Suppose there’s a guy in your neighborhood who routinely harasses strangers on the street, calling them ugly names, maybe threatening them with violence, but always stopping short of anything that’s actually illegal.
You consider this bad behavior, so you work to pass some laws that will discourage it. Maybe you criminalize the behavior; maybe you tax it.
The new laws turn out to be somewhat effective. The guy tones it down. He still harasses people, but only half as much.
Question: Do we owe this guy something? Should the taxpayers cut him a check so he won’t feel so bad about having to rein himself in?
I’m going to go out on a limb and guess that most of you will answer “no”.
Here’s why I ask:
The President of the United States believes that under current circumstances, much international trade is a bad thing and ought to be discouraged. Unfortunately, there’s a bunch of farmers out there who have been behaving very badly (i.e. trading with foreigners) and the law hasn’t done much to stop them. So the President has expanded the scope of the law to punish this bad behavior via tariffs. And then he’s turned right around and announced a plan to compensate the bad guys.
Now, I myself don’t see the farmers as bad guys in the first place, but I’m trying to see this through the President’s eyes. If you grant him the courtesy of assuming he means the things he says about trade, then he must believe that many of these farmers, by sending American wheat abroad, thereby freeing up foreign workers to produce manufactured goods instead of wheat, and thereby hurting U.S. manufacturers, are doing a bad thing. You can see, then, why the President wants to stop them.
But why does he want to compensate them? Usually when you stop someone from doing a bad thing, you hope they’ll feel a little pain, so they (and others) will think twice before they do another bad thing. Instead, the president is going out of his way to make sure these (in his view) bad actors suffer no consequences.
What’s up with that?
What’s up with that is we’d all be a lot better off of Trump thought even 1/10th as deeply as you do on societal/economic issues. I think he just doesn’t think very hard, maybe because he doesn’t have to? After all, he became President as basically someone who simply entertained people and inflamed various passions.
Steve, Trump doesn’t think the farmers have done anything wrong. He wants to encourage the farmers to sell more wheat to other countries, and he wants Americans to buy manufactured goods from American manufacturers rather than foreign manufacturers. To further the second objective he put tariffs, but then other countries put retaliatory tariffs on farmers. And Trump doesn’t want to get farmers to get hurt (hence the first objective), so he’s compensating them for the losses incurred from the retaliatory tariffs.
Keshav: You do realize that this doesn’t make a shred of sense, right? Surely if it’s bad for Americans to buy foreign manufactured goods, then it’s bad to *cause* Americans to buy foreign manufactured goods. In particular, therefore, it’s bad to sell American agricultural goods to foreigners, which is exactly what the American farmers have been doing.
Steve, your post (and comment to Keshav) have proven that trade surpluses are impossible. So something isn’t right.
I’m not defending Trump, of course, but he thinks exports are a good thing and imports are a bad thing. So he thinks the farmers were doing a good thing. See Bob Murphy’s point above for why this isn’t contradictory. It’s mercantilism and it sucks and it’s wealth reducing, but it’s not contradictory.
But Steve, why can’t you be in favor of both increasing the amount of wheat farmers sell to foreigners, and decreasing the amount of manufactured goods foreigners sell to Americans?
It may be true that farmers selling wheat to foreigners, all other things being equal, may cause Americans to buy more manufactured goods from foreigners. But you can stop that undesirable side affect without stopping the wheat-selling, can’t you?
Cute, Landsburg, very cute.
For what it’s worth, over at the Library of Economics and Liberty we’ve been discussing the merits of bailing out the farmers. As you might surmise, I’m generally opposed to the policy–because it doesn’t entail enough transfers. But people have offered a variety of views.
Bob Murphy (#4) and David Henderson (#5): It is certainly true that increased farm exports this year does not logically entail increased manufacturing imports this year, but I don’t think (if we start from Trump’s stated premises) that this lets farmers off the hook.
If a madman is threatening to shoot his family and I hand him a loaded gun, it does not follow as a logical necessity that his family will die — but it’s still a *foreseeable likely consequence* of my action that his family will die, and that’s sufficient reason for you to stop me from giving him the gun, without feeling any need to compensate me for the affront.
Increased manufacturing imports are a *foreseeable likely consequence* of increased farm exports, so I think the same logic applies.
Major Major’s father was a sober God-fearing man whose idea of a good joke was to lie about his age. He was a long-limbed farmer, a God-fearing, freedom-loving, law-abiding rugged individualist who held that federal aid to anyone but farmers was creeping socialism.
Nice to see you blogging again, Cheers.
