Trade War? Bring It On!

Lots of folks are hyperventilating about the possibility of a trade war with China. I see this as a result of wide-spread misunderstandings about the economics of trade between countries.

So let me start from the basics. There are three and only three ways to create wealth. What is wealth? It is the stuff that we use, that we eat, that we build with. Cars. Medicines. Clothing. Tools. Vegetables. Oil. Fish. Electronics. And there are only three ways to create them.

1) We can grow wealth. Start a farm. Get seeds and begin growing vegetables in the backyard. Plant acres of trees.

2) We can extract wealth from nature. Dig an oil well. Go fishing. Cut down trees. Mine for gold.

3) We can manufacture wealth. Build a car manufacturing plant. Knit sweaters. Build houses. Make electronic gear.

Let me refer to these three ways to create wealth as “farms, fishing boats, and factories”. And of these, the most important is manufacturing—you cannot generally triple the amount of food from an acre, or triple the amount of oil coming from a well.

But you can triple the output of a factory without breaking a sweat—so manufacturing should be looked after and cared for and promoted at every opportunity.

Everything else is services—bankers, barbers, bookkeepers, surgeons, stylists, singers. They are important, some are life-and-death important … but they don’t create any wealth.

Now, if a country is smart, it will do everything it can to build and strengthen the part of their economy that is “farms, fishing boats, and factories”. Unfortunately, somewhere around 1985, the US got really stupid and bought into the “free trade” and “globalism” fairy tales … and since then, our manufacturing sector has gone to hell.

And why not? When a company can move a factory to Mexico and pay their workers $3 per hour with no workmen’s compensation insurance and no tariffs when they sell their goods in the US, why not? They’d be foolish to do anything other than move … and as a result, the “Rust Belt”, the industrial heart of our country is either dying or dead. With the factories gone to Mexico and China, the towns have nothing to keep them going.

Signing on to agreements like the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) is one of the stupidest things that the US has ever done … and it has cost us greatly. Here’s Presidential Candidate Ross Perot, who like President Trump was a businessman rather than a politician, speaking very presciently on the subject in his inimitable style:

 

Now, this objection to “free trade” and “globalization” is not a new idea. In 1684, an economist named Philipp von Hörnigk wrote a short essay with the lovely title of “Nine Points on How to Emulate the Rich Countries”. Here are some of his prescriptions for how a country gets rich, recommendations that are even more important today than they were in 1684. First, here is his recommendation about manufacturing. In all cases, the emphasis is mine:

… all commodities found in a country, which cannot be used in their natural state, should be worked up within the country; since the payment for manufacturing generally exceeds the value of the raw material by two, three, ten, twenty, and even a hundred-fold, and the neglect of this is an abomination to prudent managers.

Manufacturing is the easiest way to produce wealth, and thus we should do it ourselves and not farm it out overseas.

And that long ago, Philipp foresaw the huge trade deficits that our economic stupidity have brought us:

… the inhabitants of the country should make every effort to get along with their domestic products, to confine their luxury to these alone, and to do without foreign products as far as possible (except where great need leaves no alternative, or if not need, widespread, unavoidable abuse, of which the Indian spices are an example).

Unfortunately, we have ignored this excellent advice and addicted ourselves to foreign products. He goes on:

… in case the said purchases were indispensable because of necessity or irremediable abuse, they should be obtained from these foreigners at first hand, so far as possible, and not for gold or silver, but in exchange for other domestic wares.

In that paragraph, the author is warning against running up a trade deficit as we have foolishly done. He says that we should sell the same amount of goods overseas as we buy. He then says

… such foreign commodities should in this case be imported in unfinished form, and worked up within the country, thus earning the wages of manufacturing there.

Sadly, we are doing the exact opposite of this excellent advice—we are exporting raw materials and importing manufactured goods, and rather than US workers, the Chinese workers are “earning the wages of manufacturing”. Here is the sad record of our current trade deficit in goods with China:

us-china goods trade deficit.png

We are sending raw materials to China, importing manufactured goods, and wondering where our manufacturing jobs disappeared to … this is the exact opposite of Philipp von Hörnigk’s excellent advice. He said (emphasis mine):

…opportunities should be sought night and day for selling the country’s superfluous goods to these foreigners in manufactured form, so far as this is necessary, and for gold and silver; and to this end, consumption, so to speak, must be sought in the farthest ends of the earth, and developed in every possible way.

A country gets rich and stays rich by importing raw materials, manufacturing goods from the raw materials, and selling them as widely as possible … just as we used to do, and as China is doing today.

At present, as the graph above shows, we are sending about a third of a trillion dollars to China every year … and we wonder why their economy is booming? We fret and fuss because a border wall might cost twenty billion, and meanwhile, we are foolishly pissing nearly twenty times that amount down a Chinese rathole every year.

So let me bring this back to the title. I have no fear of a trade war with China, because the worst-case scenario of a trade war is that all trade between the two countries stops entirely … and that will put a third of a trillion dollars back into our pockets every year, year after year. In addition, it will totally revitalize our moribund manufacturing, because we will have to do what Philipp von Hörnigk recommended—live off of what we produce ourselves.

People object to this, however, saying things like “How can the poor consumer live without cheap Chinese goods?” But the reality is, if your factory just closed down and you are out of a job, cheap Chinese goods mean nothing. Next, that ignores the billions and billions of dollars that will be spent in the US and not overseas.

And there is a third consideration. Look at the history of our trade deficit with China:

history us china trade.png

Thirty years ago we had no trade deficit with China, or with Mexico for that matter, and our economy worked just fine. But then we signed on to NAFTA and the World Trade Organization, and just as Ross Perot predicted, we killed our manufacturing sector. Here’s the history of our trade with Mexico:

effect-of-nafta

See when we went off the rails? As soon as we signed on to the NAFTA agreement. And here’s the history of our trade deficit with the world.

us-global-balance-of-payments

Note that our stupidity is currently costing us two-thirds of a trillion dollars per year, half of which is going to China.

So my third point is that a trade war is not dangerous to us because, as you can see, as recently as the 1980s we didn’t have a trade deficit with China, Mexico, or the world … and we got along just fine.

And since this is the worst-case outcome of a trade war, I would be overjoyed to see a trade war start. We are the suckers in this global game, and as a result, a trade war can only make our position better.

This is also the reason why our trading partners are screaming so loudly about the possibility that we might impose tariffs on their goods … because we are currently the losers and they are currently the winners in the deal. That means that they can only lose in a trade war, so of course, they’ll oppose tariffs with all their might … and we can only gain in a trade war. The fact that our economic competitors hate the idea of US tariffs is solid evidence that such tariffs are a very good idea.

Finally, here’s what passes for the “free trade” that everyone is so hyped up about.

The European Union charges a 10% tariff on all cars that come from the US.

China charges a 25% tariff on cars from the US.

And us? We’re the pathetic idiots in the game. We charge a pathetic 5% tariff on the importation of foreign cars … and people call this “free trade”??? Of course the EU and China don’t want us to rock the boat—they’re taking us for fools and they don’t want to stop.

The President is 100% correct. Our trade deals are a pathetic joke. We need to renegotiate all of them, we need to stop importing goods that we can manufacture here, we need to follow the excellent recommendations of Philipp von Hörnigk from 1684, and we need to impose tariffs on a wide variety of imported goods.

Which is why I say, bring on the trade war! It can only do us good, and it might just save us two-thirds of a trillion dollars per year. What’s not to like?

In closing, my best regards to each and every one of you. Hug your families, tell your friends that you appreciate them, walk in the rain, play in the sunshine, life is far too short …

w.

FURTHER READING: I was a strong advocate of free trade until I read How Rich Countries Got Rich and Why Poor Countries Stay Poor. Erik Reinert lays out all of these points far better than I. I cannot recommend this book too highly. If you want to shed your economic innumeracy, this is the book that will do it.

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122 thoughts on “Trade War? Bring It On!

  1. Willis, thank you for this article. Could you please make a comment or two about the counter argument that if we, say, cut off manufactured goods coming from outside the US, then the cost to the consumer in the US will increase dramatically? I’m thinking of situations like Japan where the cost of living is so ridiculously high because of protectionistic trade policies. Thanks. Victor

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    • First, cheap goods are meaningless when your factory has been shipped to Mexico and you are unemployed.

      Second, as Philipp von Hörnigk said in 1684

      Ninth, except for important considerations, no importation should be allowed under any circumstances of commodities of which there is a sufficient supply of suitable quality at home; and in this matter neither sympathy nor compassion should be shown foreigners, be they friends, kinfolk, allies or enemies. For all friendship ceases, when it involves my own weakness and ruin. And this holds good, even if the domestic commodities are of poorer quality, or even higher priced. For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.

      See my post “True Wealth” for further discussion of this idea.

      w.

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  2. “farms, fishing boats, and factories” . ‘Fisheries’ might be a snappier alliterative synonym.
    There are other factors favouring wealth creation, although not in themsleves wealth in the sense you use: education, infrastructure, communications, record-keeping, a legal system, police…but I do see what you mean. It wasn’t until England started industrialising in the 18th C that it became a world power.

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  3. Willis,

    On a trip to the northwest last August I was stunned by the amount of timber (raw logs) decked along the Columbia river. From Astoria all the to Vancouver our national wealth was being bled out to be shipped over seas to be sawn and planed into lumber. Meantime trainload after trainload of Canadian lumber rolls into the US on a daily basis. How many sawmills have closed? How many lumber towns have disappeared? How many sustainable jobs have been forfeited on the hideous altar of free trade?

    When I worked on a farm for a time, the common wisdom was that every farm dollar was spent seven times before it left the local economy. I expect that local lumber mills would exhibit a similar economic boost. And instead we load the trees on a foreign ship to be multiplied in value in another country while we subsidize those who have lost their jobs here.

    Thanks for the great piece.

    pbh

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  4. Interesting analysis, Willis. Warding off foreign-made goods with tariffs might well bring back some manufacturing into the US, but at much higher prices, thus reducing aggregate demand. In general, reduction in aggregate demand is not a good thing for an economy. I’m not a sufficiently sophisticated economist to judge how that all works out in terms of overall economic health. Much to ponder.

    In theory, though, exporting lower-technology/ lower value goods should allow the US to have more capital and labor available for higher technology and higher value manufacturing (e.g., chip design, heavy equipment, aircraft, pharmaceuticals, etc.). In theory, that should benefit the economy…if labor can be re-purposes to these requirements and if the global aggregate demand for such goods is sufficient for full employment.

    Since graduate school (business/ economics studies) bought into the “free trade” argument that free trade allocates capital, labor, and entrepreneurial activity in the most globally efficient manner…and that an optimally efficient global economy benefits all. That was an easy theory to accept when the US, as a sovereign, was far stronger and economically more successful than any other sovereign. Now, with a significant portion of our wealth having been attritted away to China and the Middle East, I, like you, have re-thought the premises and implications of such an approach on our economic and societal health, and am left wondering.

    Thanks for the book reference.

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  5. Excellent job Willis! Most folks just can’t get past a headline and into the math of things now days.

    I had a discussion a while back with one of those folks on a similar subject. The $15 an hour wage item for unskilled workers. Walmart was in his sights. He insisted that they should make that $15 item happen, and at the same time keep prices low for him, and also keep the stock price high for him as a stock holder. I told him he was talking out of 3 sides of his mouth and to take a course on basic economics.

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  6. Just from memory, I read a long time ago pointed out something similar to what you say. The countries who primarily export raw materials (think third world) are way poorer than those that export value added goods (think first world).

    International companies are another problem. Why would they care if we have a trade deficit? They’re going to do what serves themselves.

    Free Trade is an illusionary feel good term like communism. About as real as free lunch (TANSTAAFL). Japan plays the game by creating importation rules that make is difficult to bring products into the country. Just something as simple as a baseball glove wouldn’t meet their standards at one point. Top that off with the interlocking nature of their companies and you have only a trickle of things getting in. Oh, and notice that companies like Sony buy our companies but I doubt that the reverse is true. Countries like China and Viet Nam also aren’t likely to allow US companies in and if they do they’ll always be in danger of losing their assets if the rulers decide to take them.

    One area of trade that you didn’t address is the intangibles. This doesn’t affect the average American but it does relate to trade. By intangibles I mean things like software and media. American movies and computer software are big overseas but employ a relatively small part of populace here for example. How much of that money actually comes back here? Those items would show up on the plus side of the balance sheet but I doubt if they are more than a drop in the bucket.

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  7. I think that the key in these discussions is who benefits from the kind of trading agreements the USA entered where goods from China and other nations come into the USA practically tariff free or with much smaller tariffs than other countries charge American goods. The investor class in the USA has benefitted from that enormously. They got to profit from low labor costs in China and practically no environmental controls while being able to sell in the USA market. So, many previously USA manufacturers became importers in fact. A few years ago I remember LOLing on hearing a presenter in CNN referring to Matel as an American manufacturer with manufacturing facilities overseas! Given that Matel, even then, didn’t manufacture anything in the USA that was clearly an awkward way of obscuring the fact that this company had become simply an importer which holds some patents. Clearly Chinese workers also benefitted with hundred of millions being lifted from abject poverty. But the price paid by the USA working class was very heavy as well as the price paid by the governments at all levels in the USA. No wonder that the economic elites in the USA went all “globalist”! At the same time the deliberate decision not to do anything about illegal immigration and the legal importation of highly skilled labor from abroad by tech companies is a nice (from a “globalist” point of view) complement: it keeps pushing labor costs in the USA down. Thanks for a lucid discussion of this situation.

