Category: Political Economy

In response to Bashar Al-Assad’s use of nerve gas to attack his civilian population, President Donald Trump ordered an attack on the Syrian airport Assad’s Air Force used to launch the attack. Now what?

It isn’t so clear what exactly Trump hoped to accomplish by lobbing a reported 50 + Tomahawk missiles at the airport from two Navy warships stationed in the eastern Mediterranean. One prominent theory making the rounds is that Trump used this as a way of “sending a message” to North Korea’s Kim Jong-un. Buttressing this argument is the Pentagon’s announcement that a U.S. Navy aircraft carrier-led strike group is headed toward the Korean Peninsula. It is apparently meant to be a show of force.

In the short run, Trump’s response to the Syrian use of a gas attack on civilians provided him with the opportunity to reap lots of political benefits without taking any appreciable risk. For one thing, it pretty much demolishes the argument, fashionable in the Resistance, that Trump is a tool of the Russians. After all, it was the Russians who negotiated a deal with then Secretary of State John Kerry to take control of and destroy Syria’s WMD, including poison gas. It is now abundantly clear (to the surprise of no one except perhaps John Kerry and Barack Obama) that Syria and Russia had no intention of doing any such thing. The only question now is whether Russia was actively complicit in the actual gas attack.

The larger geo-strategic question is whether the Trump Administration is about to toss the populist nationalism overboard and begin to reassert U.S. leadership in world politics after 8 years of atrophy under the Obama Administration. That is certainly plausible, especially given the fact that political advisor Steve Bannon has been cut down to size, particularly with respect to foreign policy. But it runs directly counter to the forces that got Trump elected in the first place.

At the heart of the Trump Presidency there is an insoluble political / economic dilemma. His (for the moment) politically popular protectionist economic policies are on a collision course with his need to increase economic growth. Supply chains and finance are global. The leg bone is connected to the thighbone so to speak. Serious disruptions in global financial markets and supply chains would be economically and politically catastrophic.

While Trump professes to be a non-interventionist in foreign affairs, he jumped into the Syrian civil war at the first opportunity. It is not clear why. A pinprick will not dissuade Assad from his determination to retain power at any price. Moreover, a pinprick without any follow-up would leave Assad in a more powerful position, something that would not escape notice in Pyongyang.

So the question remains. Does President Trump intend to begin reasserting U.S. leadership in the world? If so it is going to require working with allies, keeping the U.S. economy open, increasing funding for the military, and getting the U.S. government’s fiscal position on a path to solvency. Which is to say, pretty much the opposite of what he has been promising from the beginning, with the possible exception of increased military spending.

The Conservatives who cheered Trump along ought to be getting pretty nervous thinking about this. Trump has given no indication of anything remotely resembling a coherent view of world politics, much less a governing philosophy. That’s probably because he doesn’t have one. He has instead shown himself to be a remarkably ignorant man, who lacks intellectual curiosity, and who prefers to think of himself as a practical businessman. All of which means that there is no telling what he will do, or why he will do it. That is hardly a conservative approach. In fact, his approach thus far seems more Wilsonian than anything else, but it is still early in the game.

Conservatives and libertarians should not be comfortable with Trump taking action after announcing that his thinking had changed because of pictures he saw on television. If he is to gain the support of policy intellectuals on the conservative / libertarian side, he is going to have to enunciate a coherent doctrine that describes the world the way it actually is, what U.S. goals are, and the means to achieve them.

Reasserting U.S. leadership in an increasingly fractious world after 8 years of Obama’s neglect is also going to require the assent of the citizenry, which means leadership at home. Leadership is not a quality Trump has demonstrated to date, unless you call rants in stadiums before worshipful followers leadership. The foreign policy catastrophe produced by Obama demonstrates the need for U.S. leadership in world politics. It is not clear if Trump is up to the job.

JFB

Economic Nationalism and the Trump Trade Agenda

According to Steve Bannon, the second prong of the Trump Administration’s policy focus is “Economic Nationalism”. The obvious first question is: what, exactly, does Bannon have in mind when he refers to Economic Nationalism? An important subsidiary question is whether the Trump Administration considers Economic Nationalism to be a distinct area of policy focus, or does the Administration consider it to be an integral part of an integrated policy agenda.

The term Economic Nationalism is certain to provoke well-deserved eye rolling among the vast majority of professional economists. The term sounds like one of those focus group inventions that sounds good to the untutored, but is actually bereft of substantive economic meaning. Proof of the pudding is Obama’s use of similar rhetoric, as when he referred to “Economic Patriotism” and attacked what he called corporate “deserters”.

That said, this type of thing has to be taken seriously for a few reasons. First, terms like Economic Nationalism have a distinctly unpleasant historical odor, one might say stench, about them, as the terms are associated with the likes of Juan Peron and Hugo Chavez, not to mention Adolf Hitler. (Fans of this bunch need to read no further, they are all pretty much beyond saving). Secondly, leaving aside its linguistic associations, Economic Nationalism is often (correctly) seen as a form a mercantilism, which though noxious, doesn’t reach the depravity of fascism or totalitarianism. But mercantilism is no day at the beach either. It (incorrectly) sees trade as a zero-sum game and can easily lead to resource wars and empire building, as it did in the past.

