Me, Myself, and I: International Trade Policy

Do you want to join a club? Maybe a reading club? I don’t know. Maybe those other people want to read things you don’t want to read. Maybe some of the people in the club want you to pay dues but will never listen to what you want? But then being in a reading club might make you a better reader and more knowledgeable – and maybe it will be fun. Hmm. Which way to go?

As we get closer to the election this year we are going to have to wade through a lot of bologna. Recently I was reading about the international trade plans of the two candidates. Trump is clear about “Me, Myself and I”. He has never seen a club he likes. He’s a loner. Anything “international” seems to him to be a way to take advantage of Americans.

Biden is not like previous Democrats. He does not fully embrace the idea than anything “global” is beautiful. Especially given the recent circumstances of Covid 19, he is more mindful of jobs for Americans and he doesn’t want to support any policies that might take jobs away from Americans. He is talking about industrial polices and tax policies that will keep jobs in America. “Me, Myself, and I” figures prominently into both candidates plans. 

It is interesting to me how far we have come in less than a year. I used to like free trade agreements. I used to like the idea of promoting freer trade. I liked the idea of lots of “clubs” to join. Maybe you could call that philosophy “Us, We, and Ya’ll.  Why did I like UWY? You can pronounce it like OOWE – as in OOWE G00WE was a worm.

I liked UWY because it seemed so logical. It seemed so intuitive. None of us make our own stuff. Okay maybe you grow some tomatoes. But mostly what we do is learn how to do something – call that your occupation. We earn money and we use that money to buy squash, beer, and Impossible Burgers. You don’t, in contrast, grow all your own food, produce your own steel, make your VW Bus, or any of that stuff.

Why do you do that? Because we believe in the benefits of specialization. If I tried to make my own Hawaiian shirts, they would be very ugly and probably cost me a ton. It is better for me to spend my time trying to be a good teacher and earn enough money to buy shirts from someone who really knows how to make shirts.

The idea of free trade extends these intuitive notions to nations. Why try to be a jack of all trades when you can specialize in some things, earn income, and then buy things from others? The result is that we would have much more product that way and at a better price.

I can hear you singing your favorite hymn right now. What’s wrong with this simple plot?

Several things are wrong.

First, like any club, this international scheme means we count on our trade partners to play by the rules. For example, they shouldn’t use trade policy as a big stick to gain other advantages. If Country A wants to invade Country B, they might threaten to cut off trade with B so that they ignore their bad behavior outside of trade.

Second, countries can gain by giving unfair advantages to their own workers and firms. Should we produce our own Panama Hats? We might have some great hat makers in the USA. But what if country C decides to give big subsidies to their hat makers? The world decides to buy hats from Country C instead of the US. US firms and workers are hurt.

Third, similar to the second point, countries can advantage their own companies and workers through a variety of protectionist policies including tariffs, health and safety regulations, labor regulations, and a number of other non-tariff barriers.

Fourth, transitions can be slow and treacherous. Perhaps natural economic advantages change over time? Suppose one of these changes negatively impacts US firms and workers. No cheating going on. Just change unfolding. The reality is that US firms and workers will be hurt. It will take time and much effort for those people to move away from earnings associated with declining industries – and move into more promising ventures. A 60 year-old worker might not transition easily from making hats to writing code.

Those are four things that come to mind that jeopardize a faith in free trade. We don’t want any of those things to happen.

But the truth is that we also may not want to go to the other side. We may see very negative outcomes or at least risks arising from an industrial policy that uses the deep pockets of government to routinely assist and regulate the trade of companies.  We may see negative side-effects coming from a broad and continuous system of trade protectionism.

What do we do? As usual, try to waddle through the middle.

The benefits of free trade might be a lot like the figurative free lunch. They sound good but maybe they are not what they are cracked up to be. Of course, an economy that is run and controlled by the government might have some drawbacks too. So we walk right down the middle knowing that it will be a fight to try to get the most out of free trade knowing that government will play a role. 

Like walking on a tightrope – swaying too far in one direction or the other, means a ride to a hard surface. Staying on the rope might mean a little movement either direction but not enough to topple you.

That balance is quite a challenge! I’m not sure Biden or Trump has the balance.

Oldie Goldie From March 16, 2010 "More About Working Together"

This week I am republishing a post from 10 years ago. I think I was much too optimistic but I was younger then. :-)

In the previous post I forecast that extremist policy views would soon be seen as selfish, inappropriate, and counter-productive -- and will be edged out by saner ideas based on cause and effect logic. I know that sounds crazy but the evidence is piling up. I know -- it doesn't seem to be apparent in the health care reform debate but it is showing up in other places. I quote from yesterday's article in the Financial Times (page 11, March 15) "A frugal budgetary policy is the better solution" by George Osborne and Jeffrey Sachs...

"Our macroeconomic view, in short, can be stated as follows. We must escape from economic management by quarterly indicators and the demands of the political business cycle....Our priority should be a medium-term fiscal framework, with the first steps starting this year. That must be matched by improvements in the delivery of health, education, skills, and technology; social protection for those in need; and a decent regard for the long-term investments needed to rebuild an economy crushed by the bubbles of wishful thinking."

