Tag: Protectionism

Buy American

In recent years the U.S. government has become more protectionist (protecting its domestic firms from foreign competition). Last year it even provided billions of dollars to subsidize chip production and other designated products in the U.S., an example of industrial policy (state directed development). The CHIPS Act passed last year will shell out over $200 billion over the next five years to subsidize domestic chip production.

To add insult to injury, the so called “Inflation Reduction Act” may violate World Trade Organization rules: “We have concerns about a number of discriminatory elements in this Inflation Reduction Act which puts requirement for local content, for local production,” Dombrovskis, who also is a European Commission vice president, told Bloomberg in Prague.” EU Is Assessing If US Inflation Act in Breach of WTO Rules – Bloomberg Did we really think that we could cheat and Europe and the rest of the world would just roll over and play dead.

President Biden has proclaimed that these expensive policies are needed to create jobs in American. This is bazar given that we are currently suffering from a labor shortage.  Manufacturing output in the U.S. is at an all-time high. U.S. employment in manufacturing has gradually declined in recent decades because our workers have become more productive. But that is surely a good thing, resulting in an increase in our standard of living. President Biden has taken steps to lower our standard of living in order to create American job. Take a deep breath. If we don’t significantly increase legal immigration, you can count on the continuation of long waits on the phone to talk to a real service person.

Where does the “Buy American” impulse come from? It seems that some people see American nationalism as keeping everything at home whatever the cost, while I see it as enjoying the fruits of our largely free society to work and innovate and flourish as we each see fit for the benefit of all.

Several years ago, Ito and I celebrated the 4th of July at the American Embassy in Roma at the invitation of our friend David Zimov, at that time Counselor for Economic Affairs at the U.S. Embassy in Rome. It was really a fun event overflowing with hot dogs and hamburgers. While listening to the Marine Band and waving the little American flags we were all given, I noticed that the flag had been Made in China (clearly tagged). I am guessing that the American nationalists I referred to above were appalled. I, on the other hand, was grateful that my tax dollars were being spent as carefully and wisely as possible—on this occasion at least.  https://wcoats.blog/2023/01/22/trade-once-again/

Trade once again

Everyone understands that without trade they would be dirt poor. If everyone had to be self-sufficient, they would be lucky to survive. It’s almost as obvious that the wider we can trade the more we can specialize in our comparative advantage raising the incomes of everyone. Where many stumble is at their national borders (though within national borders of large countries some regions restrict trade with other national regions to protect otherwise less efficient enterprises thus lowering incomes in general).

Why should trade be restricted across national borders? Three reasons stand out: two legitimate and one not. A potentially legitimate reason concerns national security. Requiring that products necessary for defense be domestically produced, even at greater cost, reduces the risk of supply chain disruptions. The risk is that this excuse is easily abused to the extent that such protection can turn illegitimate or corrupt.

A second legitimate reason also concerns resilience. The most efficient allocation of productive resources must take account of the risks of disruption to supply chains. We buy insurance for many assets and activities, thus incurring a certain cost, to protect our incomes from risks (large or small) of interruption and potentially larger losses. When buying goods or inputs from cheaper producers located far away, we are exposed to larger risks of supply interruptions. American manufacturers, for example, take these risks into account in deciding where to produce and purchase inputs to their products sold in the U.S.

A government bestowed financial favor on a firm or industry (trade protection, industrial policy) is always part of a quid pro quo. The firm delivers favors to the politicians who favor it.  Government protection of otherwise uncompetitive firms increases their viability and profits but at the expense of lower income for the rest of us. Countries that heavily indulge in such protection have suffered lower levels of income. “Trade protection and corruption”

Following World War II, and the establishment of what became the World Trade Organization, barriers to trade (domestic protectionism) were gradually reduced via bilateral and multilateral trade agreements. In the 62 years from 1959 to2021, real United States’ per capita personal income, when measured in constant 2012 dollars to adjust for inflation, increased 297.1%, from $13,971 in 1959 to $55,477 in 2021. This huge increase is the result of increased productivity per worker. But such productivity gains are only possible because of trade (within or across national borders).  “The case for trade”

Weaknesses in government programs to facilitate worker adjustments that are a necessary part of a dynamic, growing economy and other geopolitical factors are undermining the freest and most efficient trade (domestic and global) that our prosperity has depended on. “Geo Economic Fragmentation and the Future of Multilateralism”  “End globalization?”

