President Obama, defending the Trans-Pacific Partnership, just said something very like the following (I heard this on the radio and am quoting from memory):
And another thing: You’ve got to compare this to the realistic alternatives. It’s not fair to compare it to some ideal, unachievable arrangement where we get to sell things all over the world and never buy anything.
Oh. I assume, then, that he’ll be defending his jobs program in terms something like this:
And another thing: You’ve got to compare this to the realistic alternatives. It’s not fair to compare it to some ideal, unachievable arrangement where we get to work all day and never get paid.
For that matter, this also works as a defense of Obamacare:
And another thing: You’ve got to compare this to the realistic alternatives. It’s not fair to compare it to some ideal, unachievable arrangement where get to spend all our time in hospitals and never get well.
At the risk of spoiling a good joke by explaining it: If you’re never going to buy anything, then it makes absolutely no sense to sell things, and it makes particularly little sense to produce those things. I am confident that Obama understands this, but chooses to pretend that he doesn’t, presumably because he thinks the voters (along with at least one major party nominee) are too dumb to follow it.
I don’t think that Trump, Clinton, or Obama are too dumb to understand this.
I think that all three (correctly) believe that many voters are too dumb to understand this, are are willing to pander/lie about their own beliefs in order to win the votes of stupid people.
Remember, we live in a system where the votes of stupid ignorant people count just as much as the votes of intelligent well-informed people, so it’s perfectly rational for politicians to intentionally spout idiotic nonsense that *sounds* good to people who don’t understand the basics of what they’re talking about.
I acknowledge my lack of economic understanding, but what is wrong with this scenario?
A nation of abundant resources able to build everything they need and then more sells its surplus and has no need to purchase anything from other nations. That does sound ideal. Unrealistic, of course, but wrong else is wrong with it?
Sorry, correction – what else is wrong with it?
At the beginning I thought that Obama was going to make the reasonable response to the utopia-fallacy arguments often made against trade deals: “Well, I am all for free trade, but TPP is a huge trade regulatory pact with thousands of pages! That isn’t free trade, so I can be against it without violating my free trade principles.”
To that reasonable people may respond, indeed, TPP is a big complicated arrangement much inferior to just plain-old unilateral abolition of barriers to trade. That said, it may very well still be a net improvement on the current state of affairs.
Obama’s only error was that he misidentified what (for Americans) would be Utopia: Everybody else in the world delivers all their good and services to Americans and Americans don’t have to give them anything in return.
@Carlton:
One can imagine such a nation which optimally fills absolutely all its requirements from domestic production (though this is much rarer and harder than you’d think given the reality of comparative advantage). But why would such a nation go to the trouble of making even more stuff which it doesn’t even need or want and give it away to everybody else in the world and receive nothing in return?
Carlton
If you only sell stuff, never buy stuff, what stuff do you end up with? No stuff. Paradise is having nothing?
This is a nice example of Steve’s dictum: follow the goods. If you pay attention to who is getting goods and services you can often see through fallacies and errors.
Carlton: It would be wonderful to be a nation of abundant resources that builds everything it needs and more, and then sends the extra stuff to other nations. It would be even better to be a nation of abundant resources that builds everything it needs and then stops, thereby having everything it needs but worki
The related fallacy preached by almost all politicians of all parties is that policy X must pursued because it “will create Y jobs!” Apart from the fact that the underlying statistics tend to be very dodgy or at least excellent examples of Bastiat’s Seen and the Unseen (http://www.econlib.org/library/Bastiat/basEss1.html), it more fundamentally misidentifies what good policy should optimize.
Jobs are very easy to create. Just instruct half the unemployed to dig holes and the other half to fill them in again. Not enough space for holes? Make them do the job with tooth picks rather than shovels.
What is hard is allowing the circumstances to arise in which there will be jobs which create so much value that some will freely employ others and pay them enough that they’ll freely work.
Ok, I think I can see the point I was missing. Most people would look at the extra profit made from selling the excess goods and stop there, claiming a net gain. (1000 units produced, 900 consumed and 100 sold would result in a profit of the price of the 100.)
However if nothing is purchased externally then the profit would just result in inflation, not an increase in the well-being / purchase power of the nation.
Carlton: I think a clearer way to think about it is that all we care about is how much we work and how much we consume. Any policy that leads to additional work without additional consumption is bad for us
Of course such a policy might be good for our grandchildren, as long as they eventually spend our savings. But if we want to work harder in order to help our grandchildren, we don’t need trade policy for that; we can just work harder and give them our paychecks.
