What Would Henry Hazlitt Think About Trump’s Trade Policy With Mexico And China?

download (1)

Donald Trump loves talking about Tariffs: he talks about them quite constantly actually. He’s gonna slap a tariff on Ford cars made in Mexico. He’s gonna slap tariffs on China (say that in Trump exaggerated way now). It seems like the so-called fair and free market supporter that he is is in favor of some unfair policies, and policies that will hurt American workers, as they’ve done so in the past.

Today, I’m talking some Henry Hazlitt, specifically on tariffs and trade policy (because those two seem to be the two of the core points in his campaign). To start, allow us to examine some select words from Chapter 11 of Henry Hazlitt’s “Economics in One Lesson” on tariffs, and to do this, we need to first read over an example that Hazlitt gives:

Now let us look at the matter the other way round, and see the effect of imposing a tariff in the first place. Suppose that there had been no tariff on foreign knit goods, that Americans were accustomed to buying foreign sweaters without duty, and that the argument were then put forward that we could bring a sweater industry into existence by imposing a duty of $5 on sweaters.

There would be nothing logically wrong with this argument so far as it went. The cost of British sweaters to the American consumer might thereby be forced so high that American manufacturers would find it profitable to enter the sweater business. But American consumers would be forced to subsidize this industry. On every American sweater they bought they would be forced in effect to pay a tax of $5 which would be collected from them in a higher price by the new sweater industry.

Americans would be employed in a sweater industry who had not previously been employed in a sweater industry. That much is true. But there would be no net addition to the country’s industry or the country’s employment. Because the American consumer had to pay $5 more for the same quality of sweater he would have just that much less left over to buy anything else. He would have to reduce his expenditures by $5 somewhere else. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 20,000 persons might be employed in a sweater industry, 20,000 fewer persons would be employed elsewhere.

But the new industry would be visible. The number of its employees, the capital invested in it, the market value of its product in terms of dollars, could be easily counted. The neighbors could see the sweater workers going to and from the factory every day. The results would be palpable and direct. But the shrinkage of a hundred other industries, the loss of 20,000 other jobs somewhere else, would not be so easily noticed. It would be impossible for even the cleverest statistician to know precisely what the incidence of the loss of other jobs had been—precisely how many men and women had been laid off from each particular industry, precisely how much business each particular industry had lost—because consumers had to pay more for their sweaters. For a loss spread among all the other productive activities of the country would be comparatively minute for each. It would be impossible for anyone to know precisely how each consumer would have spent his extra $5 if he had been allowed to retain it. The overwhelming majority of the people, therefore, would probably suffer from the optical illusion that the new industry had cost us nothing.

It is my contention that Trump may actually be aware of this. Maybe he does not care, and he’s willing to go ahead and do it anyways. His tariff proposals will mean that ALL CONSUMERS will pay a higher price on goods, be they the foreign goods with the tariff, or the domestic goods at the higher price. This is a gross manipulation of the free market, and further promotes a big government that Donald *occasionally* professes to hate.

This brings me to the next thing from Hazlitt which I will quote from him, specifically referring to the earlier example, and what would happen with wages:

And this brings us to the real effect of a tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results, in fact, in a net loss to the country. For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages.

Let us observe more clearly how it does this. We have seen that the added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles. There is here no net gain to industry as a whole. But as a result of the artificial barrier erected against foreign goods, American labor, capital and land are deflected from what they can do more efficiently to what they do less efficiently. Therefore, as a result of the tariff wall, the average productivity of American labor and capital is reduced.

If we look at it now from the consumer’s point of view, we find that he can buy less with his money. Because he has to pay more for sweaters and other protected goods, he can buy less of everything else. The general purchasing power of his income has therefore been reduced. Whether the net effect of the tariff is to lower money wages or to raise money prices will depend upon the monetary policies that are followed. But what is clear is that the tariff—though it may increase wages above what they would have been in the protected industries—must on net balance, when all occupations are considered, reduce real wages.

Allow me to use an example: the Smoot-Hawley Act of 1930, which increased tariffs on a large number of imports to protect American industries. This was after the Depression was already well underway. The result of Smoot-Hawley was to begin a trade war, where countries raised tariffs on the United States. This crippled all exports in EVERY country, and what you saw was a worsening of the Depression, and sinking the US into further troubles. More people suffered after something intended to help them was passed. This WILL be the result of the Trump tariff plan, whether you like it or not.

You will raise tariffs, but you will not raise wages, you will not make productivity better, you will not make people better off, you will not. It simply won’t work, not in the current climate of business. And do not tell me how Donald will make that better, because I know it’s not going to happen.