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  8. I have two philosophical points to make that do not necessarily affect your main argument, but still may be of interest:

    1) There is a fourth way of creating wealth: trade / exchange. Say, you have a pack of chocolate but you hate chocolate, while you absolutely love gummy bears. You meet somebody with the inverse set of likes and dislikes. So, you exchange your sweets, and each one has created wealth, where it had not been available to him before.

    This leads me to the definition of wealth: The essence of wealth is the ability to satisfy a desire (at one’s discretion). The successful fulfilment of a desire may be classified as a gain, a benefit or an advantage vis-à-vis a state of affairs, when no such fulfilment has been accomplished.

    By extension then “creating wealth” refers to an act that provides one with “a gain, a benefit, an advantage” ( i. e. results of the fulfilment at one’s discretion of a desire/desires).

    2) On these grounds, I would challenge your thesis:

    “Everything [except the above three ways of creating wealth] else is services—bankers, barbers, bookkeepers, surgeons, stylists, singers. They are important, some are life-and-death important … but they don’t create any wealth.”

    Services like cutting somebody’s hair do create wealth. For instance, assuming a “normal” human being, if I [or a doctor] manage[s] to heal my broken little finger, I have been provided “with a gain, a benefit, or an advantage” that I have strongly desired and whose immediate provision at my urgent discretion represents a capacity that we call wealthiness. I suspect, most wealth creating services may be classified with other forms of manufacturing.

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    • Georg Thomas says:

      I have two philosophical points to make that do not necessarily affect your main argument, but still may be of interest:

      1) There is a fourth way of creating wealth: trade / exchange. Say, you have a pack of chocolate but you hate chocolate, while you absolutely love gummy bears. You meet somebody with the inverse set of likes and dislikes. So, you exchange your sweets, and each one has created wealth, where it had not been available to him before.

      Clearly you are not an accountant. Since I am one, I can assure you that trading assets does NOT create wealth. If I give you $100 worth of coffee and you give me $100 worth of tea, there is no wealth created. Ask your accountant, or the IRS, if you don’t believe me.

      You also say:

      Services like cutting somebody’s hair do create wealth. For instance, assuming a “normal” human being, if I [or a doctor] manage[s] to heal my broken little finger, I have been provided “with a gain, a benefit, or an advantage” that I have strongly desired and whose immediate provision at my urgent discretion represents a capacity that we call wealthiness. I suspect, most wealth creating services may be classified with other forms of manufacturing.

      I’m sorry, but that is not true. To understand this, suppose there are two couples on a tropical island. One person fishes, one has a garden, one gathers food and building materials from the forest, one makes clothes from local fiber. They could go on for a long time that way, they are creating real wealth. They will live in comfortable houses, and eat and dress well.

      But suppose on the next tropical island there are two couples, and one person is a barber, one is a doctor, one is a journalist, and one is a musician, noble occupations all but services all … that society will have nothing to eat, nothing to wear, nothing to keep them from the rain. They will starve to death naked outdoors. None of those occupations create wealth, while all of the activities on the first island all do create wealth.

      Best regards,

      w.

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      • Thank you for your answer.

        I am puzzled.

        First you argue wealth is what your accountant or the IRS tells you what it is. Then, you arbitrarily and needlessly impoverish the term “wealth” by equating it with “indispensable requirements for basic survival”. Even your accountant has a broader notion of wealth than you do.

        What do you not like about my wider definition of wealth?

        Different people have different notions, different classifications of wealth. While the accounting classification may or may not overlap with other classifications (such as mine), it does not invalidate the logic of my reasoning: chocolate does not represent a (wealth-establishing) benefit to me, but gummy bears do (see above). So being able to trade makes the difference between enhancing my wealth and not-enhancing my wealth.

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        • Georg Thomas March 27, 2018 at 12:19 am

          Thank you for your answer.

          I am puzzled.

          First you argue wealth is what your accountant or the IRS tells you what it is. Then, you arbitrarily and needlessly impoverish the term “wealth” by equating it with “indispensable requirements for basic survival”. Even your accountant has a broader notion of wealth than you do.

          Georg, I didn’t say that “wealth is what your accountant or the IRS tells you what it is”. I said nothing of the sort.

          I said that both the IRS and an accountant will tell you that trading an asset for another asset doesn’t create wealth.

          Best regards,

          w.

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      • “I can assure you that trading assets does NOT create wealth. If I give you $100 worth of coffee and you give me $100 worth of tea, there is no wealth created. Ask your accountant, or the IRS, if you don’t believe me.”
        I believe the IRS disagrees with you on this one as I think that this was incorporated in the “tax simplification” of the Reagan era (where the tax manual actually increased significantly). As to how they enforce this at the individual level I have no idea (probably just one of those “laws” waiting for someone to trip over). The following is from IRS topic 420 @
        https://www.irs.gov/taxtopics/tc420 and there is even a requirement to provide estimated tax payments if knowing in advance.

        “Reporting Bartering Income
        You must include in gross income in the year of receipt the fair market value of goods or services received from bartering. Generally, you report this income on Form 1040, Schedule C.pdf, Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ.pdf, Net Profit from Business (Sole Proprietorship). If you failed to report this income, correct your return by filing a Form 1040X.pdf, Amended U.S. Individual Income Tax Return. Refer to Topic No. 308 and Should I File an Amended Return? for information on filing an amended return.”

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        • Thanks, BFL. I fear that you’re confusing income with wealth.

          You’re If I give you $100 worth of coffee because I prefer tea, and you give me $100 worth of tea because you like coffee, neither of has increased our wealth. The wealth is created in the growing of the tea and coffee. The amount of tea and coffee, and thus the amount of wealth, has not increased just because the owners of the tea and coffee are now different … that’s just a change in ownership, not an increase in wealth.

          In addition, in this instance, in addition to no wealth being created, there is also no income from the transaction. Now, if I trade you $75 worth of coffee for $100 worth of tea, then I have to report $25 in income to the IRS, “barter income” as they say above … but again, despite the income, no wealth has been created. We know this because the total amount of coffee and tea is the same before and after the trade.

          Again I’d point you to a Ponzi scheme to illustrate the difference between income and wealth. Yes, the starter of the Ponzi scheme has made money, but that’s a zero-sum game. For everyone making money, someone is losing money, and no wealth is created in the process.

          The wealth was created in one of the three ways I listed above—you can grow wealth. Someone grew the coffee and grew the tea, and as a result, there was more coffee and more tea in the world. That is the wealth, the stuff you are trading.

          But me trading coffee with you for tea doesn’t increase the amount of either tea or coffee, and thus no wealth is created.

          Not only that, but even if I make a profit on the deal and have to report income, there’s still not any wealth created—after the transaction, the amount of tea and coffee is still the same.

          If this doesn’t clarify it, ask more questions, make more statements … it’s how both you and I learn.

          Best regards,

          w.

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          • Oh I agree with what you say about wealth. My (not very clear point) was that the IRS rule was added to also cover “apparent” profits-not wealth (as your reference mentioned concerning the IRS). I believe that they expect one to report for gross income (via IRS article) the estimated “profit” difference say between a haircut traded (bartered) for a dental crown. And I was also trying to point out the absurdity and pettiness of this, especially considering the cost of any attempted enforcement. This rule compares with the insanity/inanity of having marijuana scheduled as a level I drug along side heroin by the DEA.

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          • The problem with the example is that the “value” of both the tea and coffee being traded are $100. That is only true at one point in time and space. The argument doesn’t take into account supply and demand. If I’m in Ceylon tea might be cheap because there is an overabundance of it, whereas in England, where the demand is high, the price would be much higher. So moving the tea from one part of the world to another doesn’t create any more tea but the “value” rises and creates wealth.

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          • Bear April 19, 2018 at 4:03 am

            The problem with the example is that the “value” of both the tea and coffee being traded are $100. That is only true at one point in time and space. The argument doesn’t take into account supply and demand. If I’m in Ceylon tea might be cheap because there is an overabundance of it, whereas in England, where the demand is high, the price would be much higher. So moving the tea from one part of the world to another doesn’t create any more tea but the “value” rises and creates wealth.

            Thanks, Bear, but you are conflating value and wealth. Suppose I have an old toy, and I run into an old toy collector. He thinks it is worth a thousand bucks, and pays me the $1,000 … yes, there is value, but once again no wealth has been created. We still just have an old toy, regardless of the price (value) that you put on it.

            Think about the old joke. Three guys wash up on a deserted island … and within two years they’ve become rich off of the profits made by trading sand with each other. Lots of value, but zero wealth created.

            The wealth is created when humans have something that they did not have before. In the case of the coffee and tea, wealth is created when the coffee or tea is grown. Before, no coffee. After, coffee. That’s wealth.

            But when coffee and tea are traded, no matter what value each party might put on the trade, nothing new is created. At the end of the day we still have a hundred pounds of coffee and a hundred pounds of tea. One guy might think he got a great deal. He says to himself, “This tea I paid $100 for is worth at least $150.” And he might sell it to the next guy for $150.

            But that does NOT mean that $50 in wealth is suddenly created. There’s still a hundred pounds of tea, you have $50 more … and the buyer has $50 less. No net gain.

            Best regards,

            w.

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          • @Willis Thanks for responding

            Thanks, Bear, but you are conflating value and wealth. Suppose I have an old toy, and I run into an old toy collector. He thinks it is worth a thousand bucks, and pays me the $1,000 … yes, there is value, but once again no wealth has been created. We still just have an old toy, regardless of the price (value) that you put on it.

            Maybe we’re lacking some common definitions. If I’m understanding your position, wealth is the creation of things of value. So the creator of the toy created “wealth” but if someone buys it and later sells it to the collector no new wealth was created, regardless of the value at that point in time? So how do you determine what amount of wealth is inherent in the toy? Can’t be based on the dollar value when the original creator sold the toy because he could have also sold it to the toy collector directly and received a larger amount for the same effort and materials. Conversely, if no one wants his toy then there is no value and therefore no wealth and you could argue negative wealth because resources were wasted. So nothing that is created that has no utility creates no wealth regardless of the value place on it?

            and within two years they’ve become rich off of the profits made by trading sand with each other. Lots of value, but zero wealth created.

            Good joke, but I would argue there is no value in the sand, to them at least, because there is no utility and an oversupply of the item where they are. Consider that Saudi Arabia imports sand. So moving sand that has no worth where it is to someplace where it does, while it is not a direct creation of wealth, is necessary to that final creation of something so some of that wealth accrues to the company that moved that sand.

            The wealth is created when humans have something that they did not have before. In the case of the coffee and tea, wealth is created when the coffee or tea is grown. Before, no coffee. After, coffee. That’s wealth.

            If I follow what you’re saying, the more coffee I create the more wealth I have created, but if no one drinks coffee where’s the wealth as I understand the term? However, if I can move it to somewhere where people drink coffee have I created wealth? One place it rots in the warehouse, in the other I can exchange it for something I want. There’s value created but can there be wealth without value?

            regards

            -B

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  9. A trade war will impoverish all the countries (or rather the citizens of those countries) that engage in it. A trade deficit is matched by capital account inflows. In a typical year foreigners take about $500 bn of what they earn selling goods and services to the US and use those dollars to acquire US assets. In other words the US has a capital account surplus. Total trade always balances. This inflow of foreign capital provides finance for capital creation and business investment and thus a more dynamic and prosperous economy. If you place tariffs on imports you are punishing your own consumers as well as US manufacturers that incorporate imported materials into their products. It is worth noting, by the way, that the trade deficit is a tiny proportion of US wealth which is approx $95trillion. Furthermore the total net worth of US household wealth increased by $2.3trillion in the first quarter of 2017. So even at the rate of €500bn foreigners are getting an even smaller percentage of ownership of the US. And that’s just household wealth. A trade deficit is nothing to worry about – it generates investment and wealth. To deliberately reduce it by import tariffs is to cut off your nose to spite your face.

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    • Richard, the investment back of funds for US assets means you are selling your future, since you have to eventually pay the investment off. You end out living in property owned by another country, and pay the price they demand for goods in companies they own. They will demand enough wealth transfer to raise their own country economy, and lower ours. We will lose many jobs and standard of living.

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    • Richard, you might consider it as a business. Suppose that your business buys more than it sells in total, as the US is doing vis-a-vis other countries. How long will that business stay in business?

      You say it’s OK because foreigners are buying the assets of the business … how on earth does that help? The business will go down the tubes whether the foreigners are buying the assets of the business or not.

      w.

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  10. There never was free trade except in the minds of US globalists.

    A personal example from a guy who was on a small consulting team tasked with either ratifying (aka CYA) or opposing (aka get fired but only after board is forced to let shareholders know the real deal) the board decision to shut down Harley Davidson in the late 1970’s motorcycle wars. I drew the short team straw and spent months in Japan with a translator figuring out their offense. Now, one defense idea was to start selling Harleys in Japan (heck, the Yakuza loved them) to price pressure the high end of Honda, Yamaha, Kawasaki, and Suzuki. Ah, those ‘samurai’ saw the trade counterthreat, and got the Japanese government to pass a new motorcycle license law requirement—‘perfectly reasonable on public safety grounds’. New special license to ride any motorcycle over 750 cc (the ‘big bike license’). Only one extra driver requirement to get it. Lay the big bike down on its side, then pick it up again, mount, and ride. You ever tried that with a Harley? Especially as a short stature Japanese?

