Monday, October 30, 2006

This one's for you, Lou

A few weeks ago, Josh Chernila, a graduate of the University of Chicago and Jim Webb campaigner, spoke at George Mason University for the Econ Society. He posed the question: "What's the cost of a $5 shirt?" His answer was that the cost is more than just the differential between the $5 and the $20 shirt. Rather, it's the cost of a livelihood, a job, to the manufacturer of the $20 shirt. Protectionism may mean a loss of $15 to you, but it means the gain of food on the table to the shirt's manufacturer.

What Chernila forgot to ask is, "What's the cost of a $20 shirt?" Say, for instance, a Chinese manufacturer exports shirts to the United States. The domestic manufacturer petitions the government to establish an "anti-dumping" law in the market for shirts. The Chinese manufacturer may no longer sell shirts to citizens in the United States.

The situation is immediately similar, actually; the Chinese manufacturer may well lose his job, his ability to put food on his family's table. This is one cost of protectionism, but unfortunately it is not an important one to a protectionist. The driving ideology behind protectionism and mercantilism is jingoism: the idea that a nation has the right to advance its relative position by any means necessary, including the bullying of other nations. A protectionist does not—cannot—care about the well-being of shirt manufacturers in China. It doesn't matter if they're poorer than, have fewer opportunities than, or have a smaller real safety net than U.S. citizens. They are, to protectionists, citizens of China's government and therefore only the Chinese need worry about them. So, although I consider the enormous increases in foreign standards of living to be one of the strongest arguments in favor of free global markets, this is not grounds for support in the political discourse of the United States. The jingoists far outnumber the cosmopolitans in this country.

Economists, to expand their message, must also show that protectionism is bad for the domestic country as well. This is easy to prove: everyone paying $5 rather than $20 for a shirt of equal quality is better off by $15. These gains may be small for individuals, but across an entire economy they are enormous, often measuring in billions of dollars. Opponents of Wal-Mart, who decry its job-destroying capability for the sake of mere low prices, must face the fact that Wal-Mart saves consumers in the United States, most of them low-to-middle-income, at least $16 billion a year. Government welfare may be nice for some, but the consumer gains created by this single corporation's practices are astounding. Imagine the same forces increasing savings in millions of other sectors across the entire nation every single year. To use a reductio ad absurdum, imagine if almost every single industry were protected; the retained jobs of their respective workers would mean nothing in light of the consumer loss such a policy would produce. (Perhaps the jobs would not even be retained. Protectionism is, after all, about lowering or stagnating productivity.)

In other words, the cost of a $20 shirt when a $5 shirt is available is potentially enormous, far more than the wages of any single domestic worker. Walter Williams, in a recent column, illustrated this point using some simple data on the U.S. sugar and textile industries:
Tariffs and quotas on imported sugar saved 2,261 jobs during the 1990s. As a result of those restrictions, the average household pays $21 more per year for sugar. The total cost, nationally, sums to $826,000 for each job saved. Trade restrictions on luggage saved 226 jobs and cost consumers $1.2 million in higher prices for each job saved. Restrictions on apparel and textiles saved 168,786 jobs at a cost of nearly $200,000 for each job saved.

But this is still not enough for protectionists, whose eyes can only lend sympathy to the domestic worker who has lost his or her job. No, to satisfy these jingoists, economists have to prove that protectionism is not beneficial even for the protected industry.

And, in fact, they have.

In 1975, the brilliant public-choice economist Gordon Tullock published a paper called "The Transitional Gains Trap." The linked paper is free for those with access to JSTOR; for those without I'll briefly summarize. Here's the abstract:
Many government programs which appear to be designed to help some particular industry or group do not seem to be succeeding. The explanation offered here is that the program, when inaugurated, generated transitional gains for the individuals or companies in the industry, but that these have been fully capitalized, with the result that the people in the industry now are doing no better than normal. On the other hand, the termination of the particular scheme would, in general, lead to large losses for the entrenched interests.

The standard example is taxicabs in New York. In New York City, it is illegal to drive a taxicab without first obtaining a medallion. The medallions were originally issued by the city government nominally in the public interest (as these things always are) to alleviate traffic congestion. Of course, the restriction of the number of taxis in the city increased drivers' wages. The number of cabs in the city fell from 21,000 in 1931 to the present number, 11,787. Medallions are transferable, but their cost is exclusively high: about $300,000 each. The drivers when the regulation was first enacted benefited. However, since then, new competitors have only been able to enter by buying a medallion. The original regulation has placed a large cost on future industry occupants, thereby eliminating the protectionist rents. And, since repealing this law would mean a loss of about $300,000 per medallion, the taxi industry would fight deregulation tooth-and-nail. In other words, the industry suffers high costs, no economic rents, and consumers greatly suffer.

You can (hopefully) imagine the relevance to other situations. Tullock further applies the theory to unionization in the United States. Because wages will be increased immediately after unionization, new workers will want to enter the union. However, because employers must now ration more carefully, these workers will remain unemployed. Furthermore, if rationing is dictated by seniority, new entrants to the union will suffer low-seniority jobs and intermittent unemployment for a long time. Once again, the market will return to an equilibrium at which the monopoly no longer brings any real gains to its supposed beneficiaries. However, the deadweight loss created is large and long-lasting because ending the union would create a loss for its members.

