Todd Buchholz

New Ideas From Dead Economists

At the time Ricardo wrote and argued before Parliament, workers spent nearly half their wages on breads made from grain. To block cheap grain imports adversely affected workers and their employers. Further, protectionists forget that jobs are created by selling goods and services to other countries. No wonder Ricardo became an enemy of the upper class by declaring that the 'interest of the landlords is always opposed to the interest of every other class in the community.'

Despite the force of his intellect and argument, Ricardo could not persuade Parliament to relent. The Corn Laws persisted until 1846. Ricardo did, however, persuade subsequent generations of economists that protection is almost always bad for an economy as a whole, though good for a particular group. People sometimes insult economists for frequently disagreeing about policy prescriptions. George Bernard Shaw predicted, 'If all economists were laid end to end, they wouldn't reach a conclusion.' Yet several times during the twentieth century, thousands of economists signed petitions begging the U.S. government not to block imports. Every time the domestic economy appears stagnant, some politicians try to placate voters by threatening foreign economies. The United States imposed its highest tariffs of this century when it and the world needed free trade the most, during the Great Depression. When economies turn inward, they almost always turn downward. There is no such thing as an inward and upward spiral in economics.

During the 1980s Japanese automakers began 'voluntarily' restricting exports to the United States to avoid even harsher measures from Congress. Because the supply of Japanese cars was limited, their prices rose, and American manufacturers were able to charge more for their own cars. Economists estimated that American consumers lost $350 million as a result in the first year, and car prices rose nearly $3,000 in the first three years of the restraints. Even if, at most, 10,000 jobs were 'saved,' the American economy could have paid each worker $35,000 a year just to sit at home. Instead, fewer consumers could afford cars and those who bought had fewer dollars left to purchase other goods, reducing jobs in other sectors. 'Domestic car makers could and probably should cut prices, but the government handed the American consumer to them on a platter, and they couldn't resist carving them up,' charged Robert Crandall of the Brookings Institution.

During 1989, automotive lobbyists beseeched the Treasury Department to classify imported minivans and sport/utility vehicles as trucks. If the Treasury had given in to the pressure, tariffs on such vehicles would have increased tenfold. The British government especially protested the proposal on behalf of Rover. Their embassy in Washington, D.C., informed the White House that the Queen herself drives a Range Rover, and that the Queen would never drive a truck.

Abraham Lincoln put one protectionist argument pithily: 'I don't know much about the tariff, but I do know if I buy a coat in America, I have a coat and America has the money—if I buy a coat in England, I have the coat and England has the money.' He was right—he did not know much about the tariff. Like the mercantilists, Lincoln did not understand that a country is wealthy if it consumes lots of goods and services, not if it stockpiles metals or paper currency with portraits of presidents on them. If Lincoln buys the London coat he prefers, he cashes in some dollars for British pounds. So someone in London now has dollars. Londoners do not give up pounds just to wallpaper their flats with greenbacks. The Londoner will either (1) buy an American product or (2) trade in the dollars for pounds. If she buys an American product, Lincoln is happy because he preferred the London coat, and the Londoner is happy because she liked the American good. If she dumps her dollars, she will dump them on someone else who wants to buy American goods.

What if we could just stuff a million rowboats full of American money in exchange for the QE II filled with British goods? Then the Treasury could print billions of five-dollar bills. According to Lincoln's logic, we would get beautiful sweaters, teapots, and tweed suits, while the British would get paper! Although Lincoln did not realize it, this would be a wonderful deal! But the joke's on us. Lincoln did not understand that the British accept dollars because they can buy American goods and financial assets with them. Money may not make the world go around, but money certainly goes around the world. To stop it prevents goods from traveling from where they are produced most inexpensively to where they are desired most deeply.

The issue is not whether coats will be produced in the United States or not. It is whether we will use our valuable resources to produce goods with a higher or a lower opportunity cost. By allowing trade, nations coerce their citizens to shift resources away from low productivity industries and toward high productivity industries. If nations shift, households can enjoy more goods with less sacrifice.

Shifts do cause pain, however, to workers and owners in low productivity industries. But protection often costs consumers so much, the government would do better to directly compensate the displaced workers and pay to retrain them. Protecting one steelworker's job cost over $100,000, while 'saving' a shoemaker's job costs $77,000 in the early 1980s. Further, the logic of protection points toward economic stagnation. Most industries and inventions that have raised our standard of living have forced others out of their jobs. A few years ago, Xerox produced a television advertisement depicting a monk working as a scribe at a monastery, carefully copying over pages of documents and prayers. One day his superior gives him a thick scroll to transcribe. The harried monk then briskly struts around the corner to a new copier machine, which does the job in seconds. Staring blissfully toward Heaven, he proclaims 'a miracle.' Can you imagine how a well-organized political action committee of monks might demand protection? Picture thousands of monks marching on Washington. How many monks could be displaced by electronic copiers?

The free market is not a pain-free market. The invisible hand does not protect us the way a mother protects her child. If people prefer more stability, perhaps they should opt for protection. But the benefits of economic growth and progress do not usually come to those who huddle in the corner while their government protects the harbors from Greeks bearing gifts and goods.