    Now the ‘free trade’ con was this. Honda’s 750 cc bikes weighed as much and had MORE horsepower than Harley’s 1000 plus CC machines. The engines are fundamentally different. Honda was overbore high RPM, Harley was overstroke low RPM (low wear high reliability like WW2 airplane engine designs given that eras manufacturing precision capabilities). So Japan created an artificial non tariff trade barrier based on an engine design choice difference. Simple fact: At that time Japan had no models over 750cc and Harley had none under 1000cc

    Trumps bilateral reciprocity idea means the US would have slapped a similar license requirement on all Jap motorcycles with, say, HP greater than 60 (the then Harley 1000 cc Sportster number). Meaning all of their 750cc models. You see, overstroke designs have enormous low rpm torque so don’t need as much horsepower as gotten at high rpm. Anyone whomtoday listens to the Jap screaming crochrockets versus a rumbling Harley Hog gets this intuitively.

    To finish my Harley story, the conglomerate Board owning Harley did NOT accept our recommended plan to stand and fight, and did fire BCG. But the Harley management that believed us and with whom we had worked for almost a year did a leveraged buyout based on executing our plan, which had three basic parts: 1-get ITC antidumping duties (the Jap samurai were selling in the US below cost, my personal fact contribution and ITC testimony) for 5 years, 2-use the 5 years breather to fix major quality and obsolete manufacturing issues that were more management than capital investment, 3-sell the hell out of that overstroke low rpm Harley rumble that the Jap bikes could never copy. The rest is now history.

    So, a personal anecdote in support of Willis’ general but more abstract point.

    Liked by 2 people

    • Free trade is superb but it all hangs on the exchange rate and the hidden trade barriers.
      Rist you have the hidden trade barriers well covered the power to show a subsidy or regulatory advantage should be enshrined in every agreement.
      The exchange rate is a big issue and any action that distorts the relativities should be rewarded with an equivalent universal factor import tax or duty.
      One note of caution the US is a huge subsidizer of agriculture and industry it would be massively advantaged if this was removed and replaced with direct controls to eliminate the distortions in play.
      As a New Zealander we experienced the removal of all subsidies and the economy expanded massively the one bug I have is that exchange rates are distorted and only the US can influence this. Germany have an undervalued euro to play with and it has decimated a vast portion of the planets industries.
      Always be mindful of the “gain from trade theorem” however.

      Like

      • Not just undervalued Euro. German industry is also helped by low pay/high productivity ratio and even more by the low costs of borrowing from banks as compared with other Eurozone countries.

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  11. Willis
    Your definition of wealth is too narrow. You are limiting it to the necessities of food and shelter in the context of a primitive Robinson Crusoe economy. In modern economies services make up a much higher proportion of GDP than manufacturing. Approximately 80% of US GDP comes from services. This is broadly in line with other advanced economies. In Singapore, a tiny country of few natural resources, services are 75% of GDP and agriculture is zero. Yet it is one of the richest countries in the world with a GDP per capita approaching that of the US – thanks to trade.
    A movie has value but does not put food on the table or provide shelter. I willingly pay for a haircut or visit the doctor because their services have value to me. I listen to music and rad books even though they only feed me spiritually. Is this not true wealth?

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    • By way of supplement:

      (1) By equating subsistence level production with wealth — and limiting the term “wealth” to that meaning — we would not be able to recognise a difference between US-citizens (who survive) and citizens of Sudan (those, who survive) — they are both wealthy by virtue of being able to survive. It is not a trivial matter that the wealth difference is in actual fact gigantic and matters tremendously from the point of view of humanism.

      (2) Erik Reinert explains in his excellent book how less developed countries can get trapped as eternal low-value-added producers in a comparative advantage world of free trade, requiring protectionist measures to develop and shore up high-value-added domestic industry. I tend to agree with this position. The matter is different with highly developed countries.

      However, if we are committed to free trade, we have got to be honest about it. The US-administration is right to call us — hypocritical Europeans — on being the more egregious protectionists.

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    • Richard Smith March 27, 2018 at 1:08 am

      Willis
      Your definition of wealth is too narrow. You are limiting it to the necessities of food and shelter in the context of a primitive Robinson Crusoe economy. In modern economies services make up a much higher proportion of GDP than manufacturing. Approximately 80% of US GDP comes from services.

      Thanks, Richard. Hey, if you want to live on an island with nothing but barbers, bankers, and accountants, it’s up to you … but you’ll soon find out that they don’t create wealth, and you’ll starve to death.

      Look, I’m not saying that services are unimportant. As I said above, sometimes they are life and death … but they are not creating wealth. And yes, an island like Singapore can exist with 75% services and no agriculture … but only if they have access to people who are actually creating wealth. Without the wealth creators, Singapore wouldn’t exist.

      Think about it. Suppose everyone in the world, not just Singapore but the world, was simply providing services and had no agriculture or extraction … how long before everyone starved?

      Regards,

      w.

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      • My definition of wealth, (see above):

        “The essence of wealth is the ability to satisfy a desire (at one’s discretion). The successful fulfilment of a desire may be classified as a gain, a benefit or an advantage vis-à-vis a state of affairs, when no such fulfilment has been accomplished.

        By extension then “creating wealth” refers to an act that provides one with “a gain, a benefit, an advantage” ( i. e. results of the fulfilment at one’s discretion of a desire/desires).”

        If my definition of wealth is acceptable, then you are factually wrong in claiming that only products derived from activities ensuring basic survival may count as wealth. (Also, you are needlessly burdened with the obligation to list – if called upon to do so – what activities/products count as being able to ensure basic survival ( = wealth).

        Further, there is no practicable or indeed sensible way to disentangle wealth-as-subsistence from wealth-in-non-subsistence-form in a modern economy with a very intricate and deep division of labour and roundabout ways of production (even on the subsistence level).

        Wealth in modern society is precisely characterised by the fact that very few people engage in ensuring subsistence, with the majority involved in non-subsistence activities whose provision is key to their being able to survive at the level of basic needs. Also, these non-subsistence activities keep improving, even revolutionising the way in which we ensure basic survival (engineers don’t grow potatoes but they greatly improve the products quality and level of output).

        We fare better in acknowledging wealth creation in all its forms and ramifications, instead of privileging some activities as being capable of producing wealth while leaving others out of the picture.

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      • And commerce only works if there is a surplus of something that is desired by someone else who also has a surplus that is desired and so on. Consider your islands but lets say one has an abundance of coal but is hot and the other has fish and is very cold. The first one is starving and the second one is freezing to death. Along comes a sailor with a ship and sees the situation. He takes a load of coal to the second island and trades for the fish who he takes back to the first island and continues trading between the two islands. Of course he needed some trade goods to get the coal in the first place, or credit from the coal island people(enter banking). In essence the coal and fish weren’t worth very much to the people who had them since they had an overabundance but lacked some other necessity. By moving the goods to another place did he create wealth? They were certainly more valuable when they were moved (but only to the people that were lacking them). Services (not all but some) may not create wealth directly but they do leverage that creation.

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        • By way of supplement: whether we grow wealth, extract it, manufacture it or realise it by trade/exchange or theft, every form of wealth depends on preconditions antecedent to growth, extraction, manufacture, trade/exchange or theft. Growing wealth, for instance, presupposes a host of physical, biological etc. preconditions. So, the fact that most wealth realised by exchange or theft has further necessary prior conditions (such as the earlier production of the wealth to be realised by exchange or theft) is not unique to trade as a wealth creator. In fact, in a society with a high degree of division of labour growth, extraction or manufacturing will not suffice to ensure the realisation of wealth. Trade will have to do the trick.

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          • Georg Thomas March 29, 2018 at 9:28 am Edit

            In fact, in a society with a high degree of division of labour growth, extraction or manufacturing will not suffice to ensure the realisation of wealth. Trade will have to do the trick.

            Two points:

            First, when I was a kid, our foreign trade was about zero … and the country was flourishing. So the idea that we must have trade doesn’t pass the historical test.

            Second, I have no problem with foreign trade … as long as we sell manufactured goods and import raw materials. Doing it the other way around, as we are doing with China, is hugely damaging to our economy by moving our manufacturing, the main way to create wealth, offshore …

            That’s just foolish.

            w.

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          • @Willis

            We’re about the same age so I remember when “Made in Japan” was a joke. Then the 70’s and 80’s came along and they started cleaning our clocks with imported cars, cycles and electronics while blocking our exports to them. Just like you’ve been talking about.

            I don’t see the problem as trade per se, but non reciprocal trade. What’s going on now is they export goods to us and we give them paper (actually it’s electronic equivalent, which is just fiat money)or sell them raw materials. If the overall trade doesn’t balance out then those dollars will come back to haunt us. The Japanese went on a buying spree with those dollars and bought up a lot of our real estate and businesses. Sony pictures, Rockefeller Center to name two prominent ones. The Europeans are doing the same thing: Breweries and Supermarkets are two that I’m aware of. I think trade is good but it’s got to be equal.

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          • You may produce as much goods and services that potentially represent wealth, if you do not act to realise that wealth, there will be no wealth available. In modern societies like the USA, wealth is mostly realised via exchange. Not even (most of) the few who produce our food and clothes (and other basic needs) are autonomous producers, having instead to realise whatever wealth will be available to them eventually via trade/exchange. The quality of our basic and non-basic goods and services would be considerably lower and we could sustain only a fraction of today’s populations, if we abandoned trading with one another and regressed to forming communities of autarkic households. Trade is an indispensable condition of wealth in our society. This holds true irrespective of how one assesses the US’ current account, the US’ terms of trade with other countries or which kind of foreign trade policy one favours.

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  12. Willis I enjoy your great insights, particularly with regard to the climate, but your views of trade make you a mercantilist, a view which eventually was discarded by the British, an island population with not much in the way of natural resources other than coal, and as a result they became the leading commercial country in the world thru trade. The US has run a trade deficit since the 70’s, during which time the wealth of the country increased dramatically. Regarding employment, we have almost record unemployment now. The greatest source of job destruction in manufacturing is technological advances. Modern steel production methods allow for the production of the same quantity of steel with a fraction of labor required as compared to the past. Finally Americans are able to benefit from the purchase of inexpensive foreign goods, enhancing the lifestyles of the least prosperous among us. Walmart has prospered from this realization. As a postscript, trade forces existing businesses to become more efficient, adopting more productive methods of manufacturing, etc..

    Liked by 1 person

    • Thanks, Stuart. Read Reichert’s book and get back to me. He lays out exactly how Britain became wealthy using a host of data and examples I don’t have at my fingertips. Short version? Britain did NOT become wealthy by trade.

      The US has run a trade deficit since the 70’s, during which time the wealth of the country increased dramatically.

      See the graph above. The net trade deficit went negative in about 1984.

      From 1960 to 1984, the economy grew at an average rate of 2.4% per annum.

      Since then we’ve run under a trade deficit, and the growth rate has been only two-thirds of that, 1.6% per annum.

      And although this seems like a small difference, if we’d continued to grow at the pre-1984 rate, instead of the GDP per capita we have now of $53,400/person, we’d have a GDP/capita of $67,300 … about a quarter more.

      And in part, this is because we are sending billions and billions of dollars out of the country each year, as measured by our trade deficit.

      Here’s a way to look at the core of the problem. Suppose we got all of our vegetables from Mexico. We send Mexican farmers billions of dollars in exchange. At the end of the year, all the vegetables are eaten … but the Mexican farmers still have the billions of dollars.

      Now suppose instead we grow all our own vegetables. We give American farmers billions of dollars plus a few more because the produce is more expensive. At the end of the year, all the vegetables are eaten … but the American farmers have the billions of dollars.

      Which way does the US end up wealthier?

      This is why Philipp von Hörnigk said in 1684 (emphasis mine):

      Ninth, except for important considerations, no importation should be allowed under any circumstances of commodities of which there is a sufficient supply of suitable quality at home; and in this matter neither sympathy nor compassion should be shown foreigners, be they friends, kinfolk, allies or enemies. For all friendship ceases, when it involves my own weakness and ruin. And this holds good, even if the domestic commodities are of poorer quality, or even higher priced. For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.

      Best to you, and please, read the Reichert book. As I mentioned above, I was a staunch advocate of free trade until I read it … and then, like the famous economist John Maynard Keynes said, ”When my information changes, I alter my conclusions. What do you do, sir?”

      Regards,

      w.

      PS: You might also enjoy my other posts on this subject, which are here.

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      • Suppose we got all of our vegetables from Mexico. We send Mexican farmers billions of dollars in exchange.

        George Goodman(aka Adam Smith) wrote a book that always stuck in my mind called Super Money which I no longer have. One of the points he made was that those dollars that went overseas didn’t just come back to the US but were floating around in the rest of the world the way the pound Sterling once was. Something of a replacement for gold because it was considered “safe”. His fear was that if the rest of the world began to mistrust the dollar they were going to come roaring back to haunt us with a major devaluation. Of course they could also be used to buy our tangible goods with money that wasn’t worth more than paper internationally before that happened.

