Wednesday, June 27, 2018

"Trump’s Trade Deals Are a Futile Conceit”

"Trump’s Trade Deals Are a Futile Conceit”
by Bill Bonner

"We are following up on yesterday’s discussion by connecting a few final dots. Then, we promise we will never mention ‘trade’ again.

Reader challenge: Talk about a ‘ball joint’, a ‘female end’ or a ‘coupling’ in Congress, and they are likely to get the wrong idea. Half the members of Congress are professional, lifelong politicians. Most of the others are lawyers by trade. Then there is an assortment of dentists, psychiatrists, and car dealers. But not a single plumber.

And yet, some people think that Congress and the administration are, at least in part, responsible for our toilets. That is the assumption built into our Dear Reader Bradley J’s challenge. He wrote: ‘The purpose of a nation is to defend the common interests of its citizens. Certainly the ability to earn a living at a standard of living higher than that of the Chinese worker with his family’s bathroom at the end of his block, shared with 50 other families, is part of what our nation exists to achieve.’

There is no mention of improving standards of living or increasing wealth in either the Declaration of Independence or the Constitution. And we know that, in the US, the private sector is responsible for toilets. But the question presumes that the feds who run ‘our nation’ can make you richer - by either offensive or defensive actions - than you would be on your own.

Is that true? How? Can they somehow create or protect higher wage rates? And if they can, how come they don’t do it everywhere? If you live in Nigeria, where the hourly wage is about $3, can the feds raise wages by setting the minimum wage at $10? Or by blocking the importation of foreign goods? Or by closing the border to immigrants? Is there something else they can do?

It seems pretty obvious that the answer is no. Nigerians make $3 an hour, grosso modo, because that’s what their labor is worth. They lack the training, capital, equipment, infrastructure, evolved financial and commercial institutions, knowhow, and markets that would make their labour more productive. Locally, the Nigerian authorities could build a wall around the whole country and prevent anyone from getting in. Then, they could set a minimum wage of 100,000 kobos. Or a million kobos. But it would still only be worth $3 an hour.

World improvers, do-gooders, and meddlers are always coming up with development programs to help poor countries. But without the guidance of honest prices (set in open markets), and the profit motive, these schemes almost always fail. Even the successes are usually fraudulent, consuming more real resources than they actually produce in output.

As far as we know, there is nothing the feds can do to help them except provide basic services - respect for property rights, safety, enforcement of contracts, and honest money. Otherwise, they should butt out and let the private sector’s win-win deals get to work.

Futile conceit: But what about the US? As our Dear Reader suggests, maybe the feds can protect high-wage industries from competition by keeping out low-wage imports. And maybe they can protect high-wage earners from low-wage competitors by closing the borders to immigrants. Why can’t they build a wall…and keep out low-priced goods and low-priced labor…so that we can live on an island of prosperity in a sea of chaos, competition, and change?

Oh, Dear Reader, you are not the first to dream! So, let’s say we put up a high wall. Is it effective? Or just a futile ‘conceit’, as the Bible suggests…like pulling the covers over your head when your house is on fire?

Do people in America earn more than people in Nigeria because their politicians are better? Or because they are more productive? Our guess is that they earn more because they have more machines. More skills. More capital. More sophisticated finance markets. Better supply and delivery systems.

Our guess, too, is that part of the reason US companies…and US workers…did so well was that they faced more competition, not less. The US was - and maybe still is - the largest free market area in the world. The shoemaker in Maine had to compete with the leather workers in California…and the steel mills of Pennsylvania had to fight it out with those of Alabama.

Competition kept everyone on their toes…and then allowed industries to concentrate and specialize in areas where they were most efficient. Oranges are grown in California and Florida, not in Virginia. Cars are made in Detroit, not in Nevada. The info tech business developed in Silicon Valley, not in West Virginia. The competition…the ability to specialize…immigrants…and the relative lack of meddling by the feds…created the most productive workers in the world. And the highest wages.