“Increased manufacturing imports are a *foreseeable likely consequence* of increased farm exports, so I think the same logic applies.” But Steve, you can take an action while stopping what would otherwise be its foreseeable likely consequence. You can give the madman the loaded gun while distracting him thereby allowing the family to escape. You can encourage farmers selling wheat to other countries while discouraging foreigners selling manufactured goods to other countries.
Steve, let me put it this way: what is inconsistent about the position “I want to create more jobs in all sectors of the economy, including farming and manufacturing”?
Keshav:
what is inconsistent about the position “I want to create more jobs in all sectors of the economy, including farming and manufacturing”?
Nothing. There is also nothing inconsistent about the position “I want 8 plus 20 to equal 25”. But it would still be a little odd to devise policies around that hope.
Steve, the difference is that it’s impossible to make 8 and 20 add up to 25, while it is perfectly possible to help farmers while also helping manufacturers. So what’s odd about devising policies around that hope?
Keshav: What the farmers have been doing is exporting wheat. The very probable consequence of that action is that Americans have been importing more manufactured goods. Trump thinks it’s bad for Americans to import more manufactured goods. Ergo, it seems natural to expect that he’d think it’s bad to do things that are very likely to *cause* Americans to import more manufactured goods. It seems odd to reward behavior that you think is bad. I have nothing more to add to this.
Steve, Trump thinks exporting wheat is good, importing manufactured goods is bad. Sometimes good things have some bad side effects, that’s the nature of life, but in many cases you can avert the bad side effects of a good thing. So why can’t you encourage wheat exports while stopping the resultant import of manufactured goods? Please answer this for me.
@Keshav I think David (#5) got it right. Trump thinks imports are good and exports are bad. As I understand it Steve’s using a model (set of models) where imports=exports* over the long term. This obviously clashes with Trump wanting more exports and less imports. In particular it makes policies that aim to increase exports clash with policies that aim to decrease imports. Here Steve is pointing at one such clash. I suppose you could imagine someone that thinks some kinds of imports are good (argriculture) and some are bad (manufacturing) but I don’t think Trump is in this camp.
* The rational here (again as I understand it, I don’t want to put words in Steve’s mouth here) is that if exports>imports that the exporting country would be silly not to stop. Similarly if imports>exports the other countries would be silly not to stop.
While I agree Trump and his officials have said certain things on trade deficits in general and specifically with China, it may still be inappropriate to view this transaction in isolation. China also has put up non-tariff trade barriers, including forced technology transfer and industrial espionage. Tariffs may not be the best lever to change that behavior, but those activities were put forward as part of justifying targeting China. Playing devil’s advocate, what alternative does economic theory and practice propose to change China’s behavior?
I think Trump may be inconsistent and therefore he can prove anything.
“So why can’t you encourage wheat exports while stopping the resultant import of manufactured goods? Please answer this for me.”
In the short-term, exports will put pressure on imports. In the very long term, eventually all assets will be turned into consumption and cumulative imports have to equal exports.
Think of yourself as a country. You work to earn a living, essentially exporting your labor service to get paid. You use your income to buy (or import) goods and services. If you want to buy a new car, you have to either work more (export more) or borrow.
Borrowing would be selling a financial claim (a change in the capital account) on your future labor income. You will eventually have to export to pay for the car.
Likewise, if you decide work harder and earn more, this will result either in higher consumption today or you saving (acquiring financial assets, again a change in the capital account) which will lead to higher consumption in the future for you or your kids.
Jonathan Kariv (#17):
As I understand it Steve’s using a model (set of models) where imports=exports* over the long term.
Well, yes, but that’s only part of the story….
Let’s suppose that for some reason you only care about the short run. Even then:
1) Net imports equals spending minus income. The amount people choose to spend, and the amount they choose to earn (i.e. the amount they choose to work) both depend primarily on how rich people feel, which in turn depends on how productive they expect to be in the future. A single instance of international trade (e.g. a farmer deciding to sell wheat to a foreigner) can’t have much effect on those expectations in the aggregate, so it can’t affect net exports. So (to an excellent first approximation) if exports increase, so must imports — by about the same amount.
[I was once told by a very prominent economist that the best test of whether a person understands economics is whether that person immediately, intuitively (and correctly) recognizes that a ban on trade in some particular commodity, or a ban on trade with some particular foreign country, cannot affect the trade balance — for exactly the same reason.]
2) Another way to get to the same place is what I already said in the post. If a farmer exports wheat to China, the Chinese will grow less wheat, and therefore will divert resources to increase the production of, say, manufactured goods. But there’s no reason to think the Chinese demand for manufactured goods has changed much, so those additional goods will be shipped out of China (and eventually to the US, because the French demand for manufactured goods is also unaffected).