The Economist magazine has argued that: “One problem [with protectionism and industrial policies] is their extra economic costs. The Economist estimates that replicating the cumulative investments of firms in the global tech-hardware, green-energy and battery industries would cost $3.1trn-4.6trn (3.2-4.8% of global gdp). Reindustrialisation will raise prices, hurting the poor most. Duplicating green supply chains will make it costlier for America and the world to wean themselves off carbon. History suggests that vast amounts of public money could go to waste…. Yet rescuing the global order will require bolder American leadership that once again rejects the false promise of zero-sum thinking. ”  “The destructive new logic that threatens globalisation”

Misinformation and corruption are undermining the basis of our incredible prosperity just when we need to pull together to deal with global warming. We must resist and fight back to restore and preserve our efficient market economies.  They would not exist without trade.

The Sources of Prosperity

I am an economist so I can’t help writing about the virtues of trade in the (futile?) hope that what is obvious to economists might be better understood and appreciated by the general public. https://wcoats.blog/2016/12/22/save-trade/,  https://wcoats.blog/2017/01/06/the-liberal-international-order/,   https://wcoats.blog/2018/03/03/econ-101-trade-in-very-simple-terms/, https://wcoats.blog/2017/01/06/the-liberal-international-order/, https://wcoats.blog/2019/02/09/tariff-abuse/

So please bear with me one more time. If you join with ten, or a hundred, or a thousand others to cooperatively produce things, you can jointly produce much more than ten times, or one hundred or one thousand times as much as you could all produce individually as one person factories. But that huge increase in productivity and output is not possible unless you can sell your joint output to others for the many other things you need and want to consume that they produce. In short, none of this is possible without trade. The wider the area over which we can trade the greater are the possible gains in productivity from the specialization of labor and capital that a larger market makes possible. The American constitution recognized this when it prohibited restraints on trade between the states (across state lines).  The ultimate limit in the size of the market is given by the world itself.

But markets—the “places” or the arrangements through which trade deals (purchase and sales agreements) occur—require trust that deals will be honored.  The rule of law, which protects private property and the enforcement of contracts, provides the certainty needed for a manufacturer or other service provider to invest in the productive capacity and facilities needed to generate the promised supply of products that is the foundation of our relative affluence. When trade extends beyond national boundaries the rule of law takes the form of international agreements to rules of the game.  Bilateral, multilateral and global trade agreements establish the rule of law within their domains.  The World Trade Organization (WTO) was created to oversee this process. The astonishing skyrocketing of the standard of living of the average (even the poorest) earthling rest on, i.e. would not have been possible without, trade.

The uneven but persistent history of trade has seen the protection of less efficient and uncompetitive firms and industries reduced over time via trade agreements that reciprocally reduced the taxation of imports (i.e. tariffs).  Starting with President Trump’s misguided withdrawal from the Trans Pacific Partnership (TPP) trade liberalization has been thrown into reverse. Trump vs Adam Smith  TPP modernized and further liberalized existing trade agreements between the U.S. and a number of Pacific countries.  The agreement was to be between 12 Asian Pacific countries until the U.S. withdrew.  It would have provided a strong magnet to further draw China into the global system of rules for increasingly free trade. It was ultimately signed by 11 countries without the U.S. and renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The US withdrawal from the agreement was a serious mistake.

