boudreaux

My second letter:

Among Robert Lighthizer's objections to principled free-traders is their opposition to protectionism "no matter how many jobs are lost" ("Grand Old Protectionists," March 6).

If Mr. Lighthizer is referring to overall employment, his facts are wrong.  Free trade does not reduce net employment.  But perhaps he's talking about specific jobs, such as those lost in Carolina textile mills when Americans buy more textiles from abroad.  The argument seems to be that practical statecraft often justifies protecting such jobs even if doing so prevents the creation of other jobs in their place.  If this is Mr. Lighthizer's point, he's too modest when calling for trade policies that allow for "practicality, nuance or flexibility."  Because technology destroys far more jobs than does trade, Mr. Lighthizer should endorse also a "pragmatic" approach to innovation - empowering government with the flexibly and nuance to block firms' introduction of efficiency-enhancing production techniques that displace workers.  Surely, according to Mr. Lighthizer's practical logic, we must reject the "dogma" that tolerates "unbridled" improvements in firms' operating efficiencies.

Sincerely,
Donald J. Boudreaux

Ikenson on Obama

Cato's Dan Ikenson takes the measure of Barack Obama.  Here's Dan's opening paragraph:

As an advocate of free trade, I feel slightly vindicated by reports that the Obama campaign quietly assured the Canadian government that the Senator’s strident words about NAFTA in last week’s debate were merely political rhetoric. We’ve long been saying that opposition to trade is mostly an artifice of politics. But the story begs the question: Is Obama (a) economically illiterate; (b) dishonest, or; (c) naïve. The answer is (d), all of the above.

(HT Sallie James)

Ohio and NAFTA

The Wall Street Journal's superb columnist Mary Anastasia O'Grady says this today about the protectionist pronouncements pouring forth from both the Clinton and Obama camps:

After watching the Obama-Clinton debate in Cleveland on Tuesday, I came away convinced that both candidates for the Democratic presidential nomination want to run this country like Argentina.

In that country, Juan Peron-inspired labor syndicates and their bosses dominate the economy and work hand-in-glove with the state. Together they have ensured Argentina's isolation from international commerce and investment, and a slow but steady decline in living standards.

This is a sharp left turn for the Democratic Party leadership. One of the most significant global trade-liberalization rounds in the 20th century bore the name of John F. Kennedy. Now Hillary Clinton and Barack Obama, by threatening to dissolve the North American Free Trade Agreement unless it is converted into a cudgel for Big Labor, want to drag us backward.

Also, as Rossputin's Ross Kaminsky points out to me in an e-mail, the unemployment rate in Ohio in December 1993 -- the month before NAFTA took effect on January 1, 1994 -- was 6.5 percent.  Says Ross: "It has never since touched a level that high again.  Why the hell doesn't anyone say that in public? It's so obvious a thing to look at."

Great point.  (Of course, the reason that Clinton and Obama don't speak this truth is because to do so would not help them politically.  Remember, they seek office and power rather than truth and understanding.  To expect either of them to utter even one politically inconvenient truth is as reasonable as expecting your pet turtle to recite from memory the Magna Carta.)

Looking at the data on Ohio's unemployment rate from the early 1990s onward is indeed revealing.  The unemployment rate in Ohio was declining before NAFTA took effect (it was, for example, 7.0 percent in January of 1993).  The rate continued to decline, reaching 3.9 percent as recently as February of 2001.  From that date, it began to rise, hitting 6.2 percent for a few months in 2004.  From November 2004, Ohio's unemployment began again to fall, settling in to the mid-five-percent range pretty much since then.  The most recent reading (for December 2007) is 5.8 percent.

Also, the most recent month prior to NAFTA going into effect in which Ohio's unemployment rate was as low as 5.8 percent is October 1990.

Ohio's unemployment rate before and after NAFTA took effect emphatically does not tell a tale of workers in that state being harmed by expanded trade between the U.S., Canada, and Mexico.