Sachs and Osborne point out what most of us know -- we will never return to good economic growth with unsustainably high government budget deficits -- so they advocate real policies to quickly address and reduce the size of government deficits. Well intended short-term stimulus at this point, according to these authors, would be counter-productive. But they do not discount a role for government since they forcefully advocate a public role in "... regulation, high quality education, pre-commercial innovation, and a world-class science and technology base.

Sachs is director of the Earth Institute at Columbia University . More information about him and a link to the FT article can be found at:http://www.earth.columbia.edu/articles/view/1804

It is a question of priorities. It doesn't matter if it was Bush or Obama who caused a larger national debt. It doesn't even matter the goodness or the motivations of the government spending. What matters most today is that most people -- at home and abroad -- wonder and worry if the US will find a way to reverse the very large deficits of the last couple of years. We see what those kinds of worries did to Greece and the Euro. Greece now must experience a macro shock treatment if it is to convince the world that it is credit-worthy. The US situation is not as dire now -- but the lesson is instructive.

First things first. If we remove the shackles of debt incredibility then we set the stage for a return to economic growth. It is this economic growth that will restore the job engine and the income growth that will allow some wiggle room to work on social inequity. Reversing the order of things right now makes no sense and helps no one.

Gored by Al Gore

If you stab someone with a sword then you have successfully gored them. After reading Al Gore’s latest mind poop in the Wall Street Journal* I feel like someone stabbed me.

There’s nothing like an emergency to bring out the Kooks. They say something like, “Aha, I told you so. If you don’t put away your toys at night, the goblins will come and haunt you. You see, that hurricane came and destroyed our house. If you had just kept your room cleaner, then none of this would have happened.”

And so Al Gore for the ten thousandth time has another reason to get behind his bloody pulpit and tell us the same things over and over and over.

It’s hardly worth rehashing but Covid has me bored and this process might be good for my mental health.

Let’s start with the title of his piece...Capitalism After Coronavirus.  He says he prefers sustainable capitalism to mere capitalism. Really, what does Al Gore know or even like about capitalism before or after Corona? The answer is nothing. Capitalism is the antithesis of what he calls sustainable capitalism. It’s a mind/word game to make you think he isn’t trying to turn the world up-side-down for his own philosophical and political needs.

Capitalism is defined as an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than the state. He wants just the opposite. He loves the word stakeholders. When firms decide to raise the price of raisins – he wants  the owners of Raisin Are Us to be joined in the decision by the city council, the Boys and Girls Club board, the labor council, Save our Bees Club, and a lot of others who might be impacted or at least insulted by the price of raisins. Of course, with Al Gore, a lengthy study on the impact on global climate change would be required as well.

Reading Gore would make one think that capitalism is now running roughshod in the world without government regulation and without plenty of representation by labor and other groups. One might think that most company boards are sitting around in luxurious meeting rooms drinking expensive Spanish Cava talking in hushed voices about how they are going to acquire reams of money to exceed the fortune of Scrooge McDuck. And of course, they do all this over the broken backs of their employees and neighbors while farting huge dark clouds of poisonous gas into the atmosphere.

If one wants to think of corporations that way, that’s okay. I am sure there are plenty of companies who fit the bill. But to think that most companies will be better off or to think the country will be better off with even more ESG, then you have a lot of convincing to do. By the way, I had to look that up. ESG means environmental, social, and governmental factors.

Isn’t it interesting how extreme he writes. He says “All investments made today must factor in long-term climate and social implications.” Are you kidding me? Does he know what the word “all” means? Investment is what makes us more competitive and it builds our future. Do we really have to hire a team of accountants and lawyers every single time we buy a piece of capital? Did I say every single time?

And then there is the very explicit idea that everything is class struggle. The ESG notion presumes that those fat cats smoking Cuban cigars and eating caviar have a huge disdain for all those employees – all those programmers, accountants, and factory hands. Those owners apparently revel in stealing a dollar from their unsuspecting employees. Nowhere does Gore show any understanding of modern management wherein output and profit is a joint result of a management team best employing capital, labor and technology within the laws of society to ensure prosperity and survival.

Has Gore ever held a job? Has he never seen how companies must be smart and work hard to survive? Does a smart company treat its employees like crap? Does a smart company ignore its social surroundings? Does a smart company always focus on quick gains at the expense of long-term stability and growth? 

One last point of emphasis. I am not decrying government regulation of business. When companies act badly, they should be fried. And there are always new situations which could result in even more government regulation. What I am saying in this post is that Al Gore has a political agenda and he doesn’t know when to say no. He doesn’t want capitalism of any kind. He wants government control of the economy. He wants to treat equity and environmental issues before anything else.

He wants to throw out the baby with the dirty bathwater. I don’t.

* Al Gore and David Blood WSJ 6/30/20 Capitalism After Coronavirus

Mixing Things

We mix a lot of things.