The United States as well as much of the rest of the world is beginning to pay the costs of Trump’s trade wars. In January of this year Deutsche Bank estimated that Trump’s trade wars have cost the U.S. stock market $5 trillion in forgone returns so far. Costs of trade war  “Bloomberg economists Dan Hanson and Tom Orlik have… concluded: If tariffs expand to cover all U.S.-China trade, and markets slump in response, global GDP will take a $600 billion hit in 2021, the year of peak impact.” US China trade war-economic fallout  “The import tariffs proposed by President Trump could wipe out the income gains provided by the Republican tax cuts for low- and middle-income earners, Jim Tankersley of The New York Times reported Monday.”  ”Trump-Tariffs-Could-Wipe-Out-Tax-Cuts-Most-Americans”

Are Trump’s import taxes old fashioned protectionism (protecting relatively inefficient domestic industries from foreign competition), a legitimate response to national security concerns, or a reflection of Trump’s “famed” negotiating style?

Protectionism

For starters Trump’s steel and aluminum tariffs of 25% and 10% respectively (following his earlier imposition of tariffs on solar panels of 30% and washing machines of 50%) are clearly protectionist and reflect an alarming over reach of executive authority. Using the “authority” given the President under Section 232 of the Trade Expansion Act of 1962, U.S. Department of Commerce found that imports of steel and aluminum “threaten to impair the national security” of the United States.  Canadian Prime Minister Justin Trudeau called the claim that reliance on Canadian steel could be considered a national security risk “absurd”.  Trump removed these tariffs on Canada and Mexico last month, but they remain in effect on our other friends (e.g., EU) and enemies. On several occasions Trump has threatened to raise tariffs on car’s imported from Europe on the same phony national security grounds.

The patters of trade that minimize costs of production and maximize labor productivity can be complex. While protecting a few inefficient American steel producers and their related jobs might be good for those few firms, it is bad for American consumers and the economy at large. Workers in less productive protected industries are thus not available to work in more productive activities. Moreover, more jobs were lost than saved as the result of high prices and lost sales by steel importing manufactures.  One study estimated that these tariffs could result in the loss of 146,000 jobs.[1]

A Peterson Institute for International Economics study estimated that American businesses and consumers paid more than $900,000 a year for each job that was created or saved as a result of the Trump administration’s tariffs on steel and aluminum. The cost for each job saved as a result of the administration’s tariffs on washing machines was $815,000.[2]

National Security

The distinction between legitimate security concerns and protectionism is not always obvious. Trump’s approach is often more protectionist and bargaining chips than concerns for security.  An early indication of this was the U.S.’s treatment of ZTE Corp, China’s second largest telecoms gear maker.  In April 2018 the U.S. band U.S. companies from selling their products to ZTE in connection with its violation on U.S. restrictions on trade with Iran, Sudan, North Korea, Syria and Cuba.  “That means no Qualcomm chips or Android software for its phones, and no American chips or other components for its cellular gear.” NYT The company was effectively shut down and heading for bankruptcy when in early June of 2018 Trump ordered these restrictions lifted to save Chinese jobs!!  According to the NYT: “The Trump administration is pressuring China to make trade concessions. It may also need Beijing’s help to strike a deal with North Korea as Washington and Pyongyang plan a high-profile meeting on June 12 in Singapore.  Mr. Trump appears to be using ZTE’s punishment as a bargaining chip in negotiations with China, rather than a matter of law enforcement.” What is ZTE–A Chinese Geopolitical Pawn

Trump’s more recent banishment of Huawei, a Chinese tech company leading the world in 5G development, from the American market and efforts to convinces our once British and EU friends to do the same provides another example. In some applications security concerns when dealing with a Chinese company may be justified, but these areas are limited and Huawei has gone to great lengths to allay those concerns. “Google has been arguing that by stopping it from dealing with Huawei, the US risks creating two kinds of Android operating system: the genuine version and a hybrid one. The hybrid one is likely to have more bugs in it than the Google one, and so could put Huawei phones more at risk of being hacked, not least by China.”  “Google warns of US national security risk of Huawei ban” FT June 6, 2019

The Trump administration has expressed its anger with the refusal of many other countries to follow its lead thus incurring a diplomatic cost as well as the economic one of restricting access to the best and/or most cost-effective products. The dangers and potential damage of using trade threats for other objections are clearly express by seven former US Ambassadors to Mexico in a joint letter published June 5: Ex US Mexico Ambassadors-Tariffs would destroy partnership we built

Moreover, the US’s exploitation of the importance of the dollar as a reserve and payment currency in forcing its political agenda on the rest of the world has incentivized the EU, Russian, China and others to look for alternatives. As another example of the growing risks of relying on American markets, Alibaba, China’s national champion internet giant whose share are currently only listed on the New York Stock Exchange, will raise its next round of capital on the Hong Kong exchange.

