Every economic recession and depression that rolls around always brings cries of “protect our workers.” We remember Ross Perot in his independent campaign complaining about free trade and his famous “there will be a giant sucking sound going south” referring to United States jobs lost to Mexican cheap labor. To the economically uneducated this seems logical and correct.
Our first Secretary of the Treasury and founding father Alexander Hamilton’s second report to President Washington was Operations of the Act Laying Duties on Imports communicated to the House of Representatives on April 23, 1790. In the report Hamilton endorsed an increase in import tariffs from 5% to 7% to 10% as well as an excise tax. During the Great Depression tariffs got as high as 60%. Congress approved the tariffs but not the excise tax. This seems to be the prevalent way of looking at taxes for the average person. It seems logical. People want to punish the other guy who lives across the ocean and not own neighbor. We can agree on that, right? Not so fast. Let have a closer look at what really happens with tariffs and quotas.
Ross Perot won 18.9% of the popular vote in the 1992 presidential election with a populist appeal to isolationist trade policies and opposition to the NAFTA
There are numerous arguments for tariffs and quotas. One is the infant industry argument. We need to protect our industries from the huge foreign competitors overseas. With time our domestic industries will achieve economies to scale and be able to compete with the foreign giants. The little guys verses the big bad guys.
We even see this argument used domestically by local residents’ every time Wal-Mart builds a new store. Local established businesses plead that they need the government to protect them from competition. The little guy verses the big evil guys.
Anti trust law was written to protect the “little guy” from competition from the big evil corporations like Standard Oil. This is a recurring theme throughout history. Robin Hood stole from the rich and gave to the poor. So what is the economic truth?
Quite the opposite most of the time. The rich and politically connected using the government as their instrument to increase profits and protect their industries from better and more competitive competition.
Bill Clinton signed NAFTA. NAFTA created the world’s largest free trade area, linking 444 million people and producing $17 trillion in goods and services annually. Estimates are that NAFTA increases U.S. GDP by as much as .5% a year.
The cold harsh truth is that tariffs and quotas are one of the most destructive things a country can do to harm its citizens. There are other more harmful tax, regulatory and political actions a government can do but high tariffs and draconian quotas certainly rate in the top five things a government can to impoverish its people, kill jobs and destroy economic growth. All one has to do is stroll down the list of economic basket cases to see the long-term affects of protectionist policies.
The most famous recent example was the Union of Soviet Socialist Republics (USSR) and Eastern Block countries. Granted communism didn’t do much for economic growth even with 1975 Nobel Prize economist Leonid Vitaliyevich Kantorovich, the Paul Krugman of his day, on their side. Still what in the end killed communism and the workers paradise was lack of authentic money. In the end without a viable competitive manufacturing base even the cheapest wages could not make USSR industries competitive with the rest of the world. Although a few arms industries were competitive, the AK-47 comes to mind, the rest of the Soviet manufacturing base became outdated and unwanted in the world economy.
So the next question would be how did they arrive at economic desperation? Anyone who lived back then knows the answer. The communist isolated themselves as much as possible from the rest of the world. Economically, politically, socially, every way they possibly could. The USSR had the ultimate quota system and that was to allow almost no western products or services to enter the USSR and it’s satellite member states. As their products became uncompetitive and the foreign currencies dried up the empire crumbled and died. Economic isolation leads to bankruptcy.
Economic illiterates like Paul Krugman spread misinformation about economics that pleases the fascist crowd but does little to promote understanding
Anyone remember the Yugo? Gone. Anyone remember the $12.2 million the British government gave to the car maker MG? Where is MG? Gone.
Economically tariffs and quotas create “dead weight loss.” No need to bore anyone with the details but suffice to say it is not a good thing for the economy. A simple example my economic professor used was if 200 people can buy a car for $21,000 domestically or $18,000 from a foreign competitor with the loss of one job then the 200 people would save $3,000 per person. Consumers could spend on other goods increasing purchasing power parity by 14%! The one worker would not be happy but if a economist looks at the transaction who is the winner? Consumers saved $600,000 and the worker lost his $100,000 union job. Clearly consumers won. How does this work out in real life? Much, much worse for the consumer than this example.
Anyone remember the uproar over the Obama “shovel ready” jobs that cost taxpayers $185,000 to $2 million per job? Tariffs and quotas produce the same dismal economic results. Here are some 2002 (to convert to 2010 dollars multiply the figures by 1.207) numbers from the Federal Reserve of what it cost to save ONE job using tariffs or quotas.