Building walls: But US wages - compared to those in the rest of the world - probably peaked out in the ‘70s. Then, the European Union created another big, almost-free trade zone. German and Japanese carmakers beat out their US competitors - even in America. And China opened up to the world economy.

And now, predictably, Americans want walls. They want to render unto Caesar the power to control what comes in and what goes out, and on what terms. But will walls protect them? There are more consumers in an economy than there are people working in export-focused manufacturing companies. So, like all other win-lose deals, tariffs help a few and hurt many.

Outside of the national borders, a person may pay $10 for a widget. Inside, he may have to pay $20 in order to preserve the wages of the domestic widget makers. The people on the widget assembly line may applaud the nation’s Caesar. But the rest of the population - if they understood what was going on - would curse him; they are on the losing end of a wealth redistribution scheme. And overall, they are poorer. Money has been taken out of the win-win economy (via import taxes) and shifted to the win-lose system. Costs go up. Earnings do not.

Rough seas: Also, protected from foreign competition and distorted by artificial price signals, domestic industries become less efficient, and managers shift their focus from the plant in Cincinnati to the headquarters in Washington.Instead of trying to satisfy their customers, they are angling, canoodling, and plotting with the feds. Capital investment, too, tends to slacken off. Why invest precious earnings to produce a better product when consumers are forced to buy what you’ve already got? Profits become a function of politics, not of productivity.

By contrast, the foreigners out on the rough seas of free-for-all capitalism become better navigators. They develop more capital, more skills, better systems of transport, more commercial connections, and more elaborate sales and distribution networks. They become more efficient and productive. And since it is private sector productivity - not public sector activism - that establishes real wage levels, the foreigners grow richer as the domestic economy becomes poorer.

Future happens: Alas, Dear Reader, high walls can’t protect you. Life is win-win, creative, destructive, and competitive 24/7. And the future happens, whether you’re ready for it or not. The feds can neither create wealth nor protect it. It is productivity that makes a worker’s time valuable. And it is productivity, and only productivity, that keeps it valuable. Everything else - including high walls and trade war bamboozles - is claptrap.

That is the theory of it. As for the practice, we have two examples. First, in 1914, the fastest-growing economy of Europe was Russia. It was about the same size as the US, and had about the same prospects. Had it continued growing at the same speed, it would be an economy more or less as big as the US today.

Instead, it took a goofy, win-lose path. Politicians decided where to invest…how much people should earn…and even how many toilets they should have. Price signals were distorted…and ignored. Trade with the outside world came to an almost complete stop. A high wall protected the Russians for nearly three generations. Almost no immigrants. Almost no foreign products.

Protecting its domestic autoworkers, for example, left Russians with only one choice of automobile - the Lada. Alas, the car was a joke in the auto industry. A man goes into a garage. ‘Can I get a pair of windshield wipers for my Lada?’ he asks. ‘Sure, Buddy. Seems like a fair trade.’

Today, the entire Russian economy is no greater than that of the New York metropolitan area. Practically the entire 20th century was wasted.

And here’s another example of where high walls were meant to keep out competition: North Korea. Nothing much goes in. Nothing much comes out. At the end of the Korean War, both North and South Korea were poverty-ridden hellholes. But they took different routes. And got very different results.

The North built walls and focused on win-lose deals, emphasizing ‘juche’ (domestic industries) and ‘songun’ (military first). The South looked to win-win deals and opened itself to worldwide competition…facing every disadvantage possible - unskilled labour, poverty-ridden consumers, capital-short industries…you name it.

An imperfect test, because there were other things going on. But about as good as you get in political economics. Same people. Same language. Same peninsula. Starting from the same point, more or less. But with two very different approaches. And what was the outcome? You already know the answer, don’t you?

Starting from almost nothing, GDP per capita in South Korea is about $25,000 today. In the US, it is about $60,000. And in North Korea? Nobody knows. But estimates put it somewhere between $1,000 and $2,000 per year. Children in the North tend to be undernourished, resulting in smaller adults and a life expectancy that is 10 years shorter than their neighbors to the south. High walls…or open walls? Let Caesar control everything…or Caesar backs off? Your choice.”

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