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  13. The most important and most fundamental reason why I prefer a fairly broad definition of wealth has to do with the anthropology that I espouse.

    My core hypothesis is: man differs from other animals in that he adapts to his environment, survives and thrives by constantly inventing/discovering new desires/needs and constantly trying to fulfil these desires. He never ceases to invent or discover, he never stops attempting to attain a newly conceived benefit (a new element within the arsenal that we call “wealth”). Constitutively, man is a wealth creator— a universal wealth creator, he applies this natural reflex to all aspects of life, not just the part required to ensure basic survival.

    That is also why I believe economic growth is a natural extension of the human condition. Man lives and prevails in his environment by permanently going for new solutions, new benefits, new needs. To deny man his universal drive to create wealth — subject to reasonable moral provisos — is to curtail his humanity. Sir Karl Popper puts is well in his phrase: “all life is problem-solving”. And all this problem-solving is driven by the conception of new needs while being directed toward fulfilment of new human desires.

    This shows even in trivial events, such as when you have just toppled your tea-pot. Looking carefully at the way you try to improve the situation, you will find that you are developing desires you have never been pursuing before (you try a new place to keep the pot safely or you do something about the working surface in your kitchen or you discover an uneven part at the bottom of the pot and try to repair it etc.) we are constantly working toward gains, benefits, advantages — and that is how we accumulate and maintain wealth.

    Liked by 1 person

  14. Here’s an example of the terrible, awful things that can happen when we put on tariffs …

    (Reuters) – India’s JSW Steel Ltd said on Monday it would spend $500 million to build out its U.S. operations in Texas, amid heightened global trade tensions following U.S President Donald Trump’s decision to pursue steep import tariffs.

    The company has signed an agreement with the Texas governor’s office, under which the governor has approved a grant worth $3.4 million to the company’s unit, the steelmaker said in a statement here.

    The unit, JSW USA, sells high-quality carbon plates to the energy, petrochemicals, defense and other heavy equipment industries.

    The company will use $150 million of the funds to improve and modernize its plant in Baytown, Texas, while the rest will fund a new facility, it said.

    w.

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  15. Willis
    My last attempt to make one of my heroes see what’s wrong with tariffs.
    Let’s start from the recognition that trade is not a zero sum game. The buyer regards the goods as worth more than the dollars paid and the seller rates the dollars more valuable than the goods received – otherwise why trade? So each party has gained. The location of each party is of no economic significance – both parties still gain. You have confused the issue by bringing in the irrelevant fact that a group of consumers in one trading block happen to have a cumulative deficit with another trading block. So what? Each and every individual unit of trade was of benefit to both. Now assume that a buyer’s government places a tariff on the purchase of goods from a foreign seller. The result is a reduction in trade which was beneficial to both parties as well as an enhancement of government power at the expense of is own citizen. Two wrongs. Would you insist in import tariffs if you were representing a US State with a trade deficit with another US State? If not, why not? Presumably you would advise any nation State with a trade deficit to do the same. Result? An insane global trade war with each State endeavouring to achieve a trade surplus with every other. Exactly what the world faced in the days of mercantilism and which Adam Smith, Frédéric Bastiat and David Ricardo inveighed against. Import tariffs will result in a global reduction in trade and thereby a reduction in wealth – particularly that of American consumers.
    ,

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    • Richard Smith March 28, 2018 at 6:43 am

      Willis
      My last attempt to make one of my heroes see what’s wrong with tariffs.
      Let’s start from the recognition that trade is not a zero sum game. The buyer regards the goods as worth more than the dollars paid and the seller rates the dollars more valuable than the goods received – otherwise why trade? So each party has gained. The location of each party is of no economic significance – both parties still gain.

      I think I see the issue. The fact that the buyer regards the goods as valuable doesn’t make the transaction beneficial for the country. For example, if I have a factory in Ohio and there are no tariffs, I can move the factory to Mexico and pay $3 per hour for my workers.

      Now, obviously, as a factory owner I gain in the process … but the country as a whole loses badly. It loses jobs, it loses a factory, a town shuts down … so no, Richard, the proper measure is not whether an individual is gaining. It is whether the country as a whole is gaining.

      You have confused the issue by bringing in the irrelevant fact that a group of consumers in one trading block happen to have a cumulative deficit with another trading block. So what? Each and every individual unit of trade was of benefit to both.

      Irrelevant? Not in the slightest. As I pointed out, if we buy our vegetables from Mexico, at the end of the year the vegetables are gone, and Mexican farmers have billions of dollars. If we buy our vegetables from the US, at the end of the year the vegetables are gone, and American farmers have billions of dollars.

      Which one is better for the US? Would you rather have those billions of dollars circulating in the US economy, providing jobs for our workers and keeping our towns and communities alive … or have them lost to Mexico? Look at what happened to the Rust Belt when our factories moved south. That’s the result of “free trade”, and it happened just as Ross Perot predicted.

      Perhaps you could answer those questions and we could move forwards. However, I cannot recommend strongly enough that you read “How The Rich Countries Got Rich, And Why Poor Countries Stay Poor” before you take too strong a stand on these matters …

      My best to you, and thank you for your kind words.

      w.

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      • Willis
        I have read and admired your many articles on all manner of things, including your first-hand observations on the poor of this world, and so I am a little surprised by the US-centric approach in your article. I’ll come to that point later.

        You blame the existence of the rust belt on foreign competition. But as Thomas Sowell has pointed out Toyota and Honda employ thousands of US workers – but not in the rust belt where jobs have been destroyed by rapacious State and local government, red tape and union militancy. Liked the UAW, the unions in the steel industry and other industries have piled on costs to the detriment of those industries and the US economy as a whole. Now they are to be protected at the expense of US consumers. (See how the DowJones responded to the news.)

        Competition from within and outwith a country forces higher cost producers out of business to the detriment of their workers. No doubt about that. The question is whether the consumer and efficiency savings create new jobs. In the opinion of the economists who have studied the data, the gains outweigh the temporary dislocation. See, for example, Greg Hankiw’s aricke in the NYT (Why Economists are worried about International Trade, Feb 16, 2018) in which he refers to research by Frankel and Romer (of Harvard and the University of California respectively) which concluded that ‘a rise of one percentage point in the ratio of trade to GDP increases income per person by at least half a percent (allowing for geography and other confounding factors).

        Now to the point I alluded to at the beginning. What about the poor Mexicans? Your support for protectionism is, by definition, country specific. Presumably if you were a German you would support the huge tariff that the EU (a protectionist block – which is partly why I voted for Brexit) imposes on processed coffee to protect the German coffee industry at the expense of poor coffee-producing Africans. Happy with that? If you were a Mexican you would protest at tariff walls that keep out cheaper Mexican imports and which could employ Mexicans desperate for work at a measly $3 ph. Whatever basis you believe there is to protect US jobs it is at the expense of poorer foreign workers and every other rich country can say, bugger everybody else (UK slang , sorry) we’re shutting them out. Result – trade war and everybody loses.

        Richard

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        • Richard Smith March 29, 2018 at 5:47 am

          Willis
          I have read and admired your many articles on all manner of things, including your first-hand observations on the poor of this world, and so I am a little surprised by the US-centric approach in your article. I’ll come to that point later.

          Now to the point I alluded to at the beginning. What about the poor Mexicans? Your support for protectionism is, by definition, country specific.

          I cannot do better than to quote Philipp von Hörnigk said in 1684

          Ninth, except for important considerations, no importation should be allowed under any circumstances of commodities of which there is a sufficient supply of suitable quality at home; and in this matter neither sympathy nor compassion should be shown foreigners, be they friends, kinfolk, allies or enemies. For all friendship ceases, when it involves my own weakness and ruin. And this holds good, even if the domestic commodities are of poorer quality, or even higher priced. For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.

          I fear that the US cannot be the support of every other country … what about the poor Bolivians, or the poor Bhutanese? Sorry … they have to look out for their own country.

          Right now, we send a criminal amount of money to Mexico every year, and have done so for a quarter of a century … you seem to think that we should continue to impoverish ourselves at the expense of the Mexicans, which seems quite crazy to me.

          w.

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          • “I fear that the US cannot be the support of every other country … what about the poor Bolivians, or the poor Bhutanese? Sorry … they have to look out for their own country.”

            Granted. But hopeless. I happen to know something about Bhutan, a Least Developed Country at present. They survive by LDC aid from the UN and a working relationship with India. With less than 800,000 people and few resources (they sell hydro power to India) and a strong desire to hold on to their traditions and values, they are in a serious pickle. And the UN has told them that they will be “graduating” out of LDC, and with that they lose a lot of aid money. The future is very uncertain. Which is sad, since they are a good people and have an honest government.

            “Right now, we send a criminal amount of money to Mexico every year, and have done so for a quarter of a century … ”

            Speaking of sending criminal money to Mexico, how much drug money gets sent there? The odd thing is that it doesn’t seem to benefit the people of Mexico. Whereas the money we send to China and Japan sure made a lot of millionaires there, who then buy businesses and property here. (not saying that’s good for us)

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          • – And Willis is exactly right. The U.S. must look after itself first and foremost – and fair trade is the basis of that; you want to trade $Umpty-Million of your goods with us? Then take $Umpty-million of ours.

            I’m Canadian, and a lot of us are flapping-in-the-wind over NAFTA; but I see it for what it is. ALL free-trade agreements with the U.S. are to gain access to U.S. markets for our products – and therefore, to move U.S. jobs here. That works up-to-a-point, but ONLY up-to-a-point; and we’re well beyond that, the U.S. is bleeding money (tax dollars their unemployed workers would otherwise be paying them) into our coffers.

            I humbly posit the U.S. can’t afford to do that anymore. Two BIG reasons are Russia and China; they’re both hungrily eyeing the “World’s Only Superpower” slot and licking their chops. We’re far, far better-off with Uncle Sam in the saddle than we’d be with Uncle Vlad or Uncle Xi, but it costs Uncle Sam a HUGE amount of money to stay up there; and we’re not trading reciprocally, so we’re not paying our share of it.

            So I say (FWIW), Trump is right; and the U.S. would be well within both common-sense and its rights to tear-up all its free trade agreements. They’re all to make it easier for us to sell our products there; and without reciprocal trade (which won’t happen – yeah, we buy all our cheap cr@p from China too), it’s to the U.S.’s advantage to slam the door on us and go back to making their own.

            And what benefit is there for the U.S. to care about us, in this matter? That’s right – none. Sorry; this is poorly thought-out, and poorly-worded.

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  16. “When a company can move a factory to Mexico and pay their workers $3 per hour with no workmen’s compensation insurance and no tariffs when they sell their goods in the US, why not?”

    This is true as far as it goes. But if American companies need to offer higher wages to get people to produce the same goods, that is because they are in competition with other American industries which can outbid them for labour. Japan and Korea used to undercut US manufactures in this way, but not any longer because their own hi-tech industries have taken off. Tariffs are the equivalent of a tax on the American consumer: they will create customers for some American industries by taking them from other industries which it would be better to have. They are always, always introduced for the benefit of old industries, never new ones. Only innovation can keep a rich country ahead and it is better to let the old industries go.

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    • Willis I’m stuck. I’ve been a bit queasy about your tariff stand since you first introduced the subject. So, if I disagree with you I’m usually wrong. If I disagree with Ron Paul I’m usually wrong. Apparently I’m wrong a lot but I’ve been reading Ron Paul longer than I’ve been reading you so I’m biased. The money “raised” by tariffs gets sucked into the non-productive governments so it’s hard to see where the people’s economics win.

      http://www.ronpaullibertyreport.com/archives/trump-on-tariffs-punish-china-by-taxing-americans

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      • The purpose of the tariff is not to have a tariff but to make trade fair. If other countries remove there tariffs, we can also and trade is fair. There would still be some in-balance due to lower labor cost, but added shipping cost and less quality control partially balance that out, and countries that can compete well eventually have higher labor cost also.

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        • Leonard Weinstein April 12, 2018 at 5:43 pm

          The purpose of the tariff is not to have a tariff but to make trade fair. If other countries remove there tariffs, we can also and trade is fair. There would still be some in-balance due to lower labor cost, but added shipping cost and less quality control partially balance that out, and countries that can compete well eventually have higher labor cost also.

          So your claim is that under NAFTA, with no tariffs, things were fair? When thousands of companies moved their factories to Mexico because they could hire workers for $3 and no workmen’s comp insurance, causing massive unemployment in the Rust Belt with entire towns closing down because their factory left town, that was fair? When thousands and thousands of American workers lost their jobs to Mexicans, that was fair?

          Leonard, I gotta say … you have a very, very different idea of what is “fair” than most people have.

          NAFTA and the removal of trade barriers have been great for Mexico, and great for US corporations who moved operations to Mexico. Yes, the US rich have gotten richer, but for the US worker and for US factories and US factory towns, it has been an unmitigated disaster. Bad news, my friend … that’s not “fair” on any planet.

          w.

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  17. Willis, Thx for a very well written article which is clear and distinct. Having worked in engineering my whole career, I am well aware that I was part of the SERVICES sector. I was constantly reminded of that (that I was essentially overhead) in spite of my role in saving the company countless $$ in avoiding making costly or catastrophic decisions. I accepted that fact – that I was not a part of operations (manufacturing) or sales… selling a product or service. Never the less, I was shocked, amazed that for the past 20-25 yrs both Republican and Democratic parties were ignorant as to what creates wealth for the U.S., and bought into this idea of globalization. By agresssively encouraging U.S. companies to relocate manufacturing plants overseas it makes products cheaper for the consumer to buy, but impoverishes the U.S. populace by eliminating manufacturing jobs. It is essentially selling your economy – your way of life for a MESS of POTTAGE.

