There is some argument over whether Mark Twain is the author of the aphorism “It is better to be silent and thought a fool than to speak and remove all doubt.” Monday night’s Presidential debate should leave little doubt that it is advice that Donald J. Trump should have heeded. After all, Trump opened with a diatribe against free trade that convincingly demonstrated that he doesn’t have the slightest understanding of basic economics despite his alleged business savvy.
About Free Trade
The case for free trade is not new. The theory of comparative advantage, which is the underlying theory in support of free trade, was developed by David Ricardo in the early 19th century. The basic idea is that gains from trade accrue to individuals, firms or nations from differences in their relative abilities to produce tradable goods. Countries should specialize in producing goods in which they possess a comparative advantage, and then trade among themselves.
For example, suppose France has a comparative advantage in producing wine and England has a comparative advantage in producing beer. They will both be better off if France produces wine, England produces beer and France trades some wine for some English beer. They will produce more of each good at lower cost than would have been the case had each produced both wine and beer. The two countries are wealthier than they would have otherwise been.
While this is well understood by economists, it is widely misunderstood (or disbelieved) by the public. That is largely because politicians insist on arguing that trade deficits are “bad” and trade surpluses are “good”. To see just how ridiculous this is try a thought experiment. Imagine that after a few years U.S. companies were to sell $1 trillion worth of goods into the Chinese market. Then imagine that in return for the goods sold, the U.S. companies received pieces of paper denominated in Chinese Yuan nominally worth $1 trillion. And further suppose that the U.S. companies decided never to spend the Chinese Yuan they received for the goods they sold.
The U.S. now has a trade surplus of $1 trillion and a vault filled with lots of pieces of paper. On the other hand there are $1 trillion worth of actual goods in China that Chinese consumers have available to them. For free. How in the world does that make U.S. companies and consumers better off?
The U.S. will have given away $1 trillion for nothing in return except for useless pieces of paper. Because ultimately, all the Yuan in the vault are only useful when they are spent. And when they are spent, they are ultimately spent on Chinese goods. When that happens the U.S. trade surplus is reduced, as is the U.S. capital account deficit, (the flip side of the same coin) and the accounts move into balance.
It is unfortunately true that Hillary Clinton joined in the trade bashing and attempted to deny that she referred to the Trans Pacific Partnership deal as “the gold standard”. She can’t even tell the truth about being right. That is a pity because it is one of the very few sensible things she has ever backed.
And All the Other Stuff
When discussing trade Trump merely displayed yet again the stunning depths of his ignorance. Most of the rest of the time he was busy demonstrating his trademark boorishness and his adolescent lack of self-control. Moreover, it is hard to imagine that the vast majority of taxpayers agree with Trump that his failure to pay any federal taxes for some years is a sign that he is smart. Ditto from financially benefitting from his foundation. He might want to check how Leona Helmsley fared after she announced “Only the little people pay taxes.”
As soon as the debate ended the Trump team started complaining about the moderator, Lester Holt, who happens to be a registered Republican. As everyone knows, the team that complains about the referee after the game is the losing team. Like all loudmouths, Trump and Co. excel at whining.
It is too early for most polls to have picked up the fall out (if any) from the debate. A Reuters / Ipsos poll published Wednesday put Clinton ahead by 4 to 6 points. The most recent general election tracking poll by LA Times / USC conducted before the debate shows Trump expanding a lead over Clinton from 3 points to 4.
Note: There is a difference in methodology in the two polls. The Reuters/ Ipsos poll is based on a random sample of 1,705 Americans interviewed online. The LA Times / USC poll takes a random sample of about 400 Americans from a constant cohort of about 3,000 people. It also has about a 1-week lag.