Bargaining

But some of Trump’s threats of tariffs no doubt reflect his approach to a trade negotiation. While it is not the usual approach to a trade negotiation, in which the parties should be looking for win-win reductions in tariffs and other impediments to freer trade, it could occasionally work to achieve greater concessions from the other side than otherwise. There is really little evidence that it has, however. The renegotiated NAFTA, given the new name United States-Mexico-Canada Agreement or USMCA, is no better than a normal review and updating of the existing NAFTA would have been expected to produce. It incorporates most of the updated provisions of the TPP, as was expected. But Trump started the NAFT review and update, by tearing up the old agreement and threatening to revert to the bad old days. Trump’s threated 5% tariff on imports from Mexico if it doesn’t do more to reduce or deal with the flow of refugees across the US Mexican border seems to be a counter example of a threat that worked.

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Donald J. Trump‏Verified account @realDonaldTrump

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On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..

4:30 PM – 30 May 2019

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What if Trump doesn’t back down as China matches each of Trump’s escalations with new tariff increases of their own? Such a true trade war was not a necessary approach to the negotiations and could be terribly detrimental to both economies as well as those of our trading partners. Some of China’s behavior should be challenged. Its theft of intellectual property, state aid to some of its companies, and restrictions on foreign companies operating in China violate the spirit of the competitive deployment of resources to their most productive uses. But these criticisms are shared by most other countries (UK, EU, Japan, Korea, India, etc.). The US should negotiate with China together with these allies. It should use and strengthen the mechanisms of the World Trade Organization rather than ignoring and weakening it.

Even if Trump does backdown, as he generally has in the past, considerable damage has already been done that could take years to undo. The development of the cost saving, productivity enhancing global supply chains took time and were built with confidence in the rules that would apply—the rule of law. These very much included the maximum taxes (tariffs) and other regulations that would apply. The trust in that framework of rules has now been badly damaged.

Supply chains are already being restructured to reduce the risks of US policy shifts. While new arrangements may avoid or reduce these risks, they do so at the cost of efficiency.  Refusing to buy Russian booster rockets or Chinese semiconductors because of concerns that the Chinese or Russian government might exploit their companies’ products militarily or to steal our trade secrets, forces us into more expensive and/or inferior products and thus keeps us and the world poorer than otherwise. We had better be sure that the costs are necessary.

[1]  Timmons, Heather (March 5, 2018). “Five US jobs will be lost for every new one created by Trump’s steel tariffs”. Quartz (publication).

[2] Long, Heather (2019). “Trump’s steel tariffs cost U.S. consumers $900,000 for every job created, experts say”. The Washington Post.

Tariff Abuse

The U.S. constitution gives Congress the authority to enact and control tariffs (taxes on American consumers of imported goods and services).  Over the years Congress has increasingly delegated that authority to the executive branch (the President) under certain specified circumstances. Section 232 of the Trade Expansion Act of 1962 gives the President the authority to restrict (impose tariffs on) imports that threaten national security without the need for congressional approval.

Last year President Trump imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum on the grounds, confirmed upon the President’s prompting by the Commerce Department, that relying on steel from Canada and the EU (fellow NATO members) was a threat to our national security.  If this were a skit on “Saturday Night Live” we would have a good laugh, but unfortunately it is for real.  It is the launching of a very ill-advised trade war by a President who had promised when campaigning for office to reign in executive overreach.  Sen. Ben Sasse, Republican from Nebraska, called Trump’s decision “dumb.”

Trump’s stated motive was to restore American jobs to an industry in which we are relatively inefficient. The few additional workers in steel and aluminum resulting from these tariffs were outweighed by the loss of jobs in industries dependent on these now more expensive metals as inputs. Bestowing financial favors on a selected group to the detriment of the rest of us can rightly be called corruption. https://wcoats.blog/2018/09/28/trade-protection-and-corruption/  Such policies do not reflect America First. They reflect My Friends First.