    At first I thought this might be an agreement between both (Rep & Dem) parties that this would be a socialization process that would elevate the 3rd world economies to quasi U.S. standards. In other words, we would diminish our economic success to benefit/boost the 3rd world economy & socialization process.

    Having lived in the 3rd world for over 20 yrs., I have seen the results 1st hand. The countries in which I worked considered that U.S. as extremely naieve as far as industrial economics. They were literally laughing all the way to the foreign exchange bank.

    Can we recover our manufacturing base? It will be an extremely long-hard struggle. It is definitely NOT an EASY process. First there has to be a willingness to engage. I haven’t seen that willingness yet. I’m hopeful, but as always- I’m realistic.

    A culture that’s adicted to services has a hard time devolving to a manufacturing/production mindset & mentality.

    Like

  18. “Everything else is services—bankers, barbers, bookkeepers, surgeons, stylists, singers. They are important, some are life-and-death important … but they don’t create any wealth.”

    NOT TRUE
    Wealth also consists of knowledge,
    skills, best practices — some wealth
    is invisible — when you need a surgeon,
    his or her wealth of knowledge and
    experience, is more important than
    wealth that is visible, like a TV.

    I wrote an article on trade
    in my April May economics newsletter
    just after the 25% steel and 10% aluminum
    tariffs were announced.

    Here is the SUMMARY portion:

    A COMING TRADE WAR ?
    Summary:
    As a libertarian, I favor free trade. But free trade does not exist on this planet. The US has been the least protectionist large economy in the world, and the most open market for imports. The average US tariff on imports is unusually low compared with other nations. The US favors open markets, and we set a decent example, although there have been exceptions. But being the most open market for imports is virtue signaling … it really means other nations are taking advantage of us.

    President Trump is an unusual politician. He seems to be doing something ‘professional’ politicians seldom do — he’s attempting to fulfill his pre-election promises. Even promises that could start a trade war. The hysteria over Trump’s 25% steel and 10% aluminum tariffs seemed excessive, in my opinion. Democrats seem to get hysterical after every Trump proposal, as soon as they find a media person with a camera! But a lot of Republicans got hysterical about the tariffs too.

    China is the most protectionist large economy in the world. President Trump aims to change that. That’s a worthy goal. But the new steel and aluminum tariffs barely affect China. And the Secretary of Defense said they were not needed for national security, which was the justification claimed by the Commerce Department, in two huge reports.

    If we are to risk starting a trade war, our first shot should have been a rifle shot aimed at a specific Chinese barrier to US goods. Instead, we had a 360 degree shotgun blast aimed at everybody in the world, except Canada and Mexico (at least during NAFTA renegotiations, maybe not permanently?).

    Trump knows we have something of great value to foreign manufacturers: We control access to the largest market for manufactured goods on the planet — the US. A trade war, even if involving ONLY China and the US, could be serious enough to halt global growth. So far, US investors do not seem to be anticipating a trade war, or they don’t care (but they should).

    My economics blog:
    http://www.EL 2017.Blogspot.com

    Like

    • Richard Greene April 2, 2018 at 8:32 am Edit

      “Everything else is services—bankers, barbers, bookkeepers, surgeons, stylists, singers. They are important, some are life-and-death important … but they don’t create any wealth.”

      NOT TRUE
      Wealth also consists of knowledge,
      skills, best practices — some wealth
      is invisible — when you need a surgeon,
      his or her wealth of knowledge and
      experience, is more important than
      wealth that is visible, like a TV.

      Richard, I refer you to an example that I’ve used several times, viz:

      To understand this, suppose there are two couples on a tropical island. One person fishes, one has a garden, one gathers food and building materials from the forest, one makes clothes from local fiber. They could go on for a long time that way, they are creating real wealth.

      But suppose on the next tropical island there are two couples, and one person is a barber, one is a surgeon, one is a librarian, and one is a musician—noble occupations all but services all … that society will have nothing to eat, nothing to wear, nothing to keep them from the rain. Those occupations don’t create wealth, while the activities on the first island all do.

      Yes, surgeons are important. Life-and-death important. When you need one, as you point out, it is more important than a TV. And librarians are guardians of the knowledge that you claim is wealth.

      But if you want to live on the island with the barber, the surgeon, the librarian, and the musician, your life will be very short despite having a doctor on the island … because you won’t have anything to eat, anything to wear, or anywhere to live.

      Look, I’m not dissing knowledge or surgeons. I’m just making a clear distinction between the means of production of wealth and other occupations.

      w.

      Like

      • Let me attempt to reconcile these two apparently different views. Wish me luck. And I won’t mention the island where everybody survives by taking in each other’s laundry.

        On one island lives a surgeon, all alone. His “wealth” doesn’t make him rich.
        On the other island lives a fisherman, all alone. He gets by until he gets sick.
        The fisherman agrees to trade some fish for some health service.

        How is that different from one island only grows potatoes and another island only grows meat and they agree to trade their surpluses? Wealth consisting of knowledge is only a potential wealth; it becomes real wealth when you can sell it or trade it for something you value. Bear and Georg Thomas said as much above.

        “Services don’t create any wealth”. True from one point of view. The sports star or the rock star collects millions for their services, so they get rich, but they have not actually created wealth, they have just shared in the wealth of their fans. And if those fans happen to be abroad, then they have brought dollars into the country, so maybe they did create some wealth. If you write a book or a song, you have created something, and if there are others who want it, it can be sold, so it is at least a virtual product if not an actual product. If I collect shiny rocks I find, I can sell them, but I did not create the rocks. No more than the fisherman creates the fish. Economics is all relative.

        It gets worse. Billions got spent on Bitcoins, which had zero intrinsic worth. Some got rich — from collecting the money of others. The problem with China is not trade, it is unfair trade.

        Like

      • (1) You write: “To understand this, suppose there are two couples on a tropical island. One person fishes, one has a garden, one gathers food and building materials from the forest, one makes clothes from local fiber. They could go on for a long time that way, they are creating real wealth.

        But suppose on the next tropical island there are two couples, and one person is a barber, one is a surgeon, one is a librarian, and one is a musician—noble occupations all but services all … that society will have nothing to eat, nothing to wear, nothing to keep them from the rain. Those occupations don’t create wealth, while the activities on the first island all do.”

        Link them via trade and the problem is solved. And all are wealthier.

        (2) Once again: You may produce as much goods and services that potentially represent wealth as you like, if you do not act to realise that wealth, there will be no wealth available. In modern societies like the USA, wealth is mostly realised via exchange. Not even (most of) the few who produce our food and clothes (and other basic needs) are autonomous producers, having instead to realise whatever wealth will be available to them eventually via trade/exchange. The quality of our basic and non-basic goods and services would be considerably lower and we could sustain only a fraction of today’s populations, if we abandoned trading with one another and regressed to forming communities of autarkic households. Trade is an indispensable condition of wealth in our society. This holds true irrespective of how one assesses the US’ current account, the US’ terms of trade with other countries or which kind of foreign trade policy one favours.

        (3) I don’t think you are right in reducing “real wealth” to activities and goods that ensure basic survival (see my explanations in earlier comments). If wealth of the basic-need-fulfilling-type can be shown to have the same features as wealth of the more-than-just-basic-needs-fulfilling-type, it is factually wrong to equate wealth = subsistence, as you do. Wealth is our ability to fulfil human desires at our discretion. And it is patently wrong to claim that human desires are confined to basic needs and that wealth creation (= the ability to fulfill human desires at our discretion) is confined to fulfilling basic needs.

        As I have written above, human beings differ from other animals in that they are wealth-creating machines, they survive, adapt to their environment and thrive by creating and enhancing wealth constantly, far beyond basic needs. This fundamental human trait does not suddenly evaporate when basic needs have been fulfilled. Restricting (the ability to create) wealth to (the ability to fulfill) basic needs is to truncate human nature, denying its true richness.

        Wealth in modern society is precisely characterised by the fact that very few people engage in ensuring subsistence, with the majority involved in non-subsistence activities whose provision is key to their being able to survive at the level of basic needs. Also, these non-subsistence activities keep improving, even revolutionising the way in which we ensure basic survival.

        Like

  19. YMMV April 2, 2018 at 9:35 am

    Let me attempt to reconcile these two apparently different views. Wish me luck. And I won’t mention the island where everybody survives by taking in each other’s laundry.

    On one island lives a surgeon, all alone. His “wealth” doesn’t make him rich.
    On the other island lives a fisherman, all alone. He gets by until he gets sick.
    The fisherman agrees to trade some fish for some health service.

    First, YMMV and Bear and all, thanks for your comments.

    Next, YMMV, at the start of your story, we have two healthy people and one fish.

    At the end of the story, we have two healthy people and one fish.

    Explain to me again about all the wealth that the surgeon has created …

    w.

    Like

    • You write: “YMMV, at the start of your story, we have two healthy people and one fish [sic].

      At the end of the story, we have two healthy people and one fish [sic].
      [YMMV did not say there was “one fish” involved but “some fish”]

      Explain to me again about all the wealth that the surgeon has created …”

      Well, the fisherman got sick and required a cure to get better. Remember: I define wealth as “the fulfillment of a human desire at one’s discretion”. The human desire was to get well. And the surgeon fulfilled that desire enriching his client or adding to his client’s wealth, as opposed to lacking that instance of wealth, and remaining ill.

      Like

    • Willis said: “…..at the start of your story, we have two healthy people and one fish.

      At the end of the story, we have two healthy people and one fish.

      Explain to me again about all the wealth that the surgeon has created …”

      The fisherman is not the owner of a fish, he is a man who catches fish, and will continue to do so, while he is healthy enough.

      Other than that, I’m pretty much in agreement with Willis and Trump (gasp) on this illusion that there is any such thing as Free Trade.

      Like

  20. Georg Thomas April 2, 2018 at 12:24 pm

    Remember: I define wealth as “the fulfillment of a human desire at one’s discretion”

    Say what? So if I desire to breathe, and I do breathe, I’m creating wealth? If I desire to punch someone in the nose, and I fulfill that desire at my discretion, I’m creating wealth?

    In the context of economics, or pretty much any context for that matter, that definition makes no sense at all. My last job was the Chief Financial Officer for a company with $40 million dollars in sales per year … if you try to run that definition of “wealth” past your accountant he’ll just laugh.

    w.

    Like

    • You write: “If I desire to punch someone in the nose, and I fulfill that desire at my discretion, I’m creating wealth?” Of course, I am. Bouncers or policemen create wealth that way. It is another matter, if I can get this sort of wealth-seeking socially recognised. Wealth creation is subject to numerous (social etc.) provisos — which is true with respect to any wealth-creating activities including those relating to basic needs —, but this does not invalidate my broad definition as such. Or can you show me that it does?

      You write: “… if you try to run that definition of “wealth” past your accountant he’ll just laugh.”

      Well, if you try to convince your accountant — or the IRS, for that matter — that wealth creating activities are restricted to the provision of basic needs … let’s see what reaction you get.

      Like

      • Georg, I didn’t ask about bouncers or policemen. If I desire to punch you in the nose, and I fulfill that desire at my discretion, have I created wealth? Because that is what you are claiming …

        In addition, you seem to be confusing making money with creating wealth … they are far from the same. I can make money cutting hair, but that does not create wealth.

        w.

        Like

        • You write: ” … you seem to be confusing making money with creating wealth … they are far from the same. I can make money cutting hair, but that does not create wealth.”

          (1) From my definition of wealth, which you quote, it is indubitable that I do not confuse (equate) creating wealth with making money — my definition is capable of covering both wealth that is accounted for in monetary terms as well as wealth not so documented.

          Of wealth, we may speak, in my classification, when we have been able to attain a gain, a benefit, an advantage, having reached a higher level of satisfaction compared to a situation when the desired gain, benefit or advantage is absent/unachieved.

          So if the service of a barber fulfills that condition, lifting you to a comparatively higher level of satisfaction, he is capable of providing you with wealth.

          (2) When a bouncer legitimately punches someone’s nose he creates wealth in at least two ways: he achieves a benefit to himself in being able to do the job he is being paid for (here violently but legally fending off an intruder or attacker). And he creates wealth for the person who provides him with income, in that the bouncer ensures the protection from intruders or attackers that his employer seeks. Incidentally, the bouncer’s wealth creation by punching noses can be in fulfillment of a basic need (not to get killed) — which provides us with one more example of why confining wealth to basic needs (which bouncing may not appear to be) involves a needlessly and absurdly truncated definition of wealth. Handling basic needs may be significantly improved by activities that may not be classified as serving basic needs ( — is curiosity relating to aerodynamics a basic need?). Another case: your wealth creating islanders may get into a situation where the only basic, survival ensuring need is to be treated by a supposedly non-wealth-creating medical professional, the surgeon.

          Human needs are an intricate and highly dynamic realm with complex interconnections. People constantly find out about what they need or don’t and in what hierarchy these things are to be fitted. Attempts at wealth creation, understood as the search for new and higher levels of satisfaction, are the epitome of human resourcefulness.

