By Kevin D. Williamson
Monday, June 17, 2024
One of the nice things about free trade is that it allows
rich countries to outsource some of the expenses of costly social policies.
But first, a bit of prelude: The fact that a policy is
costly doesn’t tell you anything about whether it is a good policy or a bad
one—only that it imposes significant expenses. Most people favor
workplace-safety rules, minimum wages, the prohibition of child labor,
environmental standards, etc. (Oh, you sentimentalists!) But even if you
like every rule implemented under OSHA, you can see that
compliance with these rules imposes costs. If the costs are large enough, they
will create incentives for firms or consumers to change their behavior:
substituting capital for labor (as in grocery store self-checkouts),
outsourcing production of certain goods to places where the labor market is
more suited to their needs, or, in the case of consumers, shifting purchases to
less-expensive goods made in places without all those OSHA and environmental
rules. While this can certainly create disruption in the lives of individuals
and families, none of that is necessarily good or bad on its own from a macro
point of view. Things change in productive economies—that’s a big part of what
makes them productive.
We tend to get a distorted view of trade issues because
we think too much about consumer goods, which often bear labels reading “Made
in China” or some such. But most things the United States
exports don’t come with “Made in USA” labels on them, because they are
capital goods (integrated circuits by themselves make up 2.55 percent of U.S.
exports by value), commodities (at more than 7 percent, refined petroleum is
the largest constituent of U.S. exports), agricultural produce (soybeans are
1.77 percent of U.S. exports), etc. We often think of international trade
competition in terms of automobiles, but that is because Americans love cars,
not because cars are so economically important: Packaged medicine and medical
instruments together make up 3.7 percent of exports, as opposed to only 2.95
percent for automobiles.
U.S. producers lead the world when it comes to petroleum
and agricultural goods. U.S. firms also tend to do better at the high end of
the market for manufactured goods, which is no surprise—while you’ll find some
interesting numbers in little dots such as Luxembourg and Singapore, the United
States is by far the richest major country in the world, with a
GDP per capita nearly 60 percent higher than Germany’s and at about twice
the average in the European Union. So you can go into Brooks Brothers and buy a
shirt
made in the United States that will cost about $200, or you can go into
Jos. A. Bank and buy a shirt made in
Honduras for about $20. They aren’t the same product—they are
differentiated by more than price. And it is good that both of them are on the
market: Some Americans want fancier shirts, and some of them need to spend as
little on clothing as they can. Free economies are good at supplying a
diversity of needs. You can impose the costs that make U.S. labor more
expensive without punishing poor people by making them all pay $200 for their
shirts.
But the story we tell ourselves about U.S. production
versus production in Honduras—or, more geopolitically significant, China—isn’t
exactly the right story. While U.S. social policies add expenses for U.S.
producers, those aren’t the main reason U.S. labor is relatively
expensive or the reason so many other inputs are relatively expensive in the
United States. You could put OSHA rules and U.S. taxes and all the rest of it
on Haiti and you wouldn’t see wages (i.e., the price of labor) in
Port-au-Prince rise to what workers make in Austin. That’s because wages aren’t
set on a cost-plus basis the way some people seem to imagine they are—like
every other price in a free economy, wages are set by supply and demand.
It costs just as much to educate and train a first-rate
professor of art history as it does a first-rate professor of computer
science—and the art history professor no doubt works just as hard and loves his
family and deserves good things—but he probably isn’t going to make as much
money as the computer-science professor, whose next-best offer is at Google or
Apple or Intel rather than, you know, Wendy’s. It’s just supply and demand. And
because there is so much productive capital in the United States and such a
large domestic market for goods and services, there is tons of demand for U.S.
labor in general—which is why our art history professors make a lot more than
their counterparts in, say, Venezuela.
Back when he was a first-rate economist instead of a
third-rate columnist, Paul Krugman wrote a famous essay
titled Competitiveness: A Dangerous Obsession. His
argument was that the then-regnant dogma associated with the Clinton
administration and with the so-called New Democrats was based on a
misunderstanding of how the world economy actually works. Krugman wrote:
The rhetoric of competitiveness—the
view that, in the words of President Clinton, each nation is “like a big
corporation competing in the global marketplace”—has become pervasive among
opinion leaders throughout the world. People who believe themselves to be
sophisticated about the subject take it for granted that the economic problem
facing any modern nation is essentially one of competing on world markets—that
the United States and Japan are competitors in the same sense that Coca-Cola
competes with Pepsi—and are unaware that anyone might seriously question that
proposition. Every few months a new best-seller warns the American public of
the dire consequences of losing the “race” for the 21st century.