Trump has apparently asked the Commerce Department to “evaluate” whether importing cars is a national security threat that would allow him to impose tariffs on them without Congressional consent. So much for rolling back executive overreach and any consideration of the national interest.

Both Republicans and Democrats may have had enough of this.  “While the Trump Administration ponders whether to claim that imported Volkswagens threaten national security, some on Capitol Hill are trying again to rein in the President’s tariff powers.”  WSJ: “Two-bills-to-defend-free-trade”

Two bills have been introduced in the House that would shift the responsibility of determining if an import is a national security risk from the Commerce Department, which naturally leans toward protecting American commerce, to the Defense Department, which should better understand real security risks. “The stronger bill was introduced last week by Senator Pat Toomey, the Pennsylvania Republican….  Mr. Toomey’s bill would require Congress’s blessing. Once a tariff is proposed, lawmakers have 60 days to pass a privileged resolution—no Senate filibuster to block consideration—authorizing it. No approval, no tariff.” WSJ 2/9/2019  A somewhat weaker bill has been introduced by Senator Rob Portman, Republican from Ohio, on the grounds that it has a better chance of passing over a Presidential veto.

Please write your congressional representatives to support one of these bills (preferably the Toomey bill) before this President fights another war that we all lose.

Trade protection and corruption

Starting with the repeal of the Corn Laws in England (tariffs on grain imports) in 1846, cross border trade and incomes blossomed. “Global life expectancy in the past 175 years has risen from a little under 30 years to over 70. The share of people living below the threshold of extreme poverty has fallen from about 80% to 8% . . . . Literacy rates are up more than fivefold, to over 80%. Civil rights and the rule of law are incomparably more robust than . . . only a few decades ago.” From The Economist’s 175 anniversary issue September 13, 2018: “A-manifesto-for-renewing-liberalism”

Post World War II trade agreements reflected a process of progressive reductions in tariffs and other impediments to trade. Unfortunately and misguidedly, President Trump has reversed this trend by introducing new tariffs and raising old ones. Import tariffs are taxes on American consumers. Why is Trump doing this? He says that he wants to bring manufacturing jobs that have moved off shore back to the U.S. by making their output cheaper than taxed imports.

As the U.S. economy is fully employed (there are currently more job openings than people looking for work), increasing employment in one area can only occur by reducing it in one or more other areas. Starting with Trump’s 25% and 10% tariffs on steel and aluminum, the shift from imported steel and aluminum to domestically produced steel and aluminum as a result of tariff protection is only possible by shifting workers from other more productive activities lowering the value of over all output. Given that these products are inputs into some American exports, which are thereby made more expensive, it is estimated that more jobs will be lost than created. “Econ-101-trade-in-very-simple-terms”

The U.S. has already imposed steep tariffs on China’s steel and aluminum to offset Chinese government subsidies to its steel and aluminum industries and thus we import almost no steel and aluminum from China. Trump has justified his new steel and aluminum tariffs on national security grounds thus bypassing usual World Trade Organization (WTO) rules for justifying tariffs. It stretches credibility, to say the least, to claim that depending on Canada and Mexico for steel is a security risk, not to mention that existing domestic production by itself exceeds our military needs. “Trump-says-steel-imports-are-a-threat-to-national-security-the-defense-industry-disagrees”

Some claim that Trump’s tariffs and threatened tariffs are just part of his negotiating strategy to achieve fairer trade agreements by a free traders at heart. This is belied by the fact that steel and aluminum tariffs remain on Mexico even after tentative agreement on a NAFTA replacement/update with Mexico. The question is why would someone benefit one small sector of the economy while imposing much larger harm on the economy more generally? The short answer is corruption.

Corruption in this context refers to bestowing benefits on a few at the expense of others in exchange for something else. In government, corruption generally takes the form of vote buying, though sometimes it is for personal financial gain. My bottom line here is that in addition to reducing an economy’s output and thus its resident’s incomes by protecting inefficient or less competitive industries, tariffs and other forms of economic protection reflect, or at the least open the door for and encourage, corruption.