          To come up with a finite list of wealth-creating (excluding all non-wealth-creating) activities reminds me of the conceit and narrow-mindedness of a command economy where people are directed to engage in “production for use”, based on a central canon that determines which are legitimate and worthy activities and which are not.

          And once again: by equating subsistence level production (fulfillment of basic needs) with wealth — and limiting the term “wealth” to that meaning — we would not be able to recognise a difference between US-citizens (who survive) and citizens of Sudan (those, who survive) — they are both wealthy by virtue of being able to survive.

          It is not a trivial matter that the wealth difference is in actual fact gigantic and that difference matters tremendously from the point of view of humanism.

          Like

  21. Well, I tried. The problem seems to be two words: creating wealth. What is ‘wealth’ and what is ‘creating’.
    “confusing making money with creating wealth”. Money is one possible form of wealth, but not the only one.

    Compare these two sets of definitions of wealth (and who knows how many more there are).
    Business, three kinds:
    http://www.businessdictionary.com/definition/wealth.html
    Indian guru, eight kinds:
    https://www.wisdom.srisriravishankar.org/8-types-of-wealth/
    I won’t say that any of them are wrong; but they are not the same thing.

    Cutting hair, or providing a medical service, does not create wealth, it just redistributes the existing wealth.
    Whether you get money or barter in exchange for that service. You get wealthier or richer, but the total value of wealth in the system does not change. So what can you do to create wealth?

    “grow wealth. Start a farm.” Grow potatoes and vegetables, get chickens and a cow. What do you have? Subsistence living. It could feel rich or poor, but to collect on some of that wealth you grow, you have to sell some of your crop to someone else who has money or stuff to barter. Trade.

    “extract wealth from nature. Dig an oil well.” No shortage of examples here. Take Saudi Arabia, nothing but sand and oil. They can trade that oil for F-35 jets and lambourghinis. Export oil, import wealth.

    “We can manufacture wealth. Build a car manufacturing plant. Knit sweaters. Build houses. Make electronic gear.” All of these things involve taking parts or raw materials and assembling them or processing them. So you might say that the wealth created is in the “value added”. Marx, Adam Smith, and others might say that. You’ve changed something into something else with a higher market value, you’ve made money. But wealth? You will have a hard time sorting out the goods and services involved in making any product to see where the wealth comes from. Some of those services might be like a catalyst — they are a necessary step along the way but they do not appear in the output. It’s better to take a systems view, for better or worse, we are not on isolated islands. We build things that others (who have wealth) want. We don’t bother building houses in ghost towns, we don’t build last years electronics. They might not create wealth, but the traders are the ones who get rich.

    Like

  22. YMMV April 2, 2018 at 9:10 pm Edit

    Well, I tried. The problem seems to be two words: creating wealth. What is ‘wealth’ and what is ‘creating’. “confusing making money with creating wealth”. Money is one possible form of wealth, but not the only one.

    No, no, and no. Money is not wealth. Money is technically called a “medium of exchange”. It is not wealth in any form. It is a convenient way for us to trade, nothing more.

    Look, suppose I start one of those “send a dollar to every person on this list, cross out the top name, and write your name at the bottom” deals. I will definitely make money, Ponzi proved that … but no wealth is created in the process. For everyone who gained a dollar, someone lost a dollar. All I’ve done is move the money around.

    It’s the difference between the baker and the bread store. The baker creates wealth by manufacturing it out of flour and yeast. The bread store does not create wealth.

    This illustrates a very important point.

    The fact that someone is making money does NOT mean that any wealth is created in the process. If I buy something at a flea market and then sell it for twice the price, I’ve made money but no wealth is created—the object is the same, no new objects have been created.

    It’s one of the reasons that I always enjoyed being a commercial fisherman—I knew I was creating real wealth, providing food for the hungry. It is a very different feeling to work in a wealth-producing industry as opposed to working in a service industry.

    It also highlights a peculiarly modern misunderstanding, which is that lots of folks misunderstand the nature of socialism. People claim that the Government post office, or government-provided “socialized medicine”, are examples of socialism. Nothing could be further from the truth.

    Socialism is defined as the government owning and controlling the “means of production” … but production of what?

    Production of wealth—that is to say, socialism is government ownership of the farms, the fisheries, and the factories. It has nothing to do with government supplied services. Governments of all kinds provide a host of services, and they often own the organizations providing those services.

    But when the government owns the means of production of wealth, that is socialism. Not government doctors. Not government postal services. Socialism is government farms and fishing boats and factories.

    Best regards, and thanks as always for your comments,

    w.

    Like

    • (1) Assuming that a vastly expanded personal budget lifts Ponzi to a higher level of satisfaction (greater gain, the attainment of desired benefits), he clearly realises wealth for himself.

      We may look at attempts at realising wealth from a hundred different perspectives — legal, moral, social etc. And thus we may condemn or prohibit certain attempts at realising wealth, but this does not affect my basic definition of wealth, rather it affects the admissibility/assessment of attempts at realising wealth in legal, moral, social etc. terms.

      When we talk about realised wealth, we will see in each case that the criteria laid down in my definition are satisfied.

      Hence:

      (2) The bread store is not likely to remain a viable proposition for long unless it realises wealth for itself and helps other people realise wealth, say by optimising and expanding distribution (creating greater convenience to its customers, positive price effects thanks to economies of scale etc.), thereby helping bakers to survive or sell more bread than they would otherwise/or force bakers to cut out inefficiencies, and so on. There are thousands of ways in which a bread store can promote the realisation of wealth for itself and others, for instance by adding a cosy café to the sales counter, a place people love to go to socialise (lifting themselves to a higher level of satisfaction).

      (3) It is not you, Willis, who decides whether your buyer realises wealth for herself. It is the person that is paying you twice as much as you did at the flea market, who decides whether the purchase is wealth-enhancing to her.

      I have a friend who always buys very expensive coats. He tells me he feels better to wear the expensive designer ones, it safes him the pain of studying hundreds of different coats, and the difference in money terms just does not matter to him, he is rich enough. He realises wealth for himself (assurance to be dressed socially correct, time saving) notwithstanding the fact that he might have been able to fetch a perfectly acceptable coat at half the price.

      Like

  23. I see that because of Trump’s tariffs China has responded with tariffs on US agricultural exports and stock markets have tumbled. How is this good for the US?

    Like

      • In addition, as I said, we’re the ones with a huge trade deficit with China. We buy something like a half trillion in goods and sell them a hundred billion in goods.

        Now, suppose both countries slap a 10% tariff on across the board.

        It will cost us ten billion, and it will cost the Chinese fifty billion … who’s the big winner there?

        Which is among the reasons I said, trade war?

        Bring it on …

        w.

        Like

  24. A trade deficit is not a problem. Sellers to the US have received dollars which they use to invest in US assets or buy US exports. The trade deficit is balanced by a capital account surplus. If trade deficits were a bad thing you would expect to see a detrimental effect on GDP but that is not the case for the US. There is, in fact, a positive correlation with trade deficits and GDP.
    Nations do not trade with each other; people do. The deficit is the sum of individual choices.

    Like

    • Thanks, Richard.

      If there are no trade barriers, we buy our vegetables from Mexican farmers. At the end of the year, the vegetables are eaten and the Mexicans have billions of dollars.

      If we erect trade barriers, we buy our vegetables from Americans farmers. At the end of the year, the vegetables are eaten and Americans have billions of dollars.

      Please explain to me why choice A is better for America …

      w.

      Like

      • The US Department of Agriculture report on Mexico Trade and FDI 2016 states that “US – Mexico trade is largely complementary, meaning that the United States tends to export different commodities to Mexico than Mexico exports to the United States. Grains, oilseeds, meat, and related products make up about three-fourths of US agricultural exports to Mexico….. “ Further in the report there is this: “Roughly two-thirds of U.S. agricultural imports from Mexico consist of beer, vegetables and fruit. These imports are closely tied to Mexico’s historical expertise in producing alcoholic beverages and a wide range of fruit and vegetables and to its growing seasons, which largely complement those of the United States. For example, many produce items that the United States does not grow in winter are grown during that time in Mexico.”
        So trade between the US and Mexico is largely complementary and both peoples benefit. According to the USDA report the US supplies 70% of Mexico’s agricultural imports which amounts to 13.1% of total US agricultural exports.
        Enjoy your Tequila!

        Like

        • Yes, we export different things to Mexico than we import … so what? The point is that we have a $60 billion dollar trade deficit with Mexico … and when there is a $60 billion trade deficit, it’s absolutely untrue to say that “both peoples benefit”.

          w.

          Like

          • A trade deficit is not a drain on wealth. The dollars received by the exporting countries must eventually return in the form of the purchase of US assets or exports – over time the capital account balances the current account. Furthermore the tariffs and resultant trade war is costing US consumers money and damaging the US economy as a whole. US unemployment was a mere 4.1 % before this trade war began – the lowest since 2000. Expect it to rise if this war continues.

            Like

          • Richard Smith April 6, 2018 at 12:21 am

            A trade deficit is not a drain on wealth. The dollars received by the exporting countries must eventually return in the form of the purchase of US assets or exports – over time the capital account balances the current account.

            Thanks, Richard. IF “the dollars received by the exporting countries must eventually return in the form of the purchase of US assets”, then there wouldn’t be any trade deficit, would there? Everything that went out would come back, the books would balance, and there would be no trade deficit.

            But that’s not the case, obviously, because the US trade deficit exists, and it has existed for almost half a century. The reality is that there is no magic law that the dollars must return to the US.

            Regards,

            w.

            Like

  25. Down in South Africa, we also have the “Chinese goods” problem. But it’s much worse here, because the Socialist ruling ANC seriously dislikes the “White Monopoly Capitalists” (i.e. everybody who actually makes things and gets money for them). The result of this is a series of pro-labour and anti-employer laws, which make would-be employers have to jump through (racially based) hoops in order to employ someone, and even MORE hoops in order to fire him. (And civil servants CAN’T be fired unless they’ve actually been convicted). Meanwhile, the number of unemployed is rising rapidly, and the ordinary guy’s main worries are employment and crime, while the ANC is currently pushing “get back the land that the whiteys stole from you”. So, when the obvious thing to do is to encourage businesses (and therefore jobs), the ANC is following basic Marxist attitudes and trying to dictate what businesses may do. It don’t work!

    Like

  26. Today’s news:

    The U.S. trade deficit increased to a near 9½-year high in February as both exports and imports rose to record highs, but the shortfall with China narrowed sharply.

    The Commerce Department said on Thursday the trade gap rose 1.6 percent to $57.6 billion. That was the highest level since October 2008 and followed a slightly downwardly revised $56.7 billion shortfall in January.

    Some of you keep talking as though a trade deficit is just an accounting device. It is nothing of the sort. It is draining wealth out of our economy at the rate of nearly sixty billion dollars per month, while we argue about spending twenty billion on a border wall … President Trump is right to be greatly alarmed by this huge ongoing cost to our well-being.

    Best to all,

    w.

    Like

  27. Willis,

    From what I have read, last year the US imported about $180 billion of petroleum products. I interpret what you have written to mean that, for example, if Trump declared it illegal to import petroleum products then the effect would be to grow our economy by $180 billion. My interpretation is based on this paragraph from your article:

    “So let me bring this back to the title. I have no fear of a trade war with China, because the worst-case scenario of a trade war is that all trade between the two countries stops entirely … and that will put a third of a trillion dollars back into our pockets every year, year after year. In addition, it will totally revitalize our moribund manufacturing, because we will have to do what Philipp von Hörnigk recommended—live off of what we produce ourselves.”

    Question: in the above example, do you really believe that our economy would grow by $180 billion?

    Thanks,

    Jeff

    Like

    • Thanks, Jeff, and welcome to the discussion. Let me restate the argument. Suppose we buy oil from Saudi Arabia. At the end of the year the oil is burned and the Saudis have $180 billion.

      Next, suppose we buy the same amount of oil from the US. We’d have to ramp up shale oil production, which is possible. At the end of the year the oil is burned and the US has $180 billion.

      Which do you think is better for the US?

      w.

      Like

      • Willis,

        In your reply to me, you posit that we would have to ramp up shale oil production to cover the shortfall from not using foreign sources. And you state we could ramp up the production. A couple of points:

        1) Assuming we could ramp up production to cover the shortfall (and I do not know if that is a reasonable assumption) it would likely take time and $$ to do so. During the ramp up time, what is the cost to the economy due to a shortfall in oil? Certainly that will increase the cost (in the US) of oil products. In general, I would expect that such actions would introduce (at least for some time) inefficiencies in our economy. Certainly there will be impacts resulting from the slowdown in our economy.

        2) Those US workers employed in industries involved with the imported Saudi oil will be savaged (at least in the short term until domestic production can replace the banned Saudi oil). I would expect that to also negatively impact our economy.

        More generally, here is a link to an article which discusses the relationship between GDP growth and trade deficit growth:

        https://www.americanactionforum.org/insight/trade-deficit-not-hurting-economy/

        In particular, it looks like the two run in parallel: when one grows so does the other, and when one shrinks so does the other – at least for the time period 1992 – 2017.

        I think the impacts of trade deficits are much more complicated and subtle then you are making them out to be.