@Carlton#9:
It is actually even worse than that. Assume your lucky country which doesn’t need or want anything from abroad, but still want to sell stuff abroad, maybe for their grandchildren in hundred years to cash in.
But how are you going to get paid for all that stuff you sell to foreigners? You can’t take their goods and services in barter, because that would mean importing which as we know is terrible. They can’t pay you in your currency, because how are they going to get any of it, if your country declines to buy anything from them?
So really your only option to get paid for your sales to that other country is to accept their currency and hold on to it for a hundred years until you might want to spend it.
But that is a pretty sweet deal for them. In effect, you have just given them an interest-free hundred-year loan. Moreover, it is a loan they can in effect legally repudiate any time by just creating some inflation.
It is strange, but somehow being super-country which doesn’t need or want anything from anybody else but can sell its goods freely elsewhere, never seems to work out right!
It is hard for politicians these days. Maybe they feel the need to keep up with Trump’s fantastic rate of lying.
Sniping aside, I think Carlton’s question and the responses to it have been wonderfully enlightening.
My interpretation of Obama’s comment is that he is criticizing the listener’s (or many listeners’) ideal of what a trade agreement should be.
Wow, ok, my eyes have been opened a bit. Thank you guys for your replies. I feel like i have been taken a level deeper in my understanding of economics.
To Harold’s point – I do think this shows the difficult road for politicians. If they understand economics any where close to what you hope they do, the politician can’t (currently) explain the true reasons behind policy, at least not to the general public. The masses can’t understand without a major education first; our school systems just don’t put a priority on education about economics.
I have at least attempted to learn and expand my horizons, but I know I am still just scratching the surface. Many others don’t realize the lack of their understanding and just want the politicians to give them what they think is best, even they they are wrong. And then you throw in that there are conflicting “experts” on both sides and it just makes it even harder to determine what the best policies would be.
Who exactly do we think lacks an appreciation of economics?
The world is awash in information. People’s capacity for attention is finite. So people quite rationally allocate their attention to topics that they can identify, at a glance, as having salience to them. Hope and fear prove to be the quick-and-dirty markers of salience that evolution has created for us. In other respects, people typically practice “rational ignorance.”
The opportunity to buy stuff from abroad triggers relatively little hope or fear. (If you lived in a developing economy that had a desperate need of pharmaceuticals, say, you might have a different reaction.)
The prospects of losing the opportunity to import stuff from abroad might trigger greater fear; the Endowment Effect tells us that people place greater value of maintaining the status quo than on the prospect of improving upon it.
In contrast, the prospect of losing your job to foreign competition, or to gaining a job due to the loss of foreign competition, might trigger much greater fear and hope, respectively. And people’s attention-allocation mechanism responds accordingly.
And politicians who understand economics responding accordingly, too.
“presumably because he thinks the voters (along with at least one major party nominee) are too dumb to follow it.”
Not necessarily too dumb, but there does seem to be overwhelming evidence that many voters do not understand it.
A comment from an article on the trade deficit with China:
” I can’t believe American can be so dumb to continue elect these politicians. When you have $360B trading deficit to China a year, you not only lose $360B worth of jobs to China per year. but also owe China $360B worth of debt, which has to be paid back by your future generation(Yeah, how selfish american are!). It’s just basic economics…Finally, Only US corporations and the rich benefit from this trading deficit. Many American either lose their jobs or suffer stagnant wage growth”
An economist writes “This means that U.S. consumers have been enjoying huge quantities of low-cost goods by borrowing cheaply from China at negative real interest rates.”
Obama has to avoid pissing off the ignorant, as well as trying to avoid actually lying. The result is soundbites that are less than accurate. I tend to be more forgiving when the phrase is spoken in dialog rather than written or presented as a prepared speech. Perhaps he meant we get to sell all over the world and never buy more than we sell?
@Carlton: Congratulations! I don’t think I’ve _ever_ seen anyone say their opinion was affected or they learned something in blog comments. Well done!
We would all love to buy stuff and not have to sell stuff (i.e., our labor.) Why is this so hard for people to understand?
@Pete 17
Actually that happens tolerably often on *this* blog. Even from the host.
Steve, you may have a legitimate gripe against Obama’s statement, but I think you’re caricaturing his position. When he said the ideal arrangement would be one “where we get to sell things all over the world and never buy anything”, presumably he meant “never buy things from other countries”, not never buy things at all. He was envisioning a scenario in which there are no imports into the U.S., only exports, and the exporters use the money they make to buy goods and services within the United States.