Celebrate Commerce

Roderick Long over at Liberty & Power posts this wonderful quotation from Joseph Addison (1672-1719).  I recommend reading the entire post, but here are some choice selections from Addison's celebration of commerce:

There is no place in the town which I so much love to frequent as the Royal Exchange. It gives me a secret satisfaction, and in some measure, gratifies my vanity, as I am an Englishman, to see so rich an assembly of countrymen and foreigners consulting together upon the private business of mankind, and making this metropolis a kind of emporium for the whole earth. I must confess I look upon High-Change to be a great council, in which all considerable nations have their representatives. Factors in the trading world are what ambassadors are in the politic world; they negotiate affairs, conclude treaties, and maintain a good correspondence between those wealthy societies of men that are divided from one another by seas and oceans, or live on the different extremities of a continent. I have often been pleased to hear disputes adjusted between an inhabitant of Japan and an alderman of London, or to see a subject of the Great Mogul entering into a league with one of the Czar of Muscovy. I am infinitely delighted in mixing with these several Ministers of Commerce, as they are distinguished by their different walks and different languages: sometimes I am jostled among a body of Armenians; sometimes I am lost in a crowd of Jews; and sometimes make one in a group of Dutchmen. I am a Dane, Swede, or Frenchman at different times; or rather fancy my self like the old philosopher, who upon being asked what countryman he was, replied that he was a citizen of the world.....
......

For these reasons there are no more useful members in a commonwealth than merchants. They knit mankind together in a mutual intercourse of good offices, distribute the gifts of nature, find work for the poor, add wealth to the rich, and magnificence to the great. Our English merchant converts the tin of his own country into gold, and exchanges his wool for rubies. The Mahometans are clothed in our British manufacture, and the inhabitants of the Frozen Zone warmed with the fleeces of our sheep.

When I have been upon the ’Change, I have often fancied one of our old kings standing in person, where he is represented in effigy, and looking down upon the wealthy concourse of people with which that place is every day filled. In this case, how would he be surprised to hear all the languages of Europe spoken in this little spot of his former dominions, and to see so many private men, who in his time would have been the vassals of some powerful baron, negotiating like princes for greater sums of money than were formerly to be met with in the Royal Treasury! Trade, without enlarging the British territories, has given us a kind of additional Empire: it has multiplied the number of the rich, made our landed estates infinitely more valuable than they were formerly, and added to them an accession of other estates as valuable as the lands themselves.

Indeed.

(HT to Bob Higgs)

Griswold on NAFTA, Manufacturing, and Ohio

In today's Wall Street Journal, Dan Griswold, the outstanding trade scholar at the Cato Institute, exposes Clinton's and Obama's anti-trade yammerings in Ohio for what they are: ignorance informed only by the grotesque desire to win political office by pandering to many voters' delusions.

Here are some key passages:

But tinkering with a 14-year-old trade agreement [NAFTA] will not bring an industrial renaissance to Youngstown and other Rust Belt cites. The relative decline of those regions dates back to the 1960s and 1970s, when the American economy began a transition from heavy industry toward an information-based service economy.

Ohio workers would pay a heavy price for pulling out of Nafta. Canada and Mexico are the top two markets for exports from Ohio, accounting for more than half of the state's exports in 2006. According to the Ohio Department of Development, 283,500 workers in the state earn their living in the export sector, with machinery, car parts, aircraft engines and optical/medical equipment among the leading exports. A trade showdown would put those good-paying jobs at risk.

Since Nafta took effect on Jan. 1, 1994, the U.S. economy has added a net 26 million new jobs. The average real hourly compensation (wages and benefits) of workers has climbed 23%. Real median household net worth has increased by a third. Of course, Nafta was not the primary driver of all that good news. But it is a useful counterpoint to the sense that large numbers of Americans have been "devastated" by Nafta and other trade agreements.

In recent years, U.S. manufacturers have enjoyed record output, revenue, exports and profits. Since Nafta, U.S. manufacturing investment in Mexico has averaged a modest $2 billion a year -- a tiny fraction of the $150 billion or more those same companies invest annually in domestic manufacturing capacity. American factories actually added a net half-million new manufacturing jobs in the five years after Nafta.

The loss of manufacturing jobs in Ohio and elsewhere since 2000 is the result of increased automation and our own domestic slowdown. U.S. factories are producing more and better stuff with fewer workers because their workers have become so much more productive.