        Jeff

        Like

        • Jeff Berman April 9, 2018 at 2:40 am

          Willis,

          In your reply to me, you posit that we would have to ramp up shale oil production to cover the shortfall from not using foreign sources. And you state we could ramp up the production. A couple of points:

          1) Assuming we could ramp up production to cover the shortfall (and I do not know if that is a reasonable assumption) it would likely take time and $$ to do so. During the ramp up time, what is the cost to the economy due to a shortfall in oil? Certainly that will increase the cost (in the US) of oil products. In general, I would expect that such actions would introduce (at least for some time) inefficiencies in our economy. Certainly there will be impacts resulting from the slowdown in our economy.

          Thanks, Jeff. Most recently, our net imports are about 3,700 barrels per day. On the other hand, we consume about 19.9 million barrels per day.

          That’s about 5 railroad tank cars per day of imports, representing a mere two-tenths of one percent of our daily oil consumption … hardly a big ask or a big change. Obama famously said that “We can’t just drill our way to lower gas prices.” However, as in many other areas, he was totally wrong. We’ve done just that.

          2) Those US workers employed in industries involved with the imported Saudi oil will be savaged (at least in the short term until domestic production can replace the banned Saudi oil). I would expect that to also negatively impact our economy.

          Huh? The pipelines don’t care where the oil comes from, they just pump it. The refineries don’t care where their oil comes from, they just refine it. Oil is a fungible commodity. And remember, we’re only talking 5 tank cars worth per day …

          w.

          Like

  28. Willis
    You said “If the dollars received by the exporting countries must eventually return in the form of the purchase of US assets then there would be no trade deficit.”
    No. There would still be a trade deficit but it would be matched by a capital account surplus. This surplus takes the form of the foreign investment of dollars in US company securities, shares, government bonds, etc. This is what I meant by ‘the purchase of US assets’ in the quotation above. This investment contributes to the growth of the US economy and the creation of US jobs.

    Like

    • Richard, you might consider it as a business. Suppose that your business buys more than it sells in total, as the US is doing vis-a-vis other countries. How long will that business stay in business?

      You say it’s OK because foreigners are buying the assets of the business … how on earth does that help? The business will go down the tubes whether the foreigners are buying the assets of the business or not.

      w.

      Like

  29. Maybe it is a bit late to comment now, but anyway here are my thoughts.

    Now, if a country is smart, it will do everything it can to build and strengthen the part of their economy that is “farms, fishing boats, and factories”.

    That was the dominating economic theory before Adam Smith’s “Wealth of Nations” revolutionized the macroeconomic thinking.

    An eloquent quote from Adam Smith is: “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom”

    As an illustrating example think of a hairdresser and a tailor. Both need clothes to their kids, and both need to have cut their kids hair from time to time. It is possible for them to do everything they can to do everything by themselves, but that is not the most effective way. Both will gain if the tailor makes clothes to both families and the hairdresser took care of both families’ haircutting.

    A trade between the hairdresser and the tailor is a win-win deal.

    Similar for nations. Some countries have better conditions for making some products and services than other, and the theory is that all will gain if we allow free trade so that every product could be made where it is most effective.

    So, do I believe in unlimited global free trade? Well, that is where it becomes complicated. I do believe in the huge economic potential in free trade, but I also realize that some people can come out as losers. There are no easy answers here.

    /Jan

    Like

    • Jan, as always it’s good to hear from you. What you are talking about is the “theory of comparative advantage”. It says that each nation should do what it does best and trade for the rest.

      I’ve pointed out the huge problem with this in my post called “Why Free Trade Isn’t“. The problem is that for many nations their “comparative advantage” is supplying raw materials. As a result, they will NEVER develop an industrial base … and industry (as exemplified by the “industrial revolution”) is the largest source of modern wealth.

      And when “comparative advantage” keeps some places from developing industry, it also denies them all of the advantages that we’ve gotten from the industrial revolution …

      I recommend to you, as I’ve recommended to others, that you read “How Rich Countries Got Rich, and Why Poor Countries Stay Poor“. It spells out the problems with your theory much better than I can. I believed as you believe … until I read Reinert’s book.

      My best to you,

      w.

      Like

      • Willis
        We have moved on from a US-China trade war to protection for very poor countries – a completely separate issue. The US has a scheme called the Africa Growth and Opportunity Act (AGOA) which allows African manufactures to enter duty-free whereas Asian manufacturers have to pay tariffs. This has a role to play in helping Africa industrialise but not the protection of domestic markets that Reinert proposes. Latin America, India and Africa have tried protectionism and it got them nowhere. India only started developing once it liberalised in the 1990s. You should read The Bottom Billion by Paul Collier, Professor of Development Economics at Oxford University and Director of the International Growth Centre. He was an advisor to the World Bank and is an expert on developing economies.

        Like

        • Richard, I implore you, I beg you, read the book I linked to above. It explains the problems with your position much, much more clearly than I can.

          All I can say is that I believed as you do until I read that book. Come back after you’ve read it and you can tell me where you think it is wrong … if you still do.

          Many thanks,

          w.

          Like

          • I agree with Richard in that Paul Collier is worth listening to. His book “The bottom billion” is highly recommendable, but you can get a short version of his message by listening to his TED talks:

            Jan

            Like

  30. ristvan: “There never was free trade except in the minds of US globalists.”

    If ‘free trade’ actually means trade without tariffs or agreements or regulations, are we so sure it does not exist anywhere? Does it not exist between states in the US? With a few exceptions such as agricultural products entering California? Isn’t this what the EU wants to emulate (poorly), the free movement of goods and people? Oh, if I remember Steinbeck, California wasn’t that happy with immigrants from the midwest during the depression.

    Like

    • YMMV, free trade between e.g. California and Oregon works because there is also a free flow of workers, and there is rough economic equality between the states. So if your factory decides to move to Oregon, you and other workers can move with it. Not only that, but in general you’ll be paid the same after as before the move.

      None of these conditions is true regarding e.g. US and Mexico. If a factory moves to Mexico, they’ll be paying the workers $3 per hour, and you are not free to move there in any case. And if you did, you’ll be paid $3 per hour.

      All the best,

      w.

      Like

    • I like the free flow of ideas. I wonder if Economics could use a dose of Thermodynamics? What happens when you put a hot country touching a cold country? In the case of USA and Mexico, poor workers stream north looking for higher wages, and they might even find something because they still get less. Companies send factories south looking for lower wages, which might even be good on the Mexican wage scale. One small step towards equilibrium; but not necessarily a good thing for the US. If you want to keep hot and cold, you need insulation between them to slow down the flows. A wall might slow the people flows, tariffs might do it for company flows. So ‘true’ free trade has issues. On the other hand, the absolute opposite isn’t the ideal either, or you end up like North Korea.

      And then there are the industrial revolutions. Many workers find themselves replaced by machines, so they migrate elsewhere and become workers in the new factories. As long as they can migrate to new jobs; if not, everybody has a big problem.

      “and you are not free to move there in any case. And if you did, you’ll be paid $3 per hour”
      Not ‘free’ totally, but if you are rich enough you can buy some nice beach property (and drive up prices beyond the reach of the locals). Doesn’t every rock star have a mansion somewhere like that?

      Like

  31. ” I was a strong advocate of free trade until I read How Rich Countries Got Rich and Why Poor Countries Stay Poor. Erik Reinert lays out all of these points far better than I. I cannot recommend this book too highly. ”

    I finished the book over the weekend on a flight from San Diego to Knoxville. I am not an economist (my son is) but I learned a lot. Manufacturing is the key. Politicians apparently don’t understand this.

    Like


  32. The Supreme Court of Canada has ruled unanimously that provinces and territories have the constitutional right to restrict the importation of goods across provincial and territorial borders — as long as the primary aim of the restriction is not to impede trade.

    Is that clear?
    http://www.cbc.ca/news/politics/scoc-decision-liquor-provinces-1.4625861


    Comeau’s defence centred on section 121 of the Constitution Act, which states products from any province “shall … be admitted free into each of the other provinces.”

    A 1921 Supreme Court decision interpreted that to mean the products only had to be free from tariffs, not from other barriers such as limits on quantity.

    Comeau and others argued that that decision offered too narrow an interpretation, and that it led to the proliferation of interprovincial trade barriers.

    But the Supreme Court disagreed Thursday, ruling that section 121 does not impose absolute free trade across Canada.

    The court said that section 121 prohibits laws restricting interprovincial trade — but only when restricting trade is the laws’ main purpose.

    Basically, the court supported the status quo. Where it gets interesting is in the current battle for/against enlarging an oil pipeline between Alberta and British Columbia. That could become a real trade war, except that neither side has tanks.

    Like

  33. Bear April 20, 2018 at 9:51 am

    @Willis Thanks for responding

    Thanks, Bear, but you are conflating value and wealth. Suppose I have an old toy, and I run into an old toy collector. He thinks it is worth a thousand bucks, and pays me the $1,000 … yes, there is value, but once again no wealth has been created. We still just have an old toy, regardless of the price (value) that you put on it.

    Maybe we’re lacking some common definitions. If I’m understanding your position, wealth is the creation of things of value. So the creator of the toy created “wealth” but if someone buys it and later sells it to the collector no new wealth was created, regardless of the value at that point in time? So how do you determine what amount of wealth is inherent in the toy? Can’t be based on the dollar value when the original creator sold the toy because he could have also sold it to the toy collector directly and received a larger amount for the same effort and materials. Conversely, if no one wants his toy then there is no value and therefore no wealth and you could argue negative wealth because resources were wasted.

    Value is determined by one thing and one thing only—what the market will pay. That’s why we have a concept called “fair market value”. The “fair” refers to an “arms length transaction”, which means that the buyer and the seller have opposing interests—the seller wants a high price and the buyer wants a low price. Whatever they agree on is the value of the object.

    But if I buy a bag of potatoes for ten dollars and sell them for twenty dollars, I have not created a scrap of food in the process … yes, the value is different, but there are no more potatoes after the transaction, so the world is no wealthier than it was before.

    Regarding the question of sand, extracting something from nature is one of the ways to create wealth. In that, the creation of wealth is in the extraction, which implies taking something (oil, fish) from where it is in nature (underground, in the ocean) to someplace where people can use it. HOWEVER … the wealth is not created in the moving of these items, it is created in the extraction of the items. No wealth is created when you move a load of fish from a fishing boat to the shore. You still only have X pounds of fish. The value was created when you extracted the fish from the ocean.

    Again, I recommend that you read the book I’ve recommended, it explains all of these concepts much better than I can.

    Thanks for continuing the discussion,

    w.

    Like

    • @Willis

      Thanks for taking the time to discuss this with me. I just finished the book you recommended and it does have a number of positions that I agree with though I also have some things I question.

      One thing that occurred to me is that the one country in the world that claims to adhere to the books thesis is North Korea and their Juche philosophy (and we can see how well that’s working for them). And yes, I’m being rather facetious given the nature of that dictatorship so please forgive me. The book does give a nod to trade though grudgingly so it is not totally doctrinaire in that regard.

      But if I buy a bag of potatoes for ten dollars and sell them for twenty dollars, I have not created a scrap of food in the process … yes, the value is different, but there are no more potatoes after the transaction, so the world is no wealthier than it was before.

      Yes, but then how do we define the wealth that was created in the first place (as opposed to value)? If I’ve expended effort in planting and harvesting more potatoes than I can use, but no one else want’s them then how much wealth is there in the extra potatoes? The wealth that accrues to me would only come about if someone else wants them and I can trade them for something else that I need or the equivalent in money. The amount hasn’t changed but they now have utility for me. Same with any other commodity. Worth also is relative. Consider that mercury was once sought after for industrial uses and now is considered a toxic waste. So at one point having it made you wealth and now it’s a troublesome byproduct. So the wealth in any commodity or product varies just as value does (though value doesn’t always depend it the utility of the object). The USSR was notorious for producing a lot (wealth?) that no one wanted to buy (value?). Famers in the Great Depression dumped milk because there was an excess supply that no one wanted. If the amount of milk is wealth but has no value (no one wants it or the price is below the cost of production) then where is the intrinsic worth of the product?

      I do agree that creating finished products yourself as opposed to selling raw materials is the proper way for a country to prosper. We’re selling logs to Japan for lumber instead of selling the lumber for example. However that only works if your effort required for production is lower than the worth of the final product. The modern flaw in free trade stems from the assumption that while another country might produce a product better and cheaper than my country can, my country can produce another product that is worth the same that I can trade to them. And yes, you can still wind up with a problem if that leaves your populace unemployed even if trade balances.

      I also take issue with the rule that it is better for the populace to buy a two dollar item made in the country as opposed to something that is better and only costs a dollar and made in another country. One problem with that is real or quasi monopolies. It presupposes that blocking trade will allow the local industry to improve itself. For some examples, look at the crap the US car industry was producing prior to the Japanese auto invasion or the junk Eastern Europe produced. Now the problem with that is that it cascades through the economy. Poorly made products that are used to produce other products and commodities raise the cost of production (repairs, replacement, and inefficiencies) and reduce the amount of surplus wealth produced.
      Another case was Japanese steel. When their steel began to come into the US the US steel manufacturers were using furnaces that were over a hundred years old (Bethlehem Steel in Baltimore for example) and were not competitive. They didn’t upgrade because they didn’t need to because there was little competition prior to the Japanese and Germans. Now in support of the book, the Japanese did exactly what it suggested and blocked imports while it built up it’s domestic manufacturing base so I will agree that it works in that situation. But after that I think it’s counter productive as long as there is a lack of competition in the system.