Advertisements

Thoughts on Trump & Bastiat’s “The Law”

fredericbastiatquote

I have issues with Donald Trump: I’ve made this quite clear if you’ve even read a single post here (at least, that doesn’t pertain to Bernie Sanders). I’ve made it quite clear that I do not like the Donald due to his stances on privacy and the 4th Amendment, with his support for the Patriot Act and warrantless NSA Spying, and his reckless stance on Defense spending.

But what does it matter? I’m just a dumb liberal college kid who has no idea what he’s talking about, or, at least, that’s what the Trumpites will think of me, since I’m not at Donald Trump’s feet, bowing to the God figure. No, I don’t pray to that fake god, for I am a Christian, and he is not.

So what keeps me from supporting him? A lot. But what is at the root of it all? I’m reading Frederic Bastiat’s “The Law”, and if you have not read this little, short book (or long essay, either way), then I highly recommend it. You can find it online in PDF form (for free) here, and on YouTube as an audiobook.

Continue reading

The Economy Is Falling Apart

baltic dry crash

Repeat after me: the economy is not doing well, and saying that things are okay is a mistake. The economy is not healthy. The economy is, pretty much falling apart. How can we tell? Well, there’s plenty of signs.

Continue reading

Do Machines Cause Unemployment?

economics-in-one-lesson-the-shortest-and-surest-way-to-understand-basic-economics-700x700-imad9gm26jvx3gkb

It’s a curious question, and one that requires more deep diving than just the usual surface examination Thayer get from the mainstream media and their on-demand economists.

Today, I’m writing this based on Henry Hazlitt’s book Economics In One Lesson. This book contains a chapter on machinery and jobs titled The Curse Of Machinery. This is where I will be basing my analysis and article on.

Hazlitt uses the example of a manufacturer of clothing learning that he can produce clothing quicker than his workers can. Hazlitt writes:

He installs the machines and drops half his labor force.

Dramatic right? Half of the workers at that factory are now unemployed. That’s far more than enough to enrage any communist or socialist. Now, upon the superficial examination, things are pretty bad. Hazlitt writes:

This looks at first glance like a clear loss of employment. But the machine itself required labor to make it; so here, as one offset, are jobs that would not otherwise have existed.

Hazlitt is applying his lesson here, which is looking beyond just the superficial data. He continues:

The manufacturer, however, would have adopted the machine if it had either made better suits for half as much labor, or had made the same kind of suits at a smaller cost. If we assume the latter, we cannot assume that the amount of labor to make the machines was as great in terms of payrolls as the amount of labor that the clothing manufacturer hopes to save in the long run by adopting the machine; otherwise there would have been no economy, and he would not have adopted it.

Confused a bit? Maybe. Let’s continue:

After the machine has produced economies sufficient to offset its costs, the clothing manufacturer has more profits than before. … At this point, it may seem, labor has suffered a net loss of employment, while it is only the manufacturer, the capitalist, who has gained. But it is precisely out of these extra profits that the subsequent social gains come. The manufacturer must use these extra profits in at least one of three ways, and possibly, he will use part of them in all three: (1) he will use the extra profits to expand his operations by buying more machines to make more coats; or (2) he will incest the extra profits in some other industry, or (3) he will spend the profits on increasing his own consumption. Whichever of these three courses he takes, he will increase employment.

So, no matter what he does with it, be it either of the three above, the manufacturer will end up increasing employment. He will increase the possibility for employment in either the mechanics who create the machines, the workers of another industry he invests in, or the workers involved in the things he is now consuming. The extra profits that these people earn from the manufacturer enables them to expand their employment, thus growing the economy.

Continuing on, because he’s still not finished here, Hazlitt writes:

In other words, the manufacturer, as a result of his economies, has profits that he did not have before. Every dollar of the amount he has saved in direct wages to former coat makers, he now has to pay out in indirect wages to the makers of the new machine, or to the workers in another capital-using industry, or to the makers of a new house or car for himself, or for jewelry and furs for his wife. In any case (unless he is a pointless hoarder) he gives indirectly as many jobs as he ceased to give directly.

Remember my big paraghraph before this? This was the basis of that paragraph. The money saved from the wages of the manufacturers lost workers will end up in the pockets of the workers in other industries.

Now, what about those lost workers? What about their welfare? They’re now unemployed, and while the economy may have recovered from their loss, they’re now out of a job. Well, consider this. Hazlitt continues on saying that if the manufacturer comes into great economies (really good times), he will expand his operations, and thus, buy more machines to produce his coats, thus increasing the quantity demanded in mechanics to produce and install them.