Behind this trend has been a shift of production down South to nonunion, right-to-work states, and up the value chain to more technology-intensive products. After 15 years of expanding trade, U.S. factories today are producing fewer shirts, shoes and lower-end auto-parts, and more pharmaceuticals, chemicals, semiconductors and sophisticated machinery and equipment.

Shift Happens

Hillary Clinton and Barack Obama are increasingly hostile to trade (or so they say on the campaign trail -- admittedly not a stage on which truth and frankness get many lines).

There are countless distressing facets of this anti-trade nonsense.  One of these is the weaselly "I'm for free trade as long as it's fair trade" refrain.  Such a claim (now as familiar in political campaigns as Dunkin' Donuts) is a cowardly attempt by the candidate to stand on both sides of the issue by invoking a word ("fair") loaded with emotion but devoid, in this context, of meaning.  No one, as far as I know, favors unfair trade -- but by slapping the label "unfair" on any trade that a candidate's favorite constituents dislike, that candidate can oppose free trade while claiming still to support free trade.

Such a rhetorical gimmick is unfair.

Also distressing is the fact that Austan Goolsbee, the fine economist who is a close adviser to Obama, apparently is ignored by the would-be President of the USA on this front.  Of course, I have no knowledge of what Goolsbee says and doesn't say to Obama, but I presume that Goolsbee isn't in the anti-trade camp.  Consider that just this past June Goolsbee had this excellent column in the New York Times, with this key passage:

We [Americans] hate experiencing major adjustments and industry transformations that force people to look for new jobs. That experience has made many skeptical about the future of the United States in the world economy. Yet the evidence seems to show that for all our dissatisfaction, we are the most flexible economy around and may be best poised to take advantage of the coming changes on a global scale precisely because we are so good at adjusting.

A related source of distress is Alan Blinder's recent skepticism of trade -- his lending his good name and the prestige of the economics profession to protectionists.  It's very bizarre (especially in light of the fact that Blinder wrote this).  In today's New York Times, "Economic Scene" columnist David Leonhardt quotes Blinder as saying that "Trade has winners and losers ... and there have been a lot of losers in Ohio."  I've written elsewhere about "winners and losers" from trade.  But I can't resist making my point again, if only in a slightly different way.

Trade is just one manifestation of consumer sovereignty.  Just as there are, by Blinder's calculus, winners and losers from consumers shifting their expenditures from goods made in America to goods made abroad, there are winners and losers from consumers shifting their expenditures from goods made in Illinois to goods made in Arizona - and from consumers shifting their expenditures from donuts, beef, cigarettes, whiskey, and train travel to bagels, fish, yoga lessons, wine, and air travel.  Trade plays no unique, or uniquely important, role as an avenue of economic change spurred in part by consumer sovereignty.  The only practical way to rid the economy of such "loses" is to try to freeze it, a futile step that will in the long-run only make losers of everyone.

(I thank my friend Greg Papandrew for the title of this post.)

A Review of Globalization

I've always admired the judgment and insight regularly displayed by John Tamny over at RealClearMarkets.  Proof that my admiration is well-placed is supplied today by John's review of my book Globalization.

Vermeer's Hat

The latest EconTalk is a conversation with Timothy Brook, author of Vermeer's Hat, a lovely book that looks at the  dawn of globalization in the 17th century by examining Vermeer's paintings and other bits of Dutch culture. We talk about the beaver trade (that supplies the fur that becomes the felt that becomes the hat of a wooing officer in a Vermeer painting) and  porcelain from China (that holds fruit in the foreground of another). We also discuss how different attitudes toward the foreign and the novel affect the evolution of a nation's prosperity.

Silly Stats

One of my professors from my undergraduate days at Nicholls State University, Oscar Varela (who now teaches at U.T. - El Paso) recently published this fine letter in the El Paso Times:

Regarding your opinion in “Trade deficit: China keeps beating up on U.S.” (12.24.2007), the U.S. trade deficit with China reflects the voluntary preferences by U.S. residents for Chinese goods. Efforts to punish China for the U.S. trade deficit would in the end punish these U.S. residents.   I (and others in El Paso) have a growing trade deficit with you, as every day I buy your paper but never sell you a thing. You are not beating me up, as my purchases are freely made without coercion. Would you support any efforts to punish you for my deficit through some government action that would restrict my pleasure in buying and reading the El Paso Times?  