… Countries do not compete with
each other the way corporations do. Coke and Pepsi are almost purely rivals:
only a negligible fraction of Coca-Cola’s sales go to Pepsi workers, only a
negligible fraction of the goods Coca-Cola workers buy are Pepsi products. So
if Pepsi is successful, it tends to be at Coke’s expense. But the major
industrial countries, while they sell products that compete with each other,
are also each other’s main export markets and each other’s main suppliers of
useful imports. If the European economy does well, it need not be at U.S.
expense; indeed, if anything a successful European economy is likely to help
the U.S. economy by providing it with larger markets and selling it goods of
superior quality at lower prices.
International trade, then, is not a
zero-sum game. When productivity rises in Japan, the main result is a rise in
Japanese real wages; American or European wages are in principle at least as
likely to rise as to fall, and in practice seem to be virtually
unaffected.
It would be possible to belabor the
point, but the moral is clear: while competitive problems could arise in
principle, as a practical, empirical matter the major nations of the world are
not to any significant degree in economic competition with each other. Of
course, there is always a rivalry for status and power—countries that grow
faster will see their political rank rise. So it is always interesting to compare
countries. But asserting that Japanese growth diminishes U.S. status is
very different from saying that it reduces the U.S. standard of living—and it
is the latter that the rhetoric of competitiveness asserts.
Rather than thinking about this in the simpleminded competitiveness terms
that Krugman rightly rejects, it might make more sense to think about this as a
question of specialization across national borders. And that takes
us back to the opening: There are certain rich-world policies, taxes, and rules
that will shape economic incentives in such a way as to make the production of
certain goods more efficient in other markets. Those policies are one factor among
many, and it is not the case that wages are lower in China or Honduras simply
because Chinese or Honduran workers are willing to accept a lower standard of
living. It is not the case the United States, Europe, Japan, etc., are rich
because wages are high—wages are high in those countries because they are rich,
and, hence, there is more competition for labor and most everything else. China
isn’t relatively poor because manufacturers there pay workers relatively low
wages; manufacturers in China are able to pay relatively low wages because
China is relatively poor, and there isn’t much demand for Chinese labor at
German wages.
To reiterate the earlier point: International shifts in
production in response to costs imposed by rich-country governments (and, more
importantly, by the generally higher costs of production in rich countries)
are, in themselves, neither good nor bad from an economic point of view. But
they can be very, very bad from a political point of view. If you are, for
example, a progressive American political party insisting that we simply must use
the force of the state to execute a fundamental transformation of key sectors
of the economy—energy production, transportation, housing, etc.—and that
this grand transformation can be effected without imposing any unpleasant costs
on American workers or consumers, you are promising an awful lot. You are, in
effect, telling people that they can—must!—drive Teslas without paying Tesla
prices. And you can achieve that: with trade.
And so the current
convulsions in Washington and Brussels about Chinese EVs: Climate
change is an existential emergency, they tell us, and it is essential that we
mitigate the effects of vehicular emissions by switching to EVs where possible.
But voters do not want to pay high prices for EVs, and domestic producers do
not want to be made to compete with EVs made in places—namely China—where it is
relatively cheap to make them. So, we must drive EVs, but we cannot drive
either the expensive ones or the inexpensive ones. The Biden administration is
putting a 100 percent tariff on Chinese EVs, the European Union is putting
an almost 50 percent tariff on Chinese EVs, and Donald Trump is out there
promising to outdo whatever Biden does, bigly.
You can have your EVs and your EV mandates. You can have
your EVs without imposing enormous costs on American consumers who are used to
paying reasonable prices and getting excellent vehicles from good old-fashioned
American manufacturers such as … Toyota and Mercedes-Benz. But what you can’t
have is all that at “Made in China” prices with “Made in the USA” manufacturing
costs. Cheap, good, American-made: Pick two.
(The same holds more or less true for Europe.)
Politicians never want to pick two. They don’t want to
acknowledge that there are tradeoffs and that their policies
impose real costs on real people and real firms—with real economic
consequences. And so when the politicians create demand for inexpensive
EVs and create conditions under which it is a lot easier to
produce inexpensive EVs in China than in Michigan or Sochaux, they also must
then do the essential thing and prevent consumers from acting on the
incentives the politicians have created.
So we get some version of: You must buy an EV, you must
not buy an EV.
I’m fine with paying $200 for a shirt made in the United
States. (But I’m not much of an economic patriot: If I were very rich, I’d
probably cough up the $800 bucks for shirts made at Place Vendôme. Pity the
fool with Charvet tastes and a Brooks Brothers budget.) I’m not fine with
forcing everybody else to prioritize their spending the same (possibly dumb)
way I do.
