A Shoe Thread? 😉
I promised a well thought out response to the below exchange from a few days ago:
coldwarrior wrote:
a nice summary
Free trade is an elegant concept in the 18th century pages of Adam Smith’s The Wealth of Nations. The Portuguese export wine to Britain, and the British export woolen goods to Portugal — a win-win situation, your Econ 101 professor would say. In the real world of the 21st century, “free trade” means 25 years’ worth of treaties and arrangements in which the U.S. hews to the Smith playbook while China, for example, puts its thumb onto the scales via rock-bottom wages, allegedly ignored labor violations, poison-level air and water pollution and a manipulated currency. And free trade hasn’t exactly delivered Smith’s promised export benefits to the U.S. We currently run an almost $366 billion trade deficit with China alone and a $484.1 billion trade deficit worldwide.
its called economics gentlemen. i suggest yinz take a course or three
From Flyovercountry:
O.K., so here’s my answer. You’ve on more than one occasion accused me of citing esoteric theory that has been proven wrong by real world results, and my answer is that the opposite is true. Your class room training, as strong as it was, has given you wonder esoteric theory that loses out to real world results. Our problems have been the result of bad government policy which have disregarded Adam Smith’s lessons.
I worked in the ‘real world’ for 8 years using the tools, theories, and logic of both high level statistics and economics. Believe me, I NEVER let a theory get in the way of making a real world decision; my job depended on it and so did the shareholders of the very public company that I worked for. I was very, very seldom wrong.
You have, like many modern economists, conflated currency with money, and conflated those two concepts with actual production and wealth. Currency is a measure of wealth, to a point. Where we get into trouble is when we assume the two to be the same thing, and not just the attempt of societies to have one be the representative of the other. You can do all the math in the world that you want, but in the end, currency, even when backed by gold, is only worth the value in terms of productivity that the society as a whole gives it. I have in my wallet right now, a $50 Billion bill from the nation of Zimbabwe. I have in my desk in my office, a stack of Zimbabwe bills that I hand out to clients. All told, I have well over a Trillion Dollars in Zimbabwe money. Give me your home address via email, and I’ll mail you a Zimbabwe bill and a U.S. first class mail postage stamp. Guess which one holds the greatest value in terms of current U.S. Dollars.
I have never conflated currency with money; I may have been sloppy in some posts, but never conflated. Money and currency are two very very different things. Money is a medium of exchange, a standard measure of a unit of trade, and a store of value. Currency is the physical manifestation of Money when brought out for use. For instance, eggs and bacon can be currency. Farmer Bob has eggs, Farmer Dave has a bacon. Bob wants some bacon to go with his eggs in the morning and Dave wants to have some eggs with his bacon. So they get together and trade eggs for bacon. Eggs and Bacon are then a currency at that point of trade that represents a store of the money of time, effort, and outlay to produce the bacon and eggs. Bob and Dave both have marvelous breakfast. What the exchange rate of these currencies are are up to the market. Currency is not a measure of wealth, it is only a physical manifestation of Money. Currency is whimsical and can be manipulated, Money not so much.
When China subsidizes goods and services to sell to us here, China is in effect giving us foreign aid. If I give you a car for free, one of those cool Elio things, the ones that get 84 mpg, you would be $6800 wealthier, and have a trade deficit with me of $6800. Would you take that deal? Would you part with $6800 of Zimbabwe money to pay for it? (Making change would be difficult for me, as $200,000 is the lowest Zimbabwe denomination that I have.)
Here you are conflating microeconomics with macroeconomics. Each time China subsidizes/plays with exchange rates/uses slave labor/etc they are indeed giving foreign aid for ONE transaction for your car in question to one consumer. In a microecon analysis where there are no other factors, then it is a good deal. Or is it? Hmmm…I like to place my microecon hiking boot story here. 15 years ago I bought a pair of Danner Mountain Light hiking boots. Yep, $350. I have had them resoled/repaired twice at a total of $200 for a grand total of $550. This makes those Chinese $36 boots that might last one year at Walmart look like a great deal! Or are they? 550/15=$36 dollars a year for top end boots. My feet, legs, and back are happier and my wallet is heavier by buying a quality (and American made) product (a macroeconomic analysis of boots follows later)
It’s not just about Adam Smith, but also Frederic Bastiat. I know that you can point to the very visible and concentrated people in particular industries who’ve lost jobs making this or that due to cheaper prices being charged by China, but what about the diffuse effects of everyone else being asked to pay higher prices for those same goods and services? People use those goods and services to produce other goods and services, and their businesses are adversely affected when you ask for them to pay higher prices in order to benefit the smaller more concentrated and visible directly affected industry. The unseen is as important as the seen. It is the broken window fallacy on steroids, grown fat beyond recognition.