Oscar Varela

And relatedly, I sent the following letter today to the New York Times:

Every month you report Commerce Department figures on the U.S. trade deficit with individual countries.  For example, we learn today that last year "[t]he trade deficit with China continued to rise, jumping by 10.2 percent to $256.3 billion" ("U.S. Trade Deficit Drops in 2007," February 14).

Before again reporting such figures, your reporters (and the Commerce Department) should ask a fundamental question: In this world of extensive multilateral trade and investment, of what conceivable relevance is a measure of the volume of good and services trade between any two countries?  America's "trade deficit" with China is as relevant as is your "trade deficit" with, say, your columnist Maureen Dowd.  I'm sure that every year you buy more from her than she buys from you.  I'm also sure that you're not bothered by this "deficit" - and for good reason: in a world of multilateral trade, no two entities are likely to have so-called "balanced" trade with each other.

Sincerely,
Donald J. Boudreaux

Extend Commerce and You Extend Peace

Here's a letter that I sent yesterday to the Washington Times:

War-making being the special talent of the state, Patrick McGinn sensibly predicts that war cannot be legislated away (Letters, January 30).  But he incorrectly argues that war reflects basic human nature in a world of scarce resources.  Virtually all resources are scarce, and yet when they are privately owned and tradable in free markets people seldom fight each other for access to them.  For example, my wife and I bought our house peacefully; we didn’t have to kill the previous owners to get inside. So, too, with all of the other scarce things that we consume regularly – water, bread, milk, coffee, chicken, wine, hotel rooms, you name it: each of these things is scarce and in high demand, and yet people in market economies almost never fight for them.

Extend commerce and you extend peace.

Sincerely,
Donald J. Boudreaux

Winners and losers from trade

This week's podcast is with Don Boudreaux, my co-host here at the Cafe and the author of Globalization, a superb primer on trade policy and the phenomenon of globalization.

Don argues in the book and in the podcast that to point to an American steel worker put out of work by imports of Brazilian steel and say that he is "harmed by trade" is to misunderstand the nature of trade and its winners and losers. He says it's like saying that a man whose wife leaves him for another man is harmed by love. After all, the man married because of love. The man is the product of his parents who were touched by love. So it is with the steel worker. His steel job exists because of trade. His whole life is supported by trade of various kinds. So in what sense is he "harmed by trade?"

It's a profound point. It forces you to see just how trade and specialization and the division of labor create the incredible lives we lead, lives of wealth and health unimagined by previous generations.

But having said that, I think there is something else to add, something about the way our self-worth and pride and satisfaction are tied up in our work. An out-of-work steel worker still has a very good life compared to generations past and the success of his life up until the loss of his job is indeed due to trade (and sometimes to the protectionism that worker would like to see made stronger). But there's no denying that it's very tough on a person who has invested most of his life in a particular skill to suddenly find that there's no demand for that skill. Yes, it's the price of progress and it's a price worth paying. Yes, it's not particular to foreign trade, as Don points out, but is the result of all kinds of economic change. But there is something deeply poignant about it, nevertheless.

It is a mistake to use protectionism to keep that worker from having to deal with change. But that doesn't change the potential sadness of the situation. I've argued that the real consolation for that worker who loses his job and struggles to find another that is as satisfying is knowing (if he knows any economics) that his children and grandchildren will lead better lives because we tolerate economic change.

If computer-based learning caused George Mason and other universities to shut down, it would be a good thing. (Remember, I'm assuming in this story that students choose computer-based learning over brick and mortar education.) I would applaud it and I'm sure Don would too. But many great teachers would have trouble finding jobs that paid as well or that led to as satisfying a life on the job. Younger teachers would find an easier time adjusting and finding new opportunities. And some of those opportunities would come into existence because of the resources saved by shutting down universities. But that wouldn't change the sadness of the out-of-work teachers who find themselves unable to use the skills that they have proudly honed.

