Ross Kaminsky: Protectionism is Political Pandering
Good article about how protectionism is pretty much vote buying, or pork barrel politics.
As one of history’s great economists, Frédéric Bastiat, put it in 1848: “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”
Trump and Clinton are bad economists indeed. If an American worker loses a job due to a factory moving overseas, they see only the impact on that worker. They neglect the benefit to consumers of buying products for less money, leaving us all with the opportunity to save for retirement or buy a nicer home or safer car or take that island vacation we’ve been dreaming of. They also ignore the many new jobs which are created by the ability of businesses to purchase their inputs at lower cost.
And nobody talks about what should be your fundamental right to buy what you want from whom you want without pandering politicians telling you to pay one-third more because they’re trying to scrounge up some votes in Ohio.
Pork barrel politics or rent seeking is where politicians and special interests take advantage of the power of government and economic biases of the public. In the case of protectionism it is taking advantage of the general public’s poor grasp of economics and understanding of the more goofy aspects of our national accounting and the general anti-foreign sentiment of the populace.
Yes, a worker’s job might go overseas. And yes that is a cost. But with foreign trade there is also a benefit. And while protectionism can possible avoid the cost of a worker’s job going overseas it also comes with a cost imposed on all others. It is no different that promising a benefit to subset of the voters paid for by the entire population. Further, other jobs may depend on foreign trade, so it is entirely possible you can prevent one job from going overseas at the expense of yet another job. And even if we engage in protectionism it is not a sure fire method of keeping that job from simply disappearing. Protectionism will likely result in less demand, so that job could simply disappear as the firm employing the worker shuts down.
And as I noted when we look at history when the Smoot-Hawley bill was passed our trading partners immediately retaliated by raising protectionist barriers to U.S. goods. So while an industry that was losing out to foreign competition might have felt less pressure from that competition those industries that relied heavily on exporting to other countries were adversely effected, for example agriculture. After the passage of Smoot-Hawley agriculture prices plummeted. It would be fair at that point to ask, “Why did Washington D.C. hate farmers so much?” Exports for steel and automobile exports also dropped significantly. What effect would an 80-85% drop in the exports in those industries have on employment in those industries?
Further, protectionism reduces competition. Reducing competition gives the remaining firms in the market increased market power–i.e. they can increase their profits by increasing their price. And how is that accomplished? By reducing output, and if you reduce output you also are going to reduce demand for the inputs. So even the industries this misguided policy is supposed to help might still lead to fewer jobs in those industries.
And even if our trading partners did not retaliate their incomes would go down due to protectionist policies…because they are not selling to us and losing that income. That income which is, in part, used to buy goods and services that the U.S. does export.
The bottom line is that a net reduction in overall global trade may not make the intended beneficiaries better off and will undoubtedly make everyone else worse off. It is a misguided and foolish attempt to try and buy votes without appearing to buy votes. And I should note we have done this before. That whole “ownership society” nonsense with getting everyone into a home irrespective of credit worthiness, lowering down payments to obtain a mortgage right down to zero, refinancing to 125% of your home’s value? Yeah, that was in part driven by politician’s desires to buy votes without appearing to buy votes. Instead of a more simple and better policy such as subsidizing down payments for a house, the policies ended up putting tremendous amounts of risk into the financial system to the point where the risk was systemic. The point is, if we want to help somebody whose job has gone overseas….we should help the guy whose job has gone overseas. Directly. Work on a policy to help such people that does not create bad incentives and will make such a transition less costly for those adversely effected. Trying to back door the help so as avoid the appearance of taking money from one group and giving it to another rarely tends to work out for anyone. And that is what we are talking about in the end. Almost all government policies end up taking from group A, which is usually large and diffuse, and giving it to group B which is usually small and concentrated.
Link via Don Boudreaux at Cafe Hayek.
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