Now as I said, you may well have an economic argument against what Obama is saying, but you should make that argument (for instance, that more dollars entering the U.S. will cause inflation rather than making us wealthier), but his position doesn’t strike me as self-evidently absurd, and I can easily imagine him genuinely believing it.
@Sub Specie Æternitatis (#11) It seems to me that your argument doesn’t get to the heart of the matter. You say “But how are you going to get paid for all that stuff you sell to foreigners? You can’t take their goods and services in barter, because that would mean importing which as we know is terrible. They can’t pay you in your currency, because how are they going to get any of it, if your country declines to buy anything from them?” Suppose for sake of argument that the dollar was a global currency. In that case, why wouldn’t a country want to have only exports and no imports.
I think the answer is some combination of “inflation” and “missed opportunities of gains from trade”. But that’s the real question that needs to be addressed. And I don’t think Steve is right to accuse Obama of being disingenuous for not knowing the right answer to that question. I daresay most educated people without training in economics would not know the right answer to that question.
@20
Ok Keshav, now THAT is funny.
@Ken B I’m being serious. It may be a fallacy to think that increasing a country’a trade surplus makes the country wealthier, but it does not strike me as a self-evidently obvious fallacy.
Keshav:
He was envisioning a scenario in which there are no imports into the U.S., only exports, and the exporters use the money they make to buy goods and services within the United States.
I can’t tell whether you mean this in jest or in seriousness, but if the latter, I think you are attributing to Obama a level of stupidity that is just not credible.
Keshav:
It may be a fallacy to think that increasing a country’a trade surplus makes the country wealthier, but it does not strike me as a self-evidently obvious fallacy.
As with your last comment, either you find this funny, in which case I don’t get it, or you mean it seriously, in which case it’s beyond absurd. If it takes an hour to produce a turkey, and if we work six hours, produce six turkeys, ship two of them abroad, and get nothing in return, we work six hours and eat four turkeys. If instead we work only four hours and ship no turkeys abroad, we work four hours and eat four turkeys. Working four hours is better than working six hours. To suggest that Obama doesn’t get this seems to me to be on a par with suggesting that he’s half-orangutan. It’s just nuts.
Steve, I assure you I don’t mean this in jest at all. I think that the average educated person does not think of the “no imports, only exports” scenario as being analogous to “shipping two turkeys abroad and getting nothing in return”. They think of it as being analogous to “shipping two turkeys abroad and getting money in return, money which can be used to purchase (say) two bushels of wheat domestically”. I do not believe that thinking this “requires a level of stupidity that is just not credible”.
Now it might well be the case that training in economics makes people see a flaw in this reasoning, but I don’t think the reasoning is absurd on its face.
Steve, let me put it this way. I think the following line of reasoning has a great deal of intuitive appeal: “If an American consumer buys an American product as opposed to a Chinese product, that benefits America. If a Chinese consumer buys an American product as opposed to a Chinese product, that also benefits America. So if we could discourage American consumers from buying Chinese products and encourage Chinese people to buy American products, that would benefit America. In the extreme case, when Americans are only buying American products and Chinese people are also buying American products, that would benefit America the most.”
I’ve never studied economics formally, but because I’ve read your books and I’m a regular commenter on multiple economics blogs, I think this reasoning is flawed, and if pressed I think I could articulate at least some of these flaws. But if you asked me ten years ago, I would probably have agreed with this reasoning wholeheartedly. And I consider myself a reasonably intelligent person. So I think it’s a pretty easy mistake for a lot of people to make.
Keshav: You are thinking yourself into knots. The gains from trade are equal to the value of what you receive minus the value of what you give up. If you receive nothing, those gains are negative.
Try this in your own household. If you have a wife or roommate, sell something that you value, and agree to keep the money in your household forever, passing it back and forth between yourselves but never using it to buy anything from outside the house. The net result is that you’ll have given up something that you value and gotten nothing in return. Try it if you don’t believe me and see how it works out for you.
Steve, the reason that wouldn’t work is that there’s not an economy within my house – it’s basically a communist arrangement where we own all money and property together. But let’s consider the town I live in as opposed to the house I live in. If I sold something I valued to someone living outside my town, and then used the proceeds to buy something from someone else living in my town, the town as a whole may benefit from this set of transactions. I think this is the way a lot of people view imports and exports.