Now you jump to macroeconomics from a micro example. So, lets proceed in a macro framework whilst visiting the micro. As stated earlier, Smith is fantastic for Farmer Bob and Farmer Dave…or for England (wool products) and Portugal (Port Wine). Wool and Port are disparate goods as are eggs and bacon. England is good at wool and Bob is good at eggs; Portugal is good at Port and Dave is good at bacon…happy Smithian free trade ensues and all grow wealthy and happy and the Scots get to wear great tartan kilts and drink marvelous Port whilst a proper breakfast is had by all!
If Portugal started undercutting British wool production with subsidies then there is a problem. If Portugal started to hurt the British Wool trade badly through subsidies and cheating, Smith would not defend that. The instant the ‘Invisible Hand’ is disrupted the game is over. Indeed, he warned about what is going on right now both domestically with the Chamber of Commerce ideas and manipulation of ‘free’ trade by nations disregarding the ‘Free Hand’. Would Smith defend Korea’s actions of dumping pipe into America given that America spends $$$ to defend South Korea. This is currency that Korea does not have to spend in its own defense. Korea chose to subsidize their gas pipe industry to provide employment and then dumped tons and tons of it here. He would not defend that.
Since we are already talking about boots from before, lets hike down the path of your above paragraph using a macroeconomic approach: If I buy a pair of boots from China, the wholesale cost goes abroad. The Danners are made on the West Coast so transportation costs and benefits to the truckers and warehousemen are the same to get them to me. I don’t want to get too wonky, but there is a thing called the ‘multiplier effect’ and this is where your conflation above between micro and macro theory becomes most problematic in the real world:
When I paid $350 and then the $200 for repairs, that is $550 that remained in this economy. The 15 years of Chinese boots leaves the economy. My boot money went to an American worker and company. That worker paid his bills, paid his mortgage, put money into his 401k, and bought goods and services over and over again. Those dollars multiply through he economy over and over again. Danner bought more leather and metal and rubber and shoe stuff made here. More American workers and companies got paid and the wonderful, virtuous cycle continues. (Imagine what happens when durable goods made in America are purchased!). Your windfall of cheap goods and services is outrun by the loss of total benefits from the multiplier effect. Do you not find the lack of inflation problematic? (This will get its own post I am sure 😉 ) . Blood pressure goes down as the body gives out to septic shock.
This entire post comes down to one question: If your cheap goods bought with an ever expanding trade deficit through more and more ‘Free Trade’ agreements are so good for the macroeconomic well being of America, where are the results? Where’s the beef…or Where’s the Bacon!
From the OP:
Free trade is an elegant concept in the 18th century pages of Adam Smith’s The Wealth of Nations. The Portuguese export wine to Britain, and the British export woolen goods to Portugal — a win-win situation, your Econ 101 professor would say. In the real world of the 21st century, “free trade” means 25 years’ worth of treaties and arrangements in which the U.S. hews to the Smith playbook while China, for example, puts its thumb onto the scales via rock-bottom wages, allegedly ignored labor violations, poison-level air and water pollution and a manipulated currency. And free trade hasn’t exactly delivered Smith’s promised export benefits to the U.S. We currently run an almost $366 billion trade deficit with China alone and a $484.1 billion trade deficit worldwide.
We have 20% real unemployment and pointless GDP growth. THIS is where adherence to ‘theory’ over reality fails miserably. The decline of the American economy is directly related to the joining of these ‘Free Trade’ (which they are not) treaties. It started with NAFTA, GATT really began the destruction, when does it end?
I can find nowhere in history where a country as strong as America willingly let itself get economically destroyed by allowing its trade ‘partners’ to lie, cheat, and steal. This is not capitalism driven competition, this is not Smith’s idea of Free Trade. That trade deficit we carry is a marker for unemployment. That deficit is jobs, jobs AND the multiplier that I explained above.
Our trade deficit of $420billion is roughly worth 3.5million jobs (up to 5million, giver or take). All those jobs making the multiplier effect turn into virtuous cycles all over the joint! Yes, a great chunk of this is directly because DC wants us to be poor and stupid, and a great chunk is because of this moronic idea of Free Trade (these are not mutually exclusive). Uncles Milty and Smith would never allow America to go down the path it is going over adherence to their theories. And frankly, if they did, I have no time for them.
In the end, tariffs only hurt those societies who employ them, be they China or the United States.
In the end, there is no evidence that tariffs hurt those who employ them. How about that Toyota Camry? Harley is looking good. I love those Benz’s built in ‘Bama! The Nissan Trucks are excellent too! Kia…etc…
Let’s also not forget that the entire devaluation thing began here, in our own country, by our own Democrats.
The dollar free floats in a violent and hungry shark tank, its value is what the market will pay; lie to the market and prepare to die. The Yuan is pegged and manipulated without real consequences, so far.
China’s bit of shooting themselves in the foot economically is the direct result of China attempting to do to us what we’ve been doing to them for quite some time now
China learned everything we taught them, we didn’t teach them everything that they needed to know.
PS: Some applied microecon on Bastait and ‘fat’ broken windows. Just before you are about to show you house for sale, how about someone comes along and breaks a ton of windows and messes up a bunch of your neighbor’s properties?
—Yours, Warm Regards,
Coldwarrior