But, then, I’m not the one telling
people what kind of car they have to drive and then putting a 100
percent tax on the least expensive options.
(More) Economics for English Majors
Donald Trump has an idea for improving the federal tax
code: a massive new tax on gasoline and prescription drugs, a tax that would
triple the price of these and other essential goods.
You know what? I kind of like it.
Trump isn’t calling his proposed massive new tax on
gasoline and prescription drugs a “massive new tax on gasoline and prescription
drugs,” of course—he’s calling it a tariff. Meeting with Republicans on Capitol
Hill last week, Trump floated the idea—fantastical, possibly idiotic, and never
gonna happen—of replacing the current tax code with an all-tariff
revenue system. That means a sales tax paid by Americans on imports.
And what do Americans import? As noted above, those “Made
in China” labels on flip-flops at Walmart are misleading. The biggest
constituents of U.S. imports are—this may seem counterintuitive, if you don’t
really understand how a big economy works—the same as U.S. exports: crude and
refined petroleum products, natural gas, and other hydrocarbons; “packaged
medicaments,” in the lingo of the government; electronics and machine parts,
etc. Many of our imports do not compete with domestically produced goods at all
but are instead critical components of those goods. Weirdly enough, insulated
wire by itself makes up nearly 1 percent of U.S. imports; office machine
parts are nearly 2 percent of imports. You see a lot of shoes labeled “Made in
China” or “Made in Vietnam” or wherever, but, in terms of value, we import more
gas turbines. But you don’t buy gas turbines at Macy’s, so those imports are
less visible.
The federal government relied heavily on tariffs for
revenue before there was an income tax. At some points in our history, the
federal government relied almost exclusively on tariffs for
revenue. But we had a much smaller federal government in 1910 than we do today.
I’d be happy to see it pared back to something more like that.
Donald Trump would not do that, of course. Trump is an
ignoramus when it comes to economics, and he proposes to fund a massive welfare
state—he is adamantly against reforming Social Security or Medicare—with an
18th-century tax system that once had funded very little more than the navy and
the construction of postal roads.
(Do you know what the United States also had in its early
history? Open borders.)
Trump, like most advocates of tariffs, doesn’t understand
how they work. Tariffs are a sales tax paid by consumers on imported goods—not,
as advocates will tell you, a tax paid by nefarious foreigners who want to
sneak into our markets and oppress Americans with … abundant goods at
attractive prices. Tariffs may or may not have the effect of protecting some
domestic businesses; many U.S. firms do not actually compete head-to-head with
imports, because a lot of what Americans consume is stuff that isn’t made here,
for all sorts of reasons. When U.S. firms do compete against imports in the
domestic market, the most reliable effect of tariffs is to raise prices.
Our captains of industry, as it turns out, like money, and so do their
shareholders—and when taxes on competitors give them the opportunity to raise
prices, they will take the opportunity.
If you rent a hotel room in Manhattan, for example, you
pay a total of about 15 percent in hotel taxes. (Like everything in New York,
it’s complicated, but it’s about 15 percent, all-in.) Now, imagine that you are
a redheaded dictator, and you really want to do something for other redheaded
people, given all of the oppression and unhappiness gingers have been made to
suffer over the years. So you decide that redheaded hotel owners in New York
City don’t have to pay the 15 percent tax. What do you think they do in
response? Cut their rates? Pay their employees more? Probably not. The price of
a Manhattan hotel room is set in a very competitive marketplace, and so are the
wages for Manhattan hotel employees. (Running a hotel in Manhattan, especially
a high-end hotel, is a great business—unless
you are stupid.) Of course, you have to compete on price for customers and
compete on wages for good help, but you probably don’t have to take 15 percent
off to be competitive—presumably, if you already were in the market in the
first place, you were reasonably competitive before the tax advantage. So, most
likely, you do what businessmen have been doing with such windfalls since time
immemorial: You pocket the money, and maybe buy a boat.
If you put a 200 percent tariff on imported
gasoline—meaning that the price goes from x to 3x—you
can be confident that importers will try to pass on that expense to consumers,
though distributors and retailers will probably also take a hit. Now, when the
price of imported gasoline goes from $3.25 to $9.75, the domestic producers are
going to be very, very tempted to raise their prices to about $9.72. And, of
course, a lot of those domestic producers are going to get hit in the ass, too,
because they make some of their gasoline out of imported crude oil.