So, though protectionism may benefit some workers in the short run, the market always returns to some sort of equilibrium in the long run. Future generations of both workers and consumers will suffer because of our myopic practices today. Milton Friedman demonstrated this point visually in his 1980 series "Free to Choose." In the second part of the ten-part series, he visited India to examine looms.





The story goes something like this: The Indian government in 1948 decided to protect the traditional weaving industry from industrialization. Not only did Indian consumers suffer for paying what essentially amounted to a tax on cotton, workers in India suffered as well. The people operating these looms may have had jobs, but they could have had better, more productive, higher-paying jobs working in a factory that produced more high-quality materials. Perhaps there would be fewer of these jobs. But because the government in India stifled entrepreneurship through other acts of protectionism, job creation in India stagnated.

So what is the cost of a $20 shirt? Billions of dollars of lost consumer surplus, thousands of lost foreign jobs, billions in deadweight loss to both producers and consumers of future generations.

Oh, but that's not all.

What Friedman captured in his work is a far more important principle. What is lost when the government controls, forces, and compels is something so precious that it immediately, in my eyes, far outweighs a one-time wage increase for some manufacturer: freedom. When the government tells me that I must buy a $20 shirt rather than a $5 shirt, it has taken my freedom of association. It is, in essence, an order that I not consort with the Chinese shirt manufacturer. Imagine if the government issued such decrees in honest wording: "Attention citizen. You may not speak, deal, or trade with that darker-skinned person over there. You must, instead, do so with this lighter-skinned person, because you are from the same country, and it is therefore more suitable." How about an even more outrageous example? "Attention high school students. You may not make friends with nerds. Instead, you must make friends with jocks. Otherwise, they will feel lonely." The nerds, obviously, don't matter to the jocks, but if you would not be angered by such a policy, even as a friend of the jocks, I would rather you not be able to elect school officials, thanks. The government, in determining who is and is not suitable to engage with in non-malificent interactions, must necessarily rob us of some important degree of freedom. Moreover, the $15 I lose in the transaction robs me of the freedom to spend that money elsewhere, to use it to associate or deal with even another party, to increase my prosperity and pursue my happiness.

Again, what is the cost of a $20 shirt? Billions of dollars in deadweight loss for consumers, foreigners, and future generations, and, more importantly, at least some amount of the freedom of consumers, foreigners, and future generations.

Protectionism is the idea that we should use domestically-produced typewriters rather than computers that the Japanese manufacture. It is the idea that political boundaries determine a person's worth. It is the idea that future generations should deal with the messes we leave them. It is an ancient idea that, under any sound and complete economic analysis, does not have any leg to stand on.

And by the looks of it, it's going to stay alive and well for some time to come. Read more.

Monday, October 23, 2006

Capitalism and Freedom, cont.

As everyone on the internet now knows, the FDA has banned Vegemite in the U.S. ostensibly because it contains folate, a vitamin which is good for you. Aside from all the "who cares, Vegemite is nasty" jokes (I've never had it), this is a pretty clear cut case of economic freedom being destroyed. I would throw a clause in there about "by people who claim to mean the best for you" or somesuch, but considering they banned this product because it's good for you, that myth is pretty much out the window. The quickest way to get on my bad side: speaketh the words "public interest."

Question: Which lobby made this happen? Bread and cereal companies, so they could claim folic acid exclusivity? Marmite producers, Vegemite's competitor?

. . .

Vegemite haterz? Something tells me they haven't formed a scum-sucking PAC just yet. Read more.
Spotted on Facebook

The group "I've never met a poor libertarian, have you?"

The implication being that libertarians are spoiled and rich and would change their minds if only they knew how hard people had it. Except, on the other hand, it may instead imply that libertarians are not poor because they're smarter than you, which, though not being decisive in the least, would surely lend at least some extra credence to their philosophy. Read more.

Wednesday, October 04, 2006

Just an old sweet song

This Hit and Run entry links to this old Krugman essay about why people refuse to learn the principle of comparative advantage. Part of Krugman's answer is that people prefer "new" to "old," especially if the new overturns what all them crazy old scientists thought they knew before.
The same principle applies to international economics. Comparative advantage is an old idea; intellectuals who want to read about international trade want to hear radical new ideas, not boring old doctrines, even if they are quite blurry about what those doctrines actually say. . . Just imagine trying to tell an ambitious, energetic, forward-looking intellectual who is interested in economics -- William Jefferson Clinton comes to mind -- that before he can start talking knowledgeably about globalization and the information economy he must wrap his mind around a difficult concept that was devised by a frock-coated banker 180 years ago!

If that's really the case, and it probably is at least a part of it, then economists are having so much trouble because they're framing the debate entirely wrong. Look at what the protectionists are saying. It is not new. They are repeating the centuries-old mantra of nationalists and mercantilists. Smith and Ricardo were the radicals, the Einsteins who turned the entire world on its head when they declared authoritatively, "Everything you know is wrong." If people are being led the other way because showboaters are boldly proclaiming that "everything economists know is wrong," it's a good time to point out just how old, tired, and useless mercantilist arguments are. Read more.