Third, to the extent that Economic Nationalism represents some kind of resurgent mercantilism, protectionism or isolationism, it is bad economic policy whose imposition would almost certainly harm economic growth in the United States and abroad leading to economic misery. Ironically enough, the bulk of the economic harms would fall mostly on the people who seem to be most enthusiastic about it.

Finally, Trump seems to mean what he says, and he and strategist Bannon seem to be on the same page.

No matter how you slice it, it is hard to see how Bannon / Trumpian Economic Nationalism is different from old-fashioned protectionism.

Trade and Protectionism

It is important to understand what free trade is and what free trade agreements like NAFTA actually do. In a nutshell, free trade refers to the free exchange of goods and services across national borders. Free trade agreements make this possible by removing trade barriers between people and companies residing in different countries. The trade barriers that are removed or reduced are typically tariffs and regulatory schemes designed to give the importing country’s home producers an advantage over foreign rivals. Consumers pay for all this through higher prices.

Discussions about free trade and trade agreements are often phrased in language that obscures more than it reveals. For example, when speaking of trade, it is typical to hear someone say something like this. “The U.S. bought $10 billion worth of goods from Mexico, but only sold Mexico $6 billion worth of goods in return. Therefore the U.S. has a trade deficit of $4 billion with Mexico. Moreover, that’s $4 billion worth of goods that American workers could have made. Therefore trading with Mexico cost Americans to lose jobs.”

Let’s take this one piece at a time. It is true but misleading to say that America bought $10 billion worth of Mexican goods, as if America is an undifferentiated whole. It is more accurate to say that millions of individual Americans in the aggregate bought $10 billion worth of stuff that came from Mexico and that millions of Mexicans bought $6 billion worth of stuff made in the U.S. The reason that Americans bought the $10 billion worth of stuff (and vice versa) is that they got a better deal buying the Mexican goods, whether in quality, price or both. In short, American consumers are better off because they can buy better quality and / or lower priced goods made in Mexico and shipped to the U.S.

It is not in any meaningful sense true that Mexico “stole” American jobs through trade. The first reason is that apart from a small number of political jobs that require U.S. citizenship, there is no such thing as an American job. There are jobs that Americans do, just as there are jobs that Frenchman do. But there is no particular reason to think of any job as American, or French or Mexican.

Second, it is without doubt the case that some jobs that were formerly performed in America are now performed in other countries resulting in the temporary displacement of some American workers. But American consumers are better off because more goods and services are available at lower cost and better quality than were available previously.

When it comes to Americans who lose jobs as a result of foreign competition, it really doesn’t matter that the competition comes from abroad or the next town over. It could come from anywhere. Eastman Kodak, for example, did not ultimately fail because of foreign competition. It failed because it resisted innovation and the advent of digital photography and was competed out of business. The lesson here is that to survive and thrive, workers and businesses need to remain dynamic and competitive.

By encouraging—or at least not impeding—the free flow of labor and capital across national boundaries, free trade facilitates the spread of knowledge, innovation and economic dynamism. It correctly treats trade as a plus sum game of shared gains. In so doing free trade allows resources to be matched to their highest and best uses, thereby promoting economic efficiency and wealth creation.

Opposition to free trade is often rhetorically disguised. One of the more popular dodges is to be for “fair trade” as opposed to free trade. Politicians routinely claim they are in favor of trade, but that it has to be “fair”. But what could be fairer than two counterparties exchanging goods and services for a freely negotiated price? And what could be less unfair than a transaction in which the police power of the State (in the form of tariffs and regulations) is used to tip the scales to favor one side?

We often hear that trade is unfair because a foreign producer’s government subsidizes them, or that their currency is being manipulated to lower prices below the market level. And in some cases this is undoubtedly correct.

So what?

If a government wants to subsidize a domestic producer directly or through currency manipulation, that government is taxing its own citizens to benefit the citizens of the importing country. Let them do it all day long. It is simply self-defeating. To see this, let’s do a thought experiment.

Suppose Korea, in an effort to guaranty large exports of Korean cars, decided to subsidize the manufacture of Hyundai and Kia cars such that the companies could sell their cars in the U.S. for a mere $1 dollar apiece. We would soon see lots of Hyundai and Kia cars on the road. And sales of other brands would dive. But American consumers would be richer and Korean taxpayers poorer because Korea would be effectively shipping products over to the U.S. and getting almost nothing in return.

Obviously, that wouldn’t last long because it would be so costly to Korean taxpayers that they would revolt. They would revolt because the favoritism (and corruption) of the arrangement is so transparent. But in principle there isn’t any real difference between the example given in this thought experiment and real world subsides and trade barriers. The only difference is that the thought experiment is clear and real world arrangements are opaque.

The Trump Trade Agenda

The Trump Trade agenda gives every indication of being old-fashioned protectionism implemented through tariffs and regulation, and gussied up as “Economic Nationalism”. The Trump argument is that it will increase employment and wages in America. Except that it won’t.