Either way, a decision to ship American wheat abroad **is** (more or less) a decision to induce Americans to import more of some other commodity. [I am NOT making the fallacious argument that the trade balance has to be zero as a matter of accounting.] Trump might wish things are otherwise, but they are not otherwise. In the world we actually live in, if you accept Trump’s assumptions, then American farmers have been behaving badly. Which leads me to repeat my question: Why reward them for it?
Thanks for the reply Steve. It does clarify the point.
My answer does remain the same as to why Trump rewards it. He’s one of the people who fails the very prominent economist’s test.
I am so happy that you’ve ended your blogging hiatus, Steve, that I am celebrating by parodying your post.
Let me clarify my earlier comment, since I can see by the initial reaction that even my long-time readers don’t see what my point was, in my reductio ad absurdum post.
So, I have two main problems with Steve’s post:
Problem #1:
Even within Steve’s framework, his conclusion doesn’t follow. Trump’s goal is to have a US trade surplus. So yes, imports are bad, but exports are good. So if farmers increase wheat exports by $1 billion, that’s $1 billion in gross benefits from Trump’s POV. Now Steve’s point is that those extra exports might induce an increase in imports of roughly $1 billion, which is a gross cost in Trump’s view. Fine, but that means the whole thing is a wash. It’s still not the case, even on Steve’s terms, that Trump should want to punish wheat exports. (The point is especially significant when we consider that there might be some slippage.)
Hence my football analogy: it would be foolish to punish a coach for scoring a touchdown, using the logic that he has thereby made it likelier that the opponent will score back. Thus, if Trump loves exports and hates imports, he’s not compelled to hate exports when you point out the subtle trade relationships. At best, it just means Trump should be indifferent to exports.
Problem #2:
I don’t like how many bloggers lately are taking it for granted that the US trade deficit is a fact of nature like the charge on an electron. If the US government switched from an income to a consumption tax, for example, wouldn’t that increase the US savings rate? Or if the US government slashed spending and balanced its budget, wouldn’t that reduce the trade deficit?
SL: “… then he must believe that many of these farmers, by sending American wheat abroad, thereby freeing up foreign workers to produce manufactured goods instead of wheat, and thereby hurting U.S. manufacturers”
Something bothers me here… what assumptions underlie this assertion? Don’t you have to state some technicalities, such as productivity in the various sectors, demand/supply/labor curve flexibility, and so on?
Clever post, and some good discussion.
Another idea: if Trump believes his policies benefit the ENTIRE COUNTRY, which means EVERYONE, not a favored few – we’re draining the swamp, remember? – then how can farmers suffer? In which case, there’s no need for any compensation! His protectionist policies, making America grate, are compensation enough.
Furthermore, if they sell less abroad, they’ll sell more here, which means domestic consumers will BUY AMERICAN, lowering trade deficits, and benefiting everyone even more!
Is there a name for this sort of thinking? Which is very common, ‘natural economics’, so to speak. It reminds me of the manner in which Aristotle physics is the natural, ‘common sense’ intellectual model of the uneducated, still today.
Trump and people like him always think it is better to be the sell than the buyer.
Borrowing from Scott Sumner, I think we can assume that Trump is basically working with three variables.
1) Exports of goods and services.
2) Imports of goods and services.
3) The “trade surplus” or “trade deficit.” (Which Sumner sometimes describes as exports of condos as second homes).
Trump is a mercantilist, so his goal is to shift 3. Trump believes he has some central planning levers to increase 1 and decrease 2, which will then foreseeably result in a change in 3, so that fewer overseas investors are investing in US companies or buying US condos, and more US investors are investing in overseas companies and buying overseas condos.
Given Trump’s model, it’s not really valid IMHO to say that Trump should decrease exports so that he then foreseeably decreases imports – his goal is to increase exports AND decrease imports so that he shifts the balance of trade. Steve may believe that’s impossible, but Trump doesn’t think so.
When it comes to giving billions to farmers, it is a pure crony game where it all goes to “some” farmers in the “protected” crops and everyone else pays the tab.
I don’t see Washington State clam farmers getting goodies when they were exporting 60% or so of their crop to China competing with BC Canada for the same market. They now have a 25% China tariff to pay which comes out of their profit or go out of business.
His giving 12 billion to “connected” farmers and giving the finger to everyone else is a typical politician move to get good press at my expense.
If Trump truly wants to lessen the trade deficit, or induce a trade surplus, he needs Congress to immediately institute capital controls to stop the incoming flood of foreign investment, drowning us poor Americans in capital goods…