As Don points out eloquently in the podcast, most of us willingly embrace and accept economic change even though we know that it sometimes has disparate effects on us. There is always a temptation to ask for an exemption from the costs while enjoying the benefits.

So I agree with Don that it's wrong to say that trade creates winners and losers. We are all winners. But it's also true that the benefits from winning are not evenly distributed and that the political demand for exemptions from certain kinds of economic change isn't going away.

Ironically, the richer we become, the more specialization we have. The more specialized you are, the greater the risks (and rewards) from economic change.

The lesson, I think, is that education should give you a range of places to apply your specialized skills. It's better to learn how to program than to learn how to program in HTML. It's better to know how to write than to know how to write an article for a traditional newspaper. It's better to know how to communicate generally than to know how to write.

It is better to learn how to learn than just to learn something specific.

Victimized by Trade?

Today's New York Times has several letters critical of Steve Landsburg's recent op-ed, in those pages, on trade.  Here's a letter that I just sent to the Gray Lady in response to one of these letters:

To the Editor:

Taking Steven Landsburg to task for showing no "compassion" for those "who have fallen victim to the deleterious side of free trade," Alan Ross completely misses Mr. Landsburg's point (Letters, January 20).  Free trade, as Mr. Landsburg eloquently explains, has no victims.  In the long run, it benefits everyone - even those who today lose their jobs to foreign rivals.  The vitally important insight is that almost every job that Americans today worry about losing was made higher-paying, and even possible, by trade.  For any worker to complain that he is victimized by trade would be akin, say, to Elvis Presley complaining that he was victimized by radio because that medium did so much to make the Beatles more popular than him.

Sincerely,
Donald J. Boudreaux

I might also have ended my letter with this alternative question: Suppose that the rise of Internet news sites causes the New York Times to lose market share.  Could the owners and editors of that newspaper then justifiably complain about being victimized by freedom of the press?

Misbehaving Amazon? Or Misbehaving State?

In his 2002 book Creative Destruction, Tyler Cowen explains "How Globalization is Changing the World's Cultures" -- for the better.

The government of France, however, seems to be intent on slowing this process of improvement for its citizens.  Check out this post by Nate Anderson over at Ars Technica (HT Konstantin Medvedovsky):

Did you hear the one about Amazon? It offered free shipping in France, got sued for it by the French Booksellers' Union, and lost. Now it's choosing to pay €1,000 a day rather than follow the court's order. Ba-da-bing!

No, it's not funny, but that's because it's not a joke. The Tribunal de Grande Instance (a French appeals court) in Versailles ruled back in December that Amazon was violating the country's 1981 Lang law with its free shipping offer. That law forbids booksellers from offering discounts of more than 5 percent off the list price, and Amazon was found to be exceeding that discount when the free shipping was factored in.

Thwarting the ability of ordinary French citizens to get good deals on books makes books more difficult for French citizens to get.  France's cultural richness is less than it would otherwise be.

Some commentors to this post take issue with identifying firms protected by the government from competition as disreputable.  I'm in the camp whose members - finding nothing especially magical, glorious, magnanimous, informed, or trustworthy about the state or political actions - hold that hiring the state to forcibly stop people from patronizing competitors at mutually agreeable prices is no different morally than hiring a street gang or your brother-in-law to do the same.

What to Expect When You're Free Trading

The always-insightful Steve Landsburg has this excellent and timely op-ed in today's New York Times.  Although access to the NYT's editorial page is now free, I paste Steve's important op-ed below in its entirety.  Read, reflect, learn.

What to Expect When You’re Free Trading

By STEVEN E. LANDSBURG  

Rochester

IN the days before Tuesday’s Republican presidential primary in Michigan, Mitt Romney and John McCain battled over what the government owes to workers who lose their jobs because of the foreign competition unleashed by free trade. Their rhetoric differed — Mr. Romney said he would “fight for every single job,” while Mr. McCain said some jobs “are not coming back” — but their proposed policies were remarkably similar: educate and retrain the workers for new jobs.

All economists know that when America