Why a 200 percent tariff, you ask? Well, here’s why: In
2022, the federal government spent $6.13 trillion dollars; in 2022, total
imports were about $3.2 trillion. Ergo, you’d need a tariff of 191.5 percent to
pay for federal spending, so, call it 200 percent, assuming—and it is a very,
very bad assumption!—that the 200 percent tax wouldn’t cause any changes in the
behavior of consumers or firms.
Of course, you wouldn’t get what the tariff advocates
promise: a renaissance in U.S. manufacturing when industry is freed from
competition from imports. The availability of imports is only one reason that
many goods are not produced in the United States. For one thing, lots of raw
materials simply are not available within our borders, as blessed with natural
resources as these United States are. India is the world’s largest mango
producer—by
far—but not because Narendra Modi’s government has been so clever with its
mango policy.
I rather expect that making gasoline, electricity, and
prescription drugs—and mobile phones, computers, gas turbines, tires, T-shirts,
etc.—three times more expensive across the board would not be politically
popular. Even the local T-shirt cartel bosses would complain about their
gasoline bills and the cost of a new gas turbine. There would, of course, be
immediate pressure for exceptions and special treatment for politically
sensitive goods, which would undermine the whole system.
A better alternative would be a tax on a single critical
good, such as energy. That’s what “carbon pricing” really amounts to: an energy
tax. Because basically everything anybody makes, consumes, uses, or eats is
made with energy—from growing food to powering factories to transporting goods
to market—a tax on energy has the advantage of being spread throughout the
economy in ways that make tax avoidance very difficult and economically
inefficient. Assuming that you could stop refineries from engaging in black-market
diesel sales, everybody would pay the tax in a way determined by his
consumption patterns.
A good tax system does one big thing (produce sufficient
revenue for public needs) and it avoids doing one big thing (distort productive
economic activity). A big carbon tax would distort economic activity, but it
would mainly distort it in ways that carbon-tax advocates would celebrate:
encouraging less overall energy consumption and a switch to lower-carbon
sources of energy. The individual income tax, the supplementary payroll tax
that supposedly funds Social Security and Medicare, and the business income tax
all produce lots of inefficient economic responses. Consumption taxes—sales
taxes, of which tariffs are an example—do, too, though they arguably can be
designed, in theory, to produce less distortion.
Tariff advocates want distortion: They want U.S.
consumers to behave in efficient ways, substituting inferior domestic goods for
superior imports. (Of course they are inferior—we have the revealed
preferences of consumers to confirm that.) They have this batty idea in their
heads that Americans are victimized by foreigners who want to provide them with
goods and services at better prices than they can get elsewhere. It’s bananas,
but it’s a longstanding superstition.
The problem, of course, is that most U.S. exports go to
the same countries that provide most U.S. imports: Canada, Mexico, China, and
Japan. If you think about it for two seconds, this makes sense: When some
scheming Canadian victimizes an American by selling him good, affordable lumber
out of which to build a house, that Canadian ends up with a pocketful of gently
depreciating U.S. dollars. What can he do with them? He can buy stuff that is
priced in dollars, meaning that he can buy American-sourced goods or invest in
dollar-denominated assets, such as shares in U.S. businesses. (He can go to the
foreign exchange market and swap them for loonies, sure, but then somebody else
has some dollars to spend, with the same choices.)
In some countries, people with dollars mostly use those
dollars to buy U.S.-made goods, and, in other countries, people with dollars
mostly use them to invest in U.S. assets. In the former case, we have a trade
surplus with that country, and, in the latter case, we have a trade deficit,
which is the flip-side of a capital surplus. Trade deficits aren’t really a
thing—a “trade deficit” is a figure of speech. But our negative balance of
trade with China, for example, doesn’t come from Beijing being so sneaky when
it comes to trade policy—it comes from Beijing being constrained by economic
reality to invest in a lot of U.S. Treasury bonds and other dollar-denominated
assets, because China’s currency is crap compared to the U.S. dollar, and
everybody knows it.
This is why poor countries hold a lot of dollars in their
reserves if they want to be taken seriously as economic players. They get those
dollars by selling goods to Americans, and then they use those dollars to buy
assets, mainly U.S. government debt, which has the effect of keeping interest
rates on government debt low and thereby subsidizing Americans’ higher
standards of living. They don’t do this because they love us, of course—as Adam
Smith knew about the baker and the butcher, they have their own reasons!—but
it’s good for Americans, nonetheless.
“But what about Detroit? Huh? Harrumph!”
Cars are an emotionally charged subject for Americans.
But do you know what would do a lot more to make GM products more competitive
against Toyota or BMW? Building better cars at better prices. You can’t tax
your way into a world in which the Chevy Equinox doesn’t suck.
