I thought this blog post called "3 Things To Do as you Watch Manufacturing Die in America" was very good.

Stefan Jovanovich replies:

I think this solution will be far, far worse than the supposed problem. What Mr. Elkus and others are advocating is the same kind of imperial preference/discriminatory tariff legislation that pushed Britain and eventually the U.S. into 2 world wars after half a century of material progress that our current age only comes close to matching. Affirmative action for industries will be as thoroughly corrupting for the country's economy as it has been for schooling, and it will produce the same result– public wealth destroyed for only the temporary private advantage of those best able to define themselves as victims of "unfairness". It really is time that the United States accept economics' greatest single practical discovery– the paradox of competitive advantage– and abandon the idiocies of mercantilism once and for all. Keynes was not wrong for wanting to see societies solve the problem of chronic underemployment through make-work; it remains the only solution– as Goodwill Industries proves every day. Almost everyone can do some work, but not all work can be profitably done. Keynes was right to urge us to provide charitable employment so that people could earn incomes, but he was as wrong as Gary is now in suggesting that governmental power could create profitable employment for all.

It is the same fallacy of all monopolies– the one that labor unions offer even now: let us have the monopoly authority of the law to set our own prices. Whether you jigger the terms of trade directly through an industrial policy or a collective bargaining monopoly or indirectly through conjuring tricks with the currency, the result is the same: a con that does nothing for the poor but provides a great deal of wealth for the people put in charge of shuffling the cards. Charitable employment has to be paid for out of profits, personal incomes and personal and business savings.

Keynes's solution, the labor movement and Gary's proposal are all attempts to do the job on the cheap– either by finding the money for it in a monopoly printing press that allows currency to be nothing but credit or by legislating higher wages/profits for favored aka "essential" works and industries. The deficit spending in these methods ends up being paid for by the "ordinary" (sic) citizen, by inflation and by increasing the cost of living beyond what it would be if the foolish citizens were allowed to buy goods priced by competition alone.

Now, regarding the fact: Mr. Elkus' story about the VCR is pure hip-hop-hooey. The American producers of tape recorders– AMPEX, for example– didn't lose out to the Japanese in the production of VCRs because of MITI; Matsushita and SONY had already won that race on their own. In broadcast production equipment RCA lost because Mr. Sarnoff decided that his company should invest its capital in trying to compete with IBM in the computer business instead of reinvesting its profits into its core broadcasting business.

Gary Rogan writes:

Stefan, I would not subsidize any specific industries at all. I would impose the kind of tariff you like. In addition, for "'habitual violators" of common norms of ethical behavior, like those who don't respect intellectual property or require technology transfers as a condition for join ventures, etc. I would impose additional tariffs that would be reduced to zero as soon as a specific set of demands was met. Deal with countries, not industries. It's unfortunate that the government, with all of its inherent corruptibility, would have to be involved, but I don't see any alternative as I don't believe it's reasonable for individual companies to fight foreign governments. My main point in posting this article was not to provide a solution though, but to document one more time that whatever has been going on has not lead to a good outcome. It's a judgment call, I believe that a serious country has to have a competitive bag of technological tricks to remain stable in the long term. I don't have any specific preferences for the areas other than weapon technologies where those tricks need to be located (like the famous "green" technologies of the future or chip-making machines mentioned in the article), but once again one can make a judgment call that the deterioration has gone too far to right itself without extreme measures.

Would having sane fiscal and monetary policies and getting rid of excessive regulation do the trick? Perhaps, but the change would have to be pretty quick and pretty extreme, and how likely is that? At some point you have to ask yourself: was South Korea completely stupid for shielding itself from foreign competition as it developed from a wasteland similar to the worst South American examples into a global technological powerhouse? Is EVERY non-competitive (call it mercantilistic if you'd like) behavior that China is undertaking bad for IT economically? And would a country like say Egypt or Ghana develop any appreciable standard of living any time soon if it somehow managed to establish a completely "fair" bilateral or multi-lateral trade regime with a number of advanced industrialized countries?

Stefan Jovanovich responds:

Thanks for agreeing about the ad valorem tariff, Gary, but if you also allow punitive tariffs for "habitual violators" the excise will quickly become as corrupt as the criminal code and the income tax law. Yours is precisely the argument in favor of economic virtue and against economic sin that Roosevelt (Teddy), Wilson and Chamberlain (Joseph) made in the support of imperial> preference and discriminatory tariffs; and there is little question that their greatest "success" was convert Germany's "threat" of making better> aniline dyes and offering better, cheaper passage across the North Atlantic into the first of the 20th century's several holocausts. If we are going to learn any "lessons" from history, surely we ought to learn that one: countries should never, ever make ultimatums to one another. I can't accept your historical assertions about South Korea and South America. The ROK's comparative success came from its competitive advantage in skilled wage rates, the same competitive advantage that Germany and Japan had after they too had been reduced to rubble by catastrophic war. The relative failures> of Argentina and other South American countries in the 20th century were attributable to their adopting the very type of "protective" legislation> that you are recommending; the result was, as we both know, pure disaster. Yes I do think Egypt and Ghana would quickly develop an appreciably greater standard of living if those countries adopted an ad valorem tariff, free capital flows and a banking/monetary system based on specie reserves and currency convertibility. That is precisely the path that Singapore took when it adopted 19th century trade laws and made its currency freely convertible into the U.S. $ which was then as good as gold. Enterprise> produces wealth; rules against "sin" and for abstractly defined "virtue" whether in trade or in life only reward lawyers and the other official> definers of what is good for the public.

"Prisons are built with stones of law, brothels with stones of religion" (William Blake).

Gary Rogan continues: 

Stefan, perhaps you should read "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism" by Ha-Joon Chang who, as it happens, hails from ROK. He is a friend of Ian Fletcher who wrote the article I posted. You may change your opinion> about what caused their current highly advanced position in the world economy and how poor they were when they started. I think he under-emphasizes the role of culture, but it's instructive to go through his view of how ROK and many other countries developed their economies. 

Steve Krisrock writes:

With 40% first dollar taxes in the USA, I don't buy any argument that small companies can compete against companies overseas who don't have the social security, unemployment, workers comp, insurance, and hoards of state and local taxes plus the democrats grab bag of taxes BEFORE they make something…go east to Asia that where wall street has found a new home to rebuild…and leave the scumbags from Chicago romi manual with those that want to destroy American power like Soros.

Tell me about property rights when the EPA seizes drilling areas, shuts down plants at both the state and locality… How about the Homeland Security not enforcing the rights of American landowners on the borders, or the fish and wildlife putting fishermen out of work for things like global warming? I'd rather be in China and borrow their money and take the risks of seizure than with the American wackos who create these ideas at places like Rutgers…how about the debasement of American citizenship by allowing hispanics in at a 100% rate bringing with them all the corruption and vote buying that comes from their cultures and stealing our healthcare…we have far too many laws and far too little protections. A man shooting an eagle can spend more time in jail than a rapist in San Antonio…such property protection…

Don Boudreaux writes:

As burdensome, annoying, etc., as U.S. taxes and regulations are, the benefits of operating in this market remain huge– so large that they outswamp the benefits, for many firms, of moving to places with lower taxes and fewer regulations.

Property rights in the U.S. RELATIVE to most other places are secure; corruption here is relatively mild; our internal market is enormous and untariffed.

And the facts speak: inward foreign direct investment in the U.S. continues to lead the world.

By the way, here is a good review by Ed Glaeser of Ha-Joon Chang's book, Bad Samaritans.

Ralph Vince writes:


I beg to differ that we get products cheap. On the contrary, I find profits always flow upwards, profit margins are not shared with the consumer unless forced to by competition. The ONLY benefit I see of imports is that it forces competition *.

But if profits created by cheaper labor flowed down to the consumer, that head of lettuce would cost me a dime, those big Nike shoes of Justin Beaver's would cost 5 bucks instead of 150.

-Ralph Vince

* consider the dumping that occurs in the US historically has only lowered prices temporarily– the long run effect, a hypothetical. Consider tires from China which now are prohibitively tariffed. The benefit of tire dumping in the US was, ultimately, short-lived to the consumer. Rather than domestic manufacturers becoming competitive at home with the dumpers here, they merely got lawmakers to collude against the consumer and removed competition by tariff.

Gary Rogan writes:


Certainly the Nike business model is to make for pennies and sell based on the image. That is NOT the WalMart model though. I'm not prepared to argue based on solid data but it is my impression that at least until very recently WalMart has passed a lot of the savings to the consumers regardless of where they sourced, but of course sourcing from China wound up being their favorite model. I would also suspect this to be true in other low-end clothing and home decor retailers. Like everywhere else, branded products are quasi-monopolies and will sell differently than commodity (in the sense of easily substituted) products. If everybody can import socks from China it's unlikely that the competition will not force some retailers to sell them at cost plus a small margin. If there are ten or more domestic sock manufacturers and no imports the situation will be the same except the higher costs will be reflected in the higher price. Obviously imports lower the cost, but I don't see the dynamic being all that different than if we only had a totally free domestic market surrounded by a mote.

