Thursday, December 07, 2006

Cafe Hayek comment

A comment I posted in this thread:

The difference, as I perceive it, is that the Scott Kirwins are caught in the experiment. If Dell's Scott Kirwins are "outsourced", they suffer significant economic harm... at least for a while. Dell, on the other hand, suffers a minor setback and regroups handily.


This is probably true. At the same time, a more protectionist policy will create Scott Kirwins in other countries, as well as increasing costs to consumers and company stockholders, all average joes themselves.

There are always negative effects. We're not talking about Pareto efficiency here--quite often we're talking about processes that may be painful for various individuals for lengths of time, through no fault of their own.

The problem, as I view it, is that those concerned for these individuals always jump for extreme policies. In Tim Harford's words, the economy is truth: it reveals the true preferences of millions of individuals interacting with each other. Sometimes this truth is ugly. His example: Elderly people in England going without heat in the winter because they cannot afford high gas prices, and subsequently freezing to death.

So what, when we don't like the truth, should we do? If it is our plan to lie, to fool the market into producing a lie, it is always better to tell little white lies than big whoppers. It's better to subsidize English elderly than to establish a price cap. It's better to expand the EITC or institute a negative income tax than to raise the minimum wage. It's better to provide free job retraining to unemployed individuals than to establish protectionist tariffs.

As a libertarian I may disagree that little white lies are necessary, but I can certainly admit that they're superior, that the misallocations they result in are less inefficient, less unjust. Unfortunately they are not what make it through as policy proposals, quite often because the inefficiency they cut off is the very profit that special interests seek.

2 comments:

Aakash said...

We need to be concerned about our citizenry first, and support constitutional measures that will help our people.

This the comment I posted, a few minutes ago, at an entry at Cafe Hayek (at which you had previously posted a comment, from which I found your blog):

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Protection and reciprocity, in trade policies, was what built our great nation in the first place... And has contributed to the growth of the economies of newly-developing countries, which are threatening to overtake ours.

Promoting free markets is vital, but there is a difference between that, and supporting unfettered global free trade. The real world does not exist in a vaccuum, and there is a reason that our country's Constitution states that it is the duty of our government to regulate commerce, by enhancing American industry through the use of tariffs and duties.

Our Founding Fathers recognized the importance of both free markets and fair trade, and even Adam Smith acknowledged this as well, in advocating measures to protect the British economy, even if it contradicted the "free trade" philosophy that he espoused. The same is true with President Ronald Reagan, who sometimes supported free trade, but recognized that sovereignty, independence, national pride, and the welfare of our citizenry are more important.

It is time for our national leaders to realize that as well.

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Swimmy Lionni said...

I would disagree with your idea that protectionism made the United States great to begin with as a simple empirical matter. It's true that we are an immensely successful nation and that we have, at least since Lincoln's presidency, been involved in some manner of economic protectionism in various sectors. But it does not follow that this has helped our economy. Consider, for example, one of our most expansive protectionist efforts: the Smoot-Hawley Tariff of 1930. The trade war it ignited sent thousands of farmers into bankruptcy and devastaed furthermore several thousand farm banks.

Even ignoring reciprocal foreign anti-trade actions, it would be difficult to prove that any protectionist act has had a net benefit for the U.S. economy in any period. As we were all reminded recently by Bush's steel tariffs, protectionism in one industry inevitably harms others; ask any car manufacturer who had to order steel during that period. Furthermore, even in the protected sector, any benefits of a longstanding tariff will have been siphoned away long ago by workers trying to capture monopoly rents.

Our founding fathers left room for protectionism in the Constitution, but it's interesting that they did not grant the same "favor" to the states. Article I, Section 10 denies states the ability to tax interstate exports or imports except to pay for their own inspection laws. It seems that, like so many others (including Ronald Reagan), their commitment to politics outweighed their understanding of economics.

It's interesting that protectionists so often jump on Adam Smith, as if he is the only economist free-traders rely on. It doesn't seem to matter that numerous economists since him have improved his theory. In any case, it's true that Smith to some degree bought into "infant industry" and "necessary for defence" justifications for protectionism, but the point is irrelevant in today's discussion. None of our foolish modern mercantilists are arguing that we protect newfound industries. They are rather arguing, over and over, that America's manufacturing sector is dying. In other words, we need to protect an established and increasingly unnecessary industry from new industry. Adam Smith would have scoffed.