For example, I like Jack* mixed with ice or what is called “Jack on the Rocks.” Sometimes I prefer Jack with some bitters and Maraschino cherries, sometimes called an Old Fashioned. On special occasions I have a dry martini which means you mix a nice dry gin with a little bit of white vermouth. Shake it in a metal tumbler with some ice until your hand freezes. Add olives. 

Basketball teams mix tall people with short people and often times mix people of color with whites. A “mixer” is often used to describe a social event or a dance that mixes the sexes. A cake mix mixes together a bunch of ingredients. And what about a pizza? Wow.

We apparently love to mix. Mixing in the above and many more ways suggests that things don’t always have to stand alone. It does not have to be one or the other. For example, Jack is fine straight up out of the bottle. And Maraschino cherries – wow, they are wonderful alone. Most French fries don’t even need a hint of catsup.

Yet, despite the wonderfulness of things alone, we often find that combining them produces better outcomes. Straight Jack might be too strong for some people. Gin is not only strong but it has a specific flavor related to the juniper berry that some people prefer with some sort of embellishment. Some people are much better single while others can barely exist without a continuous partner.

All the above got me thinking about people on the ideological extremes. Like a good ounce of bourbon, a liberal progressive has some very clear and important characteristics. A conservative makes some points so true and tasty that even pommes frites eaten in a Maastricht square could not compete.

But isn’t it interesting that even though liberals and conservatives each have very important beliefs and messages, they don’t see the benefit of mixing? Sure, we have people called centrists and moderates who blend these ideas, but isn’t it interesting that the moderates don’t seem to have much sway these days.

Economic conservatives love motivation and the idea of creating incentives to get people to do things that are good for themselves and for society. For example, a financial conservative might favor giving a company a tax break so that it might hire more people and produce more goods.

A liberal worries that incentive is not enough or that it might be wasted. A liberal might prefer a more direct approach as in a regulation or a penalty that might drive a firm to hire more people.

The conservative retorts that liberal regulations can be misspent and ineffective; the liberal believes the same of the tax incentive.

This is just one example of the differences between conservatives and liberals. The point is that they both have good ideas. As in gin & tonic or a Bloody Mary, why can’t liberals and conservatives see the beauty in each other’s approaches? In the above example, perhaps some mixing of incentives and regulations might be better than the extreme or purely ideological approaches. Giving a firm incentives to grow, while at the same time putting some parameters around how the incentives are spent, might work. Paying close attention to the unintended effects of tax cuts and/or regulations suggests getting the most out of policies.

Yet as reasonable as all that sounds, we see moderates drowned out by extremism on the left and right. Has our world always been that way? Do we lack so much in entertainment or in so much heart-felt emotion, that we have to fume and scream at each other when we know that mixing might be better than extreme policies? Is it simply more fun to scream at people who see the world a little differently? Must Jack on the Rockers scream at Old-Fashioners?

I don’t know about you, but I am getting pretty thirsty. A French fry wouldn't hurt either.

Comment by Bruce Gingles* on Covid, Recent Policy, and Supply-Side Economics

Dear Larry,

Very respectfully, I offer the courteous rebuttal to your current posting on supply economics.

Year to date, tech stocks are up 20%. This is relevant to supply policy since technology has become the economic equivalent of a coronavirus vaccine. New machine tools allow people to work from home, order curbside pick up, take orders and deliver goods without direct human contact, and do practically everything much faster, safer and at lower cost than high-touch methods (who waits in line at the bank anymore except me? I have the place to myself).

As technology finds its way deeper into finance, manufacturing, leisure, construction, healthcare, agriculture, services and even sports (the nerdy world gamers convention draws a live audience about the size of the Super Bowl), fewer people will drive higher productivity and lower cost. It’s not an entirely rosy picture, especially for those left out, and there will be many, but supply may expand before we solve Covid. Supply side policy looks different than in 1990, when we equated productivity with employment.

A thought experiment asks whether a progressively taxed tycoon with wealth equal to total US GDP could ethically support the livelihoods of all Americans while employing his/her legal business practices, including technology, to the exclusion of human labor. This person’s taxes are adequate to sustain all US citizens at their current wage.

While not a perfect analogy, our current federal payments to businesses and individuals as relief from an infectious pandemic provide a glimpse of what such a scenario might look like, without incurring Treasury debt. Is this case example morally defensible? If so, one could argue that productivity (imagined as supply) is an end justified by its means. Only technology provides a plausible proof of this theoretical construct. We already see this trend emerging in the form of three McDonald’s menu/payment kiosks replacing 5-6 human order-takers in activist minimum wage locales.Automation tracks wage acceleration fairly closely.

In conclusion, I believe very little attention needs to be paid to supply-side policies as these are already being efficiently addressed by the free market, largely in the form of advanced technologies capable of increasing productivity during and after periods of decimated labor due to pandemics.

https://www.google.com/amp/s/www.cnbc.com/amp/2017/08/16/evidence-minimum-wage-hikes-result-in-workers-being-replaced-by-robots.html

*Bruce Gingles resides in Bloomington, Indiana