When the government has or takes the authority to tax or exempt from tax individual industries or firms, it invites, if not begs for, corruption. Read the story of the Dixon Ticonderoga pencil company and weep. “How-dixon-ticonderoga-has-blurred-lines-of-where-its-pencils-are-made”

Econ 101: Trade deficits

Responding to critics of the administration’s proposed steel and aluminum tariffs, Commerce Secretary Wilbur Ross stated on CNBC: “I think this is scare tactics by the people who want the status quo, the people who have given away jobs in this country, who’ve left us with an enormous trade deficit and one that’s growing. [The trade deficit] grew again last year, and if we don’t do something, it will keep growing and keep destroying American jobs.” “Wilbur-Ross’s-star-rises-as-trump-imposes-tariffs”

Though the forces determining our trade deficits have many moving parts, it is not that complicated to explain why everything in the above statement is wrong. In this note I explain why:

  • Our trade deficits are caused more by U.S. government fiscal deficits than by the mercantilist export promotion policies of China, Japan, and Germany;
  • Mercantilist policies that subsidize exports and restrict imports don’t cost American jobs but rather reallocate workers and capital to less productive jobs that lower our standard of living; and
  • Challenging mercantilist policies using the tools and provisions of the WTO and other trade agreements better serves our long run interests than unilaterally imposing tariffs and inciting trade wars.

To understand the relationship between our fiscal deficit and trade balance, it is essential to understand the macro level relationship of our trade deficit to the other broad categories of our national income and expenditures. So take a deep breath as I explain the national income identities through which I will explore that relationship.

The economy’s total domestic output, known as Gross Domestic Product (GDP), can be broken into the broad components of our output/income that reflect how that income is spent. I understand how a little math can discourage some from reading further, but this is necessary and I hope you will indulge me. Starting with the components of expenditures:

GDP = C –M + I + G + X, or GDP = C + I + G + (X-M)

Where:
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

C-M is household consumption of domestically made goods and services, while M is household consumption of foreign made goods and services. If we subtract M from X (foreign expenditures on domestically made goods and services) we have the famous trade balance. When we buy more foreign goods and services than foreigners buy of our output, i.e., when X-M is negative, we have a trade deficit. As discussed further below, it is important to note that the trade balance (deficit or surplus) is between the U.S. and the rest of the world. Bilateral deficits or surpluses with individual countries are irrelevant.

But another way of breaking up total output (and thus income) is into how households allocate it:

GDP = C + T + S

Where:

T = household tax payments (personal and corporate income taxes plus sales taxes)

S = household saving

These two equations each provide definitions of the same quantity (GDP) and thus can be set equal to each other. This enables us to arrive at a useful formulation of the trade deficit:

C + I + G + (X-M) = C + T + S, or M-X = I-S + G-T;

The relationships in the identity can be described in several ways. Our fiscal deficit (G-T) must be financed by domestic net saving, i.e. a negative I-S, or by foreigners (M-X), i.e. a trade deficit or a mix of the two. Government finances its deficits by selling treasury securities domestically or abroad. If they are purchased domestically, residents must save more for that purpose or investors must borrow less from existing saving. If a fiscal deficit doesn’t crowd out private investment or increase private domestic saving (e.g., if I-S = 0) then it must be financed by foreigners who get the dollars with which to buy U.S. treasure securities by selling their goods and services to us in excess of what they buy from us, i.e., a trade deficit.

The above relationships are derived from definitions. They are tautologies. If the government’s spending exceeds its tax revenue it must borrow the difference from someone: a diversion of spending that would have financed investment (crowding out), a reduction in consumption (i.e., increase in saving), or an increase in the share of consumption spent abroad (increase in imports) giving foreigners the dollars they lend to the U.S. government. The interesting part—the underlying economics—is how markets bring about these results (usually a mix of all three).