Any argument that sooner or later there will be only a small number of domestic monopolistic suppliers would apply to the international market as well.As I mentioned, I'm not for product-targeted tariffs, at least not at the present stage. Perhaps something called "raw materials" could be exempted but that's about it. I'm also under no illusion that domestic manufacturers will not typically raise prices as high as the market will bear if imports are restricted in any way. I do think that Stefan's favorite tariff is a better source of fully funding the government than income taxes, but I also believe that if we chose to enforce intellectual property rights domestically, we should enforce them internationally, and through higher tariffs.

The same should apply to other thuggish behavior as in "if you want to sell here you get a local 51% partner and you transfer all technology to him, and MAYBE we will let you sell for some undetermined number of years". And if a country chooses to impose a tariff higher than our tariff on ANY product category we should impose at least an equal tariff on ALL products from that country. No discussions, no negotiations, just automatic action. If we determine that there are some monkey business-type restrictions on selling ANY product category in a particular country, we immediately impose a tariff ON THE ENTIRE COUNTRY to compensate for the inconvenience. I do realize that there is a lot of opportunity in the latter category for corruption, but those are the breaks.

Believe me, I understand the beauty of totally free markets. I just don't understand the logic of pretending that having a population of a billion people trading with us via some crazy rules controlled by a handful of people and us just taking what they are shipping here totally on their terms constitutes a free market.

Stefan Jovanovich adds:

Open Trade and Food Prices

Percentage Share of Household Spending on Food, 2008

United States                                         6.9
Ireland                                                  7.2
Singapore                                            8.0
United Arab Emirates                            8.7
United Kingdom                                    8.8
Canada                                                 9.1
Switzerland                                         10.2
Australia                                              10.5
Austria                                                  11.1
Germany                                             11.4
Sweden                                               11.5
Denmark                                             11.5
Netherlands                                         11.5
Finland                                                 11.9
New Zealand                                        12.1
Hong Kong, China                                 12.2
Qatar                                                     12.7
Norway                                                12.9
Belgium                                                13.0
Spain                                                     13.2
France                                                  13.5
Greece                                                 14.0
Malaysia                                              14.0
Japan                                                    14.2
Italy                                                       14.2
Kuwait                                                  14.5
Bahrain                                                 14.5
Estonia                                                 14.6
Slovenia                                               15.0
South Korea                                         15.1
Portugal                                               15.6
Czech Republic                                     15.6
Hungary                                               16.3
Slovakia                                                16.6
Israel                                                     17.7
Bulgaria                                                18.2
Uruguay                                               18.5
Ecuador                                                19.0
Latvia                                                    19.0
South Africa                                          19.8
Argentina                                              20.3
Poland                                                  20.3
Lithuania                                              21.8
Chile                                                      23.3
Saudi Arabia                                         23.7
Mexico                                                 24.0
Taiwan                                                  24.0
Turkey                                                  24.4
Brazil                                                     24.7
Thailand                                               24.8
Costa Rica                                            25.7
Croatia                                                  25.8
Iran                                                        25.9
Turkmenistan                                        27.1
Colombia                                              27.6
Russia                                                   28.0
Bolivia                                                   28.2
Peru                                                      29.0
Venezuela                                             29.1
Dominican Republic                              29.2
Bosnia-Herzegovina                              31.1
Macedonia                                           31.5
China                                                     32.9
Romania                                              34.3
Kazakhstan                                         34.9
Uzbekistan                                         35.1
India                                                      35.4
Guatemala                                          35.5
Tunisia                                                  35.7
Philippines                                          36.7
Vietnam                                               38.1
Egypt                                                     38.1
Cameroon                                             38.4
Nigeria                                                  39.9
Morocco                                                40.4
Jordan                                                  40.7
Georgia                                                40.7
Ukraine                                                42.1
Indonesia                                             43.0
Belarus                                                 43.2
Algeria                                                  43.8
Kenya                                                   44.9
Pakistan                                               45.5
Azerbaijan                                            46.9

Source: USDA

I think we are now in the realm of horses and water and drinking. The not-so-subtle point here was that Singapore and the Emirates - those agricultural powerhouses - had among the lowest food costs in the world because they had open trade laws. I am going to end my contributions to this discussion on a (warning: aural pun coming) sour note. The rush for imperial preference that led to World War I began with the German Empire agreeing that foreign grain and milled flour would be subject to prohibitive tariffs. This was done so that the value of the Prussian nobility's estates would be preserved and braten would only be served with rye bread (the only grain that could be grown in the lands on the shore of the Baltic). There is no proof for this speculation, but I have always thought that a great deal of the appeal of Hitler's plan of Lebensraum to the German public was its implicit promise of good, plentiful, inexpensive pastry flour. That seems far more probable than the idea that a promise of free land would by itself appeal to a population that had long ago left the farms for the towns and cities and had no desire to return to them, even if agriculture was an "essential" industry. Having now made a really bad joke and played the Hitler card, I surrender.


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