Benzenoid industry saved 216 jobs at a cost of $1,376,435 per job or a total cost of $297,309,960.
The luggage industry saved 226 jobs at a cost of $1,285,078 per job or a total cost of $290,427,628.
Softwood lumber industry saved 605 jobs at a cost of $1,044,271 per job or a total cost of $631,783,955.
Dairy products industry saved 2,378 jobs at a cost of $685,323 per job or a total cost of $1,629,698,094.
Frozen orange juice industry saved 609 jobs at a cost of $635,103 per job or a total cost of $386,777,727.
And the list goes on and on. The United States protects the ball bearing industry, sugar, machine tools, women’s handbags and even canned tuna. It does not take a rocket scientist to see how protecting certain industries from foreign competition and not others is a recipe for corruption. Looking at the numbers even Paul Krugman could figure that one out. Spending a million dollars to save a $100,000 job just does not make economic sense. Generally consumers lose $9 to $19 dollars in lost purchasing power for every $1 of benefit of a domestic producer.
The most economically illiterate politicians seem to graduate from Ivy League schools like Harvard. I think they confused the Communist Manifesto and John Maynard Keynes with economics and real economist
Another way of looking at it is a tax on consumers paid to corporations. If we eliminated tariffs and paid the Benzenoid industry $360,000,000 directly from tax dollars would this gain traction politically? Every statist from coast to coast would be screaming about corporate welfare. That is exactly what quotas, tariffs, and cumbersome repetitive regulation and graft are. Corporate welfare and corruption.
We the consumers are paying corporations our money for their benefit in the form of higher prices. Every time we consume a sugar product we are paying almost double for the sugar in the product. Our price for sugar (2009) is 33 cents a pound and the world price is 17 cents a pound. Why? Because of quotas that benefit a few very rich growers in Florida. There growers, like all big corporations, know that paying political contributions and asking for favors is not good business but GREAT business.
Colorado representatives John Salazar and Marilyn Musgrave received $40,200 and $34,137 respectively over three years from the sugar industry. In 2003 the United States consumed 8,614,460 tons of refined sugar. Adjusting to 2009 population numbers that would be about 9,105,484 tons converted to pounds times the difference of 33 cents minus 17 cents and the sugar industry pocketed a nice $2,913,754,880. This math may not be exactly right but its close enough. Split the difference between Congressman Salazar and Musgrave and say big sugar contributes $37,000 to all 435 congresspersons, 100 senators, and the president. 536 times $37,000 equals $19,832,000. So for our millionaire businessmen in South Florida clearly an investment of $19,832,999 yields a payback of $2,913,754,880 or $146.91 per every dollar invested. Of course every member of Congress did not get $37,000. In reality politicians are much cheaper to bribe than that. Still you get the idea of the economic and business side of tariffs and quotas.
Congress likes them because they get paid off. Business loves them because they are maybe the best legal playoff a fat cat can get for his money. Maybe selling illegal drugs pays better but that’s debatable. Seriously what businessman would not jump at the chance to make $147 off every $1 invested? You would be a fool not to make that investment.
What about the consumer in all this? The average consumer losses about $11 dollars a year in higher prices for sugar and sugar products. Not much to get angry about. That is what Congress counts on. They hope you do not notice the loss of $11 here and $20 there. Silly you the consumer getting upset over the cost of a movie ticket.
It has taken a $14 trillion dollar deficit and the possibility of a dollar collapse to get the American public to focus on basic economic policies. For generations there has been to a great extent misinformation out there from people like Paul Krugman, FDR, Harvard, Yale, powerful business interest, politicians, big business, fat cats, Wall Street, Washington, and the Federal Reserve. People with money and political connections work in unison to rip off We the People. They know the game and are counting on the ignorant peasants to stay glued to American Idol. Now the peasants are finally waking up to the reality that the crooks won the game.
Tariffs, quotas and bureaucratic red tape are just another government scam. What would I do? Cut tariffs to zero, no quotas, no corporate taxes, and no capital gains taxes. Unemployment would be 4%. Corporations would not bribe our politicians. Big corporations and fat cats would have to compete with domestic competition as well as foreign competition. For most but not all profits would shrink, market share would shrink. Increased demand for US workers would raise wages.
Students often ask me how this is possible. Remember that deadweight loss? Well it is boring and I will not bother you with it.
But what about the workers who lose their jobs? Most will find employment in more productive sectors of the economy. Why? Thats where the jobs and money will always be. Some will accept lower paying jobs. Some will retire and some will never adjust. Nobody said economics was perfect but it sure beats ignorance.
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