When the government increases its need to borrow, other things equal, the increase in the supply of treasury securities relative to the existing demand for them increases the interest rate the government must pay. Higher interest rates generally encourage more saving and discourage investment. If we have no trade deficit (X-M = 0 so that G-T = S-T), the government’s deficit (G-T) must be financed by net saving (S-T). Depending on how much of the net saving comes from an increase in saving and how much from a decrease in investment, government deficits are bad for investment and economic growth in the long run (abstracting from countercyclical budget deficits and surpluses meant to offset cyclical swings in aggregate demand).

However, much of our fiscal deficits have been financed by foreigners (predominantly China and Germany) through their trade surpluses and our trade deficits. The market produces this result because the higher interest rates on U.S. treasury securities (and until now their perceived low risk of default) attracts foreign investors. The foreign demand for dollars in order to buy these treasury securities increases (appreciates) the exchange rate of the dollar for other currencies. An appreciated dollar makes American exports more expensive to foreigners and foreign imports cheaper for Americans. The resulting increase in imports and reduction in exports increases the trade deficit, which then finances our fiscal deficit.

As Alan Blinder put it: “Nations that invest more than they save must borrow the difference from abroad. Happily, the U.S. can do that because foreign countries have confidence in American securities. When we import more than we export, foreigners get IOUs in return for goods and services Americans want. That sounds more like winning than losing: We get German cars, French wines, and Chinese solar panels, while the Germans, French and Chinese get paper assets. America’s tremendous ability to export IOUs has been called our “exorbitant privilege.” Yes, privilege.” “This-is-exactly-how-trade-wars-begin”

If you have made it this far, you will be better able to understand the errors of Secretary Ross’s statement above: “if we don’t do something, it [the trade deficit] will keep growing and keep destroying American jobs.” If the United States government wants to reduce our trade deficit, it should reduce, rather than further increase, our fiscal deficit.

As noted above, however, our trade deficits reflect many moving parts. In the above example, foreigners want to increase their holdings of U.S. dollars (and dollar assets) in part because the dollar is a widely used international reserve asset. Our trade deficit is the primary way in which we supply our dollars to the rest of the world (and its central banks). However, what if our trading partners were manipulating their exchange rates in order to produce trade surpluses for themselves?

In the past, China followed such a mercantilist policy of promoting its exports over imports as part of its economic development strategy. In that case our trade deficit would result in foreign investments in the US with the net dollars accumulated abroad even without U.S. fiscal deficits. If they are not soaked up financing government debt they will be invested in private securities or other assets (such as Trump Hotels). Just to keep it complicated, these foreign investments would either add financing to increased domestic investment (if they lowered U.S. interest rates) or would buy existing American assets freeing up funds of the sellers to help finance government deficits or new investment. As I said, there are many moving parts, which adjust depending on prices (interest rates) and the public’s buying and investing propensities.

Tariffs don’t violate the above national income identities. Rather they potentially change the allocation of resources toward or away from traded goods. The Better Way tax reform proposals of Congressman Kevin Brady in 2016 included a so-called border adjustment tax, which taxed all imports equally and exempted all exports from the domestic expenditure tax. The tax on imports would have been, in effect, a tariff on all imports. Interestingly Brady’s border adjustment tax would not have affected our trade balance nor distorted resource allocation. The dollar’s exchange rate would have adjusted to nullify the impact of the tariff/tax on the prices we would pay domestically on imports.

Contrast this with the tariffs proposed by President Trump on steel and aluminum imports. These tariffs were meant to prop up inefficient American steel and aluminum firms by increasing the cost of their imported competition. As such it would reallocate our workers and capital to activities that are less productive than they would otherwise be used for (i.e., to the increased production of steel and aluminum). Once all of the adjustments were made we would be poorer, though still fully employed. “Econ-101-trade-in-very-simple-terms.”

It turns out, however, that Trump’s tariff threats were probably a negotiating ploy (He has temporarily exempted Canada and Mexico from the tariffs and is making deals with other suppliers in exchange for suspending the tariff). China is already paying special tariffs on these products to counter Chinese government subsidies and only sells the U.S. 2% of its steel imports. Thus the tariff is largely irrelevant for China. The net short-term affect of Trump’s ploy may well result in almost no tariff revenue and no protection for U.S. steel and aluminum producers and some improvements in other trade deals with our trading partners (or at least what the President considers improvements). In short, Trump’s tariff threat could turn out to be helpful. However, given Trump’s generally negative and/or ill-informed views on trade, this may be an overly generous interpretation.