To the extent that people in protected industries keep jobs they do so at the price of higher costs and lower quality for consumers. It necessarily means that inefficiency is being subsidized, which in turn means that the dollars being shoveled into inefficient enterprises are being denied to innovative and efficient businesses that represent the growth of the future.

The path to increased economic growth and with it, higher wages, is one that recognizes the importance of achieving productivity gains through innovation and Schumpeterian creative destruction. It does not come through subsidizing failure; nor does it come by taxing consumers to privilege the industries with the best lobbying efforts.

Trumpian protectionism does not just fail to make the case in its own right; it is also undermines his stated intention to roll back the Regulatory, or Administrative State. Any serious effort to impose trade protectionism would entail massive increase in the power of the Administrative State. How are we to distinguish what is and is not an “American” product. How far back do we have to follow the supply chain to see whether a car manufactured in South Carolina counts as American or foreign. Are BMWs made in South Carolina foreign or American? How about Volvos? And who makes that determination and how?

Should we consider iPhones to be American products? There are about 750 or so parts suppliers, of which 69 are in the U.S. About 85% of the “rare earth” elements in the iPhone come from China. But the intellectual property of the iPhone has its home in Steve Jobs from California. And, by the way, Jobs’s biological father was a Syrian immigrant to the United States.

The Politics of Trade

Unfortunately, the current political environment does not favor trade. Trump has bought into the illiberal if not bizarre idea that Americans need to be protected from the freedom to trade. Bernie Sanders, Sherrod Brown and Elizabeth Warren have been there all along. Free traders dominate the Republican Congressional leadership, so perhaps they can limit the damage that Trump seems intent on inflicting in concert with Democratic Progressives. Trump has already moderated on some things; perhaps Paul Ryan will talk some sense into him and provide a fig leaf for a decorous retreat.

One can only hope.

JFB

The story is always the same; it is only the names that change. This time the name is Kevin Lara Lugo. He died on his 16^th birthday. The New York Times reports that he had spent the previous day foraging for food in an empty lot because there was none at home. The family had gone without for three days, and they were getting weak, so he went out to find something, anything, to eat. What he did find turned out to be poisonous. Because the hospital lacked the simplest supplies needed to save him, the boy died on a gurney while his mother stood by helplessly.

His aunt told Nicholas Casey, the Times reporter, that “the boy [died] for no reason at all.” But that is not correct. The boy died because he was killed by Socialism, the most ruthless man-made killer the world has ever known.

In Venezuela, as a direct result of the Socialist revolution brought about by Hugo Chavez, there are widespread shortages of food and medicine. Doctors lack water to clean operating tables, and there are food riots. But Venezuela is just the latest to go down this path. People starve to death in North Korea every day. The most conservative estimates of North Korean starvation deaths in the late 1990s are in the neighborhood of 250,000 with some estimates greater by an order of magnitude.

During 1932-33 Joseph Stalin deliberately starved to death between 3 and 7 million Ukrainians in what Ukrainians call the Holodomor. This took place within a larger collapse of Soviet agriculture that accompanied–was caused by– the collectivization of the farms. Kazakhstan was particularly hard hit, losing about 2 million to starvation. From 1919 through 1933 Kazakhstan lost more than half its population as a result of the Soviet imposition of collective farming.

At the moment Cuba, which imports 80% of its food, is going through one of its periodic food shortages, and is looking north to U.S. farmers for help. And if you look at a list of 40 countries where people are going hungry you will find names like Zimbabwe, Chad, Liberia, Mali, Republic of Congo, Haiti, India, Nicaragua, Ethiopia, Kenya, Mozambique, Sudan, Afghanistan, Myanmar, Uganda and Nepal. And that list leaves out places like Syria.

Not a capitalist one in the bunch. Not one. Every single one of them represents some stripe of collectivism. Call it socialism, communism, fascism, planned economy or whatever you want. The result is always the same. Bureaucrats and politicians, not business people and entrepreneurs make key economic decisions. As a result, the poor and vulnerable, those without political connections, are left to deal with predictable shortages of food and medicines. Make no mistake: these shortages are brought about by the politicians and bureaucrats who substitute central planning, bureaucratic control and regulation for free markets.

Which begs the question. Why is it that the activists who seem to be constantly staging marches for social justice are nowhere to be found protesting the plight of Venezuelans? Where are Bernie Sanders and the professional left? After all, Bernie Sanders has spent his entire political career advocating for the policies that have produced the predictable (and predicted) disaster in Venezuela. Shouldn’t he have some explaining to do? Believe it or not Sanders actually described food lines as a good thing. He said, “You know, it’s funny. Sometimes American journalists talk about how bad a country is when people are lining up for food. That’s a good thing. In other countries, people don’t line up for food. The rich get the food and the poor starve to death.”

Please see the John Stossel  You Tube segment below.

So the question needs to be asked. Why does the mainstream press give Sanders (and his ilk) a pass? Why are his campus followers, decked out in their Che branded T-shirts, treated as idealists rather than as dupes? Let’s be clear. The collectivist ideology they so enthusiastically and foolishly embrace is what ultimately killed Kevin Lara Lugo on his 16th birthday.

Kevin Lara Lugo, born 2000, died 2016. RIP.

JFB