Words about Words
I made, and corrected, a typo above, having written not
“pity the fool” but “pithy the fool.” I think Pithy the Fool would make
a good title for a memoir, but I’ve already settled on The Gun Didn’t
Know I Was Loaded.
In Other Wordiness …
Headline:
“Trump’s rapper schtick is for MAGA.”
Shtick is one of those words that gets
misspelled frequently. I think there is just something kind of Germanic/Yiddish
in the sch formation, as in schnauzer or Schmidt, and shtick
sounds like it should be in that category. But the word is shtick. It is
indeed of Yiddish origin, borrowed from the German word Stück, meaning
“a piece,” comparable to the English comedy-jargon expression “a bit.”
In the wider world of illiteracy, another headline:
“‘Bridgerton’ gives us hiatus interruptus.” Ye gods. A hiatus is an interruption,
as in a gap or a pause. Hiatus interruptus would make
sense—it would still be stupid, but it would make sense—if we were talking
about a hiatus that had itself been interrupted, as in a professor coming back
early from a sabbatical. But the column is just about a regular ol’ hiatus.
Dog Latin terms such as hiatus interruptus are
variations of coitus interruptus, a fancy way of indicating the most ancient form of birth
control. I guess because the article is about Bridgerton, which
I’ve never seen but take to be a pretty sexed-up show, the indirect reference
to coitus seemed clever to somebody.
Somebody dumb.
Also …
I’m a watch guy, so I get a lot of interesting spam meant
for rich people. The latest is from Tourneau bearing the headline: “Wear art on
your wrist.” Well, what admirer of high horology doesn’t want to wear art on
his wrist? The items referenced include … a foot-high, 16-pound mechanical
desk clock. (By Ulysse Nardin, about $73,000.) Flava
Flav couldn’t wear the thing—not even with a high-tech suspension
system and a back brace—much less wear it on his wrist. Pay attention,
marketing weasels!
And Furthermore …
From The
Hill: “Stephanopoulos: Biggest debate question should be ‘Who won the
last election?’” That’s a great question. I should have thought of that. Oh, I did.
I hope you’re paid up, Stephanopoulos.
Speaking of George Stephanopoulos, a
Stephanopoulos-related story that is only tangentially about politics.
Stephanopoulos was a pretty big deal when I was in college and he was in the
Clinton administration. Clever young fellow—you know the type. In 1995,
Stephanopoulos was arrested after a car accident and charged
with leaving the scene of an accident and driving with an expired
license. The assumption—never proved—was that he had fled the scene because
he’d been drinking and wanted to avoid a DUI charge.
What I remembered from the story was that he was driving
a red Honda CRX. I was surprised—and kind of disappointed! Here was this guy
who was famous, accomplished, seated at the right hand of big-time power, and
he drove a basic Honda—not even a new one! At the time, I didn’t understand
that it is the very disconnect between money, power, and celebrity
that drives so much of the social dynamic of life in Washington and in the
media. (I should have
listened to Bernie White.) I’d later experience this for myself when
friends who would see me on television (I used to do the pundit panels on Fox
News and elsewhere when I was in New York) would assume that I had private-jet
money because they’d seen me on television, unaware that I didn’t even get paid
for that stuff, that it’s just one of the things you do if you work in a
particular kind of journalism.
CRX. Man, what a disappointment. But then again, I used
to have a really cool motorcycle until a few months ago, when I bought … a
Honda. A minivan, of course.
And Furtherermore …
Slate still can’t
get bump stocks right. Do I even need to point out that this is, you know,
not true?
When done correctly, by contrast,
“bump firing” can then unleash a spray of bullets without repeated pulls of the
trigger, and at the rate of an automatic weapon.
In bump firing, the trigger is actuated one time for each
round fired, exactly as with an ordinary semiautomatic weapon, which is what a
rifle with a bump stock is. Faster, yes; automatic, no.
Everybody is all … up in arms? … over the Supreme
Court’s bump-stock
decision. Well. Does anybody remember who passes the laws in this country?
Congress does! And bump-stock bans have been proposed in Congress, which has,
so far, declined to take them up. It’s a silly and symbolic idea—you don’t need
a bump-stock to bump-fire; it just makes it easier—but a bump-stock ban would
probably stand Second Amendment scrutiny. I can’t see why it wouldn’t. If
Congress were to, you know, pass a law or something.
In Conclusion
The Canadians are apparently worried about the prospect of a civil war in the United States. I think there is far too much apocalyptic fantasy in our politics and discourse already, and I do not think that a civil war is very likely. But, still, one can see how the idea would spook the ’Nucks. If they were clever, they’d figure out a way to build a wall and get America to pay for it.
No comments:
Post a Comment