Hazlitt writes:

The rate of profit of the manufacturers using the new machine will begin to drop, while the manufacturers who have still not adopted the machine may now make no profit at all. The savings, in other words, will begin to be passed along to the buyers of overcoats – to the consumers.

The more their competition begin to get onto their level, the more their profits drop. This, in turn, will cause the demand for overcoats to increase, because the price is now much lower before, and more people can now afford them. Hazlitt then writes:

If the demand for overcoats is what economists call “elastic” – that is, if a fall in the price in overcoats causes a larger total amount of money to be spent on overcoats than previously – then more people may be employed even in making overcoats than before the new labor-saving machine was introduced.

So, it’ll increase employment? Yes. But he goes on to say that this increase in employment isn’t even dependent on elasiticity of demand for the product. He goes on to say that if the price were cut, and the quantity supplied did not go up, then the consumer would have that extra money left over. He uses the example of the overcoat that is priced at $150, and the price is cut to $100. The consumer now has that $50 left over that can now be spent in other industries, and increase their employment.

So, in summary, Hazlitt writes:

In brief, on net balance machines, technological improvements, automation, economies and efficiency do not throw men out of work.

So, this is Henry Hazlitt’s lesson in economics for today. I know, it was long, but I think it was worth it.

Lessons Learned From Henry Hazlitt

economics-in-one-lesson-the-shortest-and-surest-way-to-understand-basic-economics-700x700-imad9gm26jvx3gkb

Henry Hazlitt, a name sadly unfimiliar to most, is a man whom I quite like, especially this one book of his. The book, Economics In One Lesson, starts out in parts. The first is a simple, common sense lesson on economic thinking, and the rest of the book is just the lesson being applied to things that many progressives and maybe some on the right now would support too. I’d like to go over a few things that I’ve learned so far, and I’m only on page 57.

In Chapter 6 of the book, titlled Credit Diverts Production, he teaches us about many things. One would be loans, and the differences between government loaning money and private institutes loaning money. When a private institution, say Bank of America, makes a loan, it’s with money that they have with them. When government makes a loan, say through Fannie Mae or Freddie Mac, it’s with the tax dollars the people gave them. Usually, private institutions are more careful in judging people and businesses before making a loan. There is more oversight and checking into backgrounds before an agreement is made. In government, there is less of that.

Hazlitt tells us that private institutions are more careful in lending, and will lend to customers they are either well sure will be able to pay back their loans, or are completely sure they can pay back. Why not lend to those who cannot? Because those who cannot pay back the money most likely won’t. Investors of capital want to be able to gain a return, and to see loans going out and not being repaid is bad news. They’d pull out of that failing venture, and thus, that institution would be doomed. That’s how things should work.

Hazlitt also tells us that government institutions are not that careful, and lend recklessly. Most times, they do not get back the full amount of the loan they lended out, and many times, they don’t make back anything. Hazlitt say’s this:

“If the government operate by the same strict standards, there would be no arguement for its entering the field at all.”

His notion is that when government makes loans, they make loans to B and forget A. A is the person or firm who’d be fully able to make payments and cover the duties on the loan. They’d be the one who a private institution looks positively at. B is the person or firm who’d not be able to make payments and fully cover the duties of the loan. They’re the person who the private firm wouldn’t probably lend to, and would need to to turn to government for said loan.

The reasons why government making loans is bad are as follows, and in this case, he’s using government-guarunteed mortgages:

“The advocates of government–guarunteed mortgages also forget that what is being lent is ultimately real capital which is limited in supply, and that they are helping identified B at the expense of some unidentified A. Government mortgages… invevitably mean more bad loans than otherwise. The force the general taxpayer to subsidize the bad risks and defray the losses. They encourage people to “buy” houses they cannot really afford. They tend eventually to bring about an ooversupply of houses as compared with other things. They temporarily overstimulate building, raising the cost of builiding for everybody…, and may mislead the building industry into an eventually costs overexpansion.”

Confused? Don’t be. We can apply this to today terms. Think back to the Housing Bubble. What was happening? Fannie, Freddie, and even private institutions made loans to people who wouldn’t be able to afford those homes. Prices on homes went up, and builidng began to pick up steam too. Then the bubble crashed, and people lost those homes they couldn’t afford. The whole country felt the effects of that malinvestment, so much that some private institutions eventually would end up bust.

So I thought I’d just type this up and share it with you. I heavily recommend that you actually do read this book. You can find it on Amazon, or if you wish to be cheap, you can dowload the PDF version put out by the Mises Institute. Either way, it’s a good ready, whether you’ve studied Microeconomics in High School, or haven’t learned a thing about economics at all.