      The discussion the book makes on gold and silver seems to contradict some of the rest of the book. He even states that using gold and silver where they are used up is anathema to his thesis. I’m assuming because they’re “money”. He imparts a utility on them which is a medium exchange that has no intrinsic worth (I would normally use the term value but we’ve been using it in a monetary sense). Today they are used in industrial applications but at the time I don’t know of much that used them in that fashion and he recommends against that use anyway. So whereas things such as linens and metals that are used in creating manufactured goods have an intrinsic worth gold and silver don’t.

      Again thanks for taking the time to discuss this. The book makes for very thoughtful reading and I’m going to have to mull over much of it.

      Like

  34. Given the discussion on wealth I thought I’d mention this article which is in the Washington Monthly. Now the Washington Monthly was once run by self identified socialist though I guess they’d call themselves progressives now. And to me it explains the so called elites.

    This paragraph is the one that really stood out.

    But at a certain level, this tired conservative whine is correct: the people who lead and create culture don’t respect them. Artists, actors, inventors, comedians, entrepreneurs, academics, musicians, journalists and professionals across almost all creative industries have no patience for what passes for modern conservatism. And why should they?

    Notice that none of them create wealth as you’ve defined it. Now you could argue that inventors and entrepreneurs do, depending on the invention, but my guess is even those were referring to people like Steve Jobs, Bill Gates or Bezos. I’m sure that he would exclude the guy who invented fracking for example. And I’m sure the conservatives he’s denigrating are the ones that grow his food, extract the oil and natural gas that heat his home and build the car (er hybrid) he drives.

    What he has done is defined who is part of the cultural elite. Or maybe drones is a better term. And they don’t grasp why their hateful attitude is causing the situation that got Trump elected. Yes, I’m being as generalizing as he is, but the set that includes the elites overlaps to a large degree with the set of each of those groups he listed.

    Like

  35. I thought you might like this article which supports your thesis. Columbia appears to have read Erik Reinert’s book. Being commodity export dependent for your wealth seems to be a way to ensure poverty in the long run.

    Like

    • Outstanding find, Bear, and it neatly illustrates what I’ve been saying. If you allow manufactured goods to enter your country easily, you’ll never develop an industrial base and you’ll stay poor forever. Not sure why this is so hard for folks to grasp, but cheap imports do NOT help the consumer in the long run.

      w.

      Like

      • Reading that article ranks as a “wow” moment for me.

        There’s a saying: “eating your seed corn” that has some application to this subject.

        Like

      • I think the Smoot-Hawley Tariff Act and the Great Depression are the main factors in the reaction against protectionism. When you can’t consume all that you produce and everyone else is following Reinert’s rules then what do you do? Obviously, switch some of your production to something else. One thing that I remember about the GD was that farmers were dumping milk because the price had gone through the floor because of oversupply. Having heavy investment in a single commodity that doesn’t allow you to easily switch to something else that is in higher demand often creates a situation where the producer doubles down by increasing their output to make up for the reduced price. Of course that just makes things worse. That’s one thing that Reinert IIRC didn’t have to deal with since mass production hadn’t taken hold in his time.

        Like

  36. Trump isn’t imposing tariffs on foreign countries – he is imposing tariffs on Americans. They must pay more for goods that are imported. So much for the land of the free.

    Like

    • Richard, what you say is true, but you miss the larger picture. What may be good for the individual consumer may be very bad for the nation as a whole.

      For exmple. If we buy a billion dollars worth of vegetables from Mexican farmers, at the end of the year the vegetables are eaten, the Mexican farmers have a billion dollars more, and the US is poorer by one billion dollars.

      But if we buy a billion dollars of vegetables from American farmers, at the end of the year America is as rich as it was before.

      And at present, our stupidity in this matter is costing us more than half a TRILLION dollars a year through our trade deficit.

      This was understood even as far back as 1684, when Philipp von Hörnigk wrote about the overriding importance of keeping production within the country even if it cost more than doing it out of country, viz:

      Ninth, except for important considerations, no importation should be allowed under any circumstances of commodities of which there is a sufficient supply of suitable quality at home; and in this matter neither sympathy nor compassion should be shown foreigners, be they friends, kinfolk, allies or enemies. For all friendship ceases, when it involves my own weakness and ruin. And this holds good, even if the domestic commodities are of poorer quality, or even higher priced. For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.

      Best regards,

      w.

      Like

  37. So the US consumer is forced by the US government to subsidise the US producer. Crony capitalism. The purpose of economic activity is consumption, not production. Free trade compels local producers to become more efficient or move into activities that are more productive. This is the engine of growth in a free market economy. The number of jobs in agriculture has fallen substantially and will continue to do so as greater efficiencies are made and food becomes cheaper. This fall is world wide and is paralleled in manufacturing jobs – even in China according to the World Bank. The US is fortunate in that it is a big country with free trade within it. But as a Californian why don’t you object to free trade with Texas if it means that Californian producers can’t compete?

    Like

    • Nope, that’s not what it means. It means the US consumer is forced by the US government to support the economic well-being of the US as a whole. It’s called “national interest”, and yes, sometimes we have to force individuals to act in the national interest. For example, nobody in any nation wants to pay taxes to support an army … so every country forces them to do so because it’s in the national interest. Same with economic matters …

      Next, you say:

      The purpose of economic activity is consumption, not production.

      Nope again. The purpose of economic activity is the production of wealth. Without production of wealth there is nothing to consume. And a half-TRILLION dollar annual trade deficit is making us all less wealthy—you, me, everyone. We’re pissing away a half-trillion per year, it’s leaving the country and not coming back. And thank goodness we finally have a President who recognizes that and is willing to act on it.

      And while you may wish to ignore everyone else and act in your own selfish interests, in the end, that leads to national economic suicide.

      So I’m sorry, but you and I cannot always just act out of personal greed and self-interest …

      w.

      Like

      • I agree with your points but implementation is an issue. Two examples are the auto and steel industries prior to Japan entering both markets in the US. Let’s face it Detroit was producing crap cars. Why? because you had three automakers that had decided that they could make money that way. GM was the elephant in the room and the other two went along. GM raised prices and they raised theres. GM lowered prices and they did too. The cost of creating a new brand was prohibitive so the quality of the cars kept getting worse and worse. People needed transportation and they were the only game in town. Hence you had Pintos, Citations, and Vegas to name a few. They didn’t try to clean up their act until Honda and Toyota began to clean their clock with inexpensive reliable cars. Finally they had to be saved by the government when the recession hit. Now you’re right about tariffs being needed to protect a domestic market and keeping wealth in the country, but there still has to be incentives domestically to innovate and build high quality merchandise or you wind up like the Soviet Union though by a different route. Same thing happened with domestic steel. Bethlehem Steel in Baltimore were using 100 year old blast furnaces before foreign steel came in and drove them out of business. No real competition so no need to innovate until it was too late. They probably would have kept using those furnaces while the rest of the world grew wealthier if the government had protected their domestic market.

        Like

      • I am quoting Adam Smith about the purpose of economic activity being consumption. You state that the purpose is the production of wealth. But production is not wealth unless there is a demand for it – in others words it is the consumption of what is produced that is wealth. Produce what nobody wants and you have destroyed wealth.
        The trade deficit is not making Americans poorer – the money eventually comes back in the form of foreign investment in the US economy. How long do you think foreigners are going to sit on piles of dollars? It is tariffs that make American consumers poorer. Furthermore a trade war will make the world a poorer place.

        Like

        • Richard Smith June 5, 2018 at 8:21 am

          The trade deficit is not making Americans poorer – the money eventually comes back in the form of foreign investment in the US economy.

          First, there’s no law saying they have to invest in the US just because they got US dollars. They can piss the money down a rathole or more likely just invest it in their own economies if they wish.

          Second, if that happens, the end result is that foreigners will have bought up all of the US businesses and real estate … you haven’t thought this all the way through. How on earth will foreigners owning all the US businesses benefit the US economy?

          Third, what countries actually do if there are US trade barriers is set up production facilities in the US and hire US workers. That does benefit the economy.

          w.

          Like

          • True. The Japanese went on a buying spree but the didn’t buy our goods they bought our equity: land, businesses, and properties such as Rockefeller Center. Dollars had also replaced the Pound Sterling as an international currency so it was being traded around the world without ever returning to the US. That only works as long as people have faith in the dollar. Flood the market with fiat money and eventually it will devalue. Just ask Germany or Venezuela.

            Like

          • Do you really believe that holders of dollars will ‘piss the money down a rathole’. These are people who have sold goods to Americans in return for dollars that they then just throw away? And if they invest the dollars in the US what is there to fear from that? It will enhance the growth in US GDP to the benefit of Americans in general. Your fear that it could end in foreigners buying up all US businesses is fantasy. The mere annual growth in the US GDP (let’s assume a measly 2% of $18 trillion) is greater than the annual capital
            surplus (the mirror image of the trade deficit).
            The word ‘deficit’ is misleading. It is not a deficit in the sense of a debt. If I buy bread from the baker I have a trade deficit and he has a trade surplus. We both benefit because I value the bread more than the dollars and he values the dollars more. The whole purpose of work (the hard bit – what we export) is so that we can have the benefits (the nice bit – what we import). Trade is not a zero sum game and everybody gains. That is why restrictions on trade impede wealth.

            Like

  38. Richard Smith June 6, 2018 at 10:01 am

    Do you really believe that holders of dollars will ‘piss the money down a rathole’. These are people who have sold goods to Americans in return for dollars that they then just throw away?

    Say what? It is a figure of speech.

    And if they invest the dollars in the US what is there to fear from that? It will enhance the growth in US GDP to the benefit of Americans in general. Your fear that it could end in foreigners buying up all US businesses is fantasy. The mere annual growth in the US GDP (let’s assume a measly 2% of $18 trillion) is greater than the annual capital surplus (the mirror image of the trade deficit).

    What is there to fear from foreigners buying up US businesses? If you can’t see the danger in that, I fear I cannot explain it to you. Suppose China were to buy McDonnell-Douglas … you good with that?

    The word ‘deficit’ is misleading. It is not a deficit in the sense of a debt. If I buy bread from the baker I have a trade deficit and he has a trade surplus. We both benefit because I value the bread more than the dollars and he values the dollars more. The whole purpose of work (the hard bit – what we export) is so that we can have the benefits (the nice bit – what we import). Trade is not a zero sum game and everybody gains. That is why restrictions on trade impede wealth.

    I’m sorry, but you don’t grasp the facts. If we buy a billion in vegetables from Mexicans, at the end of the year we have nothing because the vegetables are eaten … and Mexico is richer by a billion dollars.

    But if we buy a billion dollars from US farmers, at the end of the yearMexico is NOT richer by a billion dollars.

    One way Mexico ends up with a billion dollars. The other way, US farmers end up with a billion dollars. If you cannot see the difference for the nation as a whole between those two, as Shakespeare said, “This disease is beyond my practice”. I cannot help you.

    Let me suggest very, very strongly that you read How Rich Countries Got Rich … And Why Poor Countries Stay Poor. It may stand a chance of breaking through to you, because I can’t. Let me invite you to come back after you read it and you can tell us where the author is wrong … or you can just blow it off and continue on your path …

    My best wishes to you,

    w.

    Like

  39. So Americans get lots of lovely fruit and veg and Mexicans end up with pieces of paper with pictures of Ben Franklin. Sounds like a deal!

    Like

  40. You often claim that free trade makes America poorer. But tariffs make American consumers poorer – particularly poor Americans. The poor spend proportionally more on cheaper foreign goods. It is estimated that blocking free trade completely would reduce the purchasing power of the richest 10% by 4% but that of the poorest 10% by 70% (Faigelbaum and Khandelwal, 2015).

    Like

  41. For those like Richard Smith bemoaning the cost of losing cheap Chinese TVs and claiming that the money shipped overseas as part of our trade deficit will somehow magically return to the US, here’s a link for you. Money quote?

    America’s trade deficit with China serves the authoritarian state’s global ascendance and regional power ambitions, said Decker.

    “What are our dollars doing?” asked Decker. “We’re building, paying for, and underwriting [China’s] military buildup. We’re building their infrastructure. We’re making their country stronger for the future, sort of at the long-term expense of our own. We’re not making the investments in our own infrastructure.”

    “Every three years, we’re at a rate of $1.2 trillion in trade deficit with China,” said Decker. “That’s money they’re just using to build a deepwater fleet so they can project force in the Pacific. It’s a national security issue, as well.” …

    The trade deficit “is not only a consumer question,” said Decker, inviting political observers to contemplate “the bigger picture” of geopolitics.

    So you see, we have larger issues than cheap TVs for the poor …

    w.

    Like

  42. Brett Decker May be an Asia expert but he doesn’t have a clue about economics. What he says is the reverse of the truth. China’s trade surplus means that it has a capital account deficit – i.e. China invests more outside of China than foreigners invest in China. The US, on the other hand, by virtue of its trade deficit has capital account surplus so more investments are flowing into the US than out. Note also that China is harming itself by keeping the RMB artificially low against the dollar thus stoking inflation.

    Like

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