And Steve, as to your statement “If you receive nothing, those gains are negative.”, the way a lot of people think about exports is not “receiving nothing”, but rather “receiving money”. Now you can make an argument as receiving money from foreign countries when you receive no goods or services from foreign countries does not make a country richer, but it requires making an argument, it’s not something that’s obvious for the average educated person.
Keshav:
. If I sold something I valued to someone living outside my town, and then used the proceeds to buy something from someone else living in my town, the town as a whole may benefit from this set of transactions.
To paraphrase Sarah Silverman, you are being ridiculous. If you believe for some reason that your economy can benefit from an influx of money, then the policy prescription is to create money, which we can do at essentially zero cost. It makes no sense to trade away valuable goods to get something you can create for yourself for free.
It would be good if you stopped to think for a moment before posting this stuff. It’s not hard, it’s not complicated, it’s not controversial, it’s basic arithmetic, and there’s nothing more to be said.
Steve, I apologize if I seem obtuse, but my point is simply that it is an easy mistake to think that because an individual can become wealthier by selling valuable goods for money, therefore society can become wealthier by selling valuable goods for money. To be clear, I fully acknowledge that it’s a mistake to think that, but I think a great many educated people without training in economics make that mistake.
Keshav:
I think a great many educated people without training in economics make that mistake.
Yes, but they make that mistake because they (for perfectly good reasons) have never given the matter a moment’s thought. I am sure that the President of the United States has given this matter more than a moment’s thought, and I am sure he is not confused about it.
I agree that Obama’s statement is silly on its face for all the reasons given.
But I think everyone is overthinking the logic behind the statement. I think the logic is simply: exports are good and imports are bad, so “utopia” is all exports (selling) and no imports (buying).
Maybe it would help to think at a US State level. Say Nebraska exports wheat to the other states but never imports anything from the other states. Nebraskans can use the dollars they get from selling the wheat, but they can’t spend it on computers from California, or cars from Detroit. Since Nebraskans collectively already have everything they produce, they can’t spend the dollars on anything at all. They can put them aside for their children.
Keshav: “I think a great many educated people without training in economics make that mistake.”
I think so too. I think that’s why Obama is peddling the line; he is gulling many such people.
Look, when Trump peddles obvious nonsense people accuse him of an appeal to ignorance. Well, it’s the same thing here but a prejudice — we Obama voters are smart and educated! — prevents many from seeing that clearly.
I believe that this is wrong; employment of otherwise unemployed/unemployable people, even if it produces no net societal value, has benefits. If nothing else, it avoids/ameliorates hysteresis, crime, social unrest and Trump-voting.
I meant to say “even if it produces no immediate additional net economic output”. Obviously, the avoidance of hysteresis, crime, social unrest and Trump provides substantial societal benefits.
@Ken B#19:
And that is one of the reasons I hang around here. Intelligent disagreement is a win-win for the genuine friend of truth. You either get to correct your own errors or to gratify your ego by demonstrating superior understanding.
“The peculiar evil of silencing the expression of an opinion is that it is robbing the human race, posterity as well as the existing generation — those who dissent from the opinion, still more than those who hold it. If the opinion is right, they are deprived of the opportunity of exchanging error for truth; if wrong, they lose, what is almost as great a benefit, the clearer perception and livelier impression of truth produced by its collision with error.”
John Stuart Mill, On Liberty at 16 (Elizabeth Rapaport, ed. 1978).
But the again we know that
“John Stuart Mill, of his own free will
On half a pint of shandy was particularly ill”
@nobody.really#43: Yeah, but I am pretty sure I said it first before that “Mill” guy whoever *he* may be.
@ Steve: I think this falls into the category of things which you need to think hard about weather or not they’re obvious. Which is to say, it’s obvious if you look at it in the right light. i.e. if you phrase it in terms of goods and services then it becomes obvious pretty quick. If you phrase it in terms of currencies and “trade surplus/deficit” and the like it gets really easy to think yourself into the wrong answer. Is it really all that shocking for someone to go down the wrong path here?
Many things are not obvious to anybody, even brilliant people http://www.thebigquestions.com/2015/07/29/this-would-be-a-great-illustration-of-comparative-advantage-if-it-werent-such-a-great-illustration-of-absolute-advantage/, who has never given the matter any serious thought.
But if those who have not thought about the subject nevertheless issue strong opinions on it, they are fairly denounced as missing points obvious to those who have.
That is why I don’t comment on pop music or the relative merits of the teams in La Liga.