As The Economist magazine put it: “If this were the extent of Mr. Trump’s protectionism, it would simply be an act of senseless self-harm. In fact, it is a potential disaster—both for America and for the world economy.” “Trumps-tariffs-steel-and-aluminum-could undermine-rules-based-system” Why? Even if the tariffs are waved sufficiently to avoid the retaliatory trade war Europe and others are threatening, Trump’s use of the national security justification for his steel and aluminum tariffs can’t be taken seriously. “That excuse is self-evidently spurious. Most of America’s imports of steel come from Canada, the European Union, Mexico and South Korea, America’s allies.” The Economist My long time friend Jim Roumasset noted that “Wilber Ross did indeed make such a finding [of a national security threat], but then declared that the tariffs are “no big deal.” In other words, the tariffs won’t improve national security. Unfortunately, there is neither check nor balance against the ignorance of commerce secretaries.”

The large expansion of international trade made possible by removing trade barriers, including lowering tariffs, has enormously benefited us (the U.S. and the rest of the world). In 1980 60% of the world’s population earned less than $2.00 a day (inflation and purchasing power parity adjusted). Because of economic growth, significantly spurred by expanding world trade, this number as plummeted to 13% by 2012 (latest figure available). This incredible feat was made possible by the collective agreements of virtually all of the world’s countries to increasingly lower tariffs and other trade barriers and to agree on global rules for fair competition. These trade rules were developed under the General Agreement on Trade and Tariffs (GATT) created after WWII as one of the three Bretton Woods institutions (the International Monetary Fund, the World Bank, and the GATT), which became the World Trade Organization (WTO) in 1995.

With its large and diverse membership of 164 rich and poor countries, the GATT/WTO has not been able to conclude new global trade agreements since 1995. Thus attention shifted to regional, multilateral agreements such as the 11 country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) successor to the Trans-Pacific Partnership (TPP) from which Trump very foolishly withdrew the U.S. last year. “The-shriveling-of-U.S.-influence”

When China was admitted to the WTO in 2001 we expected that it would continue to liberalize and privatize its economy in accordance with the requirements of the WTO’s rules. The expectation was that China’s membership in the WTO would draw it into the liberal international rule based trading system.

In 2002, the IMF sent me to China to discuss these requirements in the banking sector with the Peoples Bank of China. We had high expectations. Unfortunately, China’s liberalization has gone into reverse in recent years. While not a trade issue, China’s recent launch of its centralized rating of the good behavior of its citizens, drawing on its extensive surveillance capacities, and its just announced intension to bar people with low “social credit” scores from airplanes and trains is certainly not an example of the more bottom up civil liberties, human rights views and approaches of most other countries. “China-to-bar-people-with-bad-social-credit-from-planes-trains.”

China’s behavior has been a disappointment. From its accession into the WTO, China began flooding the world with its “cheap” exports while continuing to restrict its imports from the rest of the world. The normal market reaction and adjustment to the inflow of dollars to China from its resulting trade surplus would be an appreciation of the Chinese currency (renminbi), which would increase the cost of China’s exports to the rest of the world (and lower the cost of its foreign import). However, China intervened in foreign currency markets to prevent its currency from appreciating and as a result China accumulated huge foreign exchange reserves (peaking at 4 trillion U.S. dollars in 2014). Not only did China intervene to prevent the nominal appreciation of its currency, but it also sterilized the domestic increase in its money supply that would normally result from the currency intervention, thus preventing the domestic inflation that would also have increased the cost of its exports to the rest of the world.

China’s currency manipulation was not seriously challenged at that time. Economic conditions in China have more recently changed and since 2014 market forces have tended to depreciate the renminbi, which China resisted by drawing down its large FX reserves (all the way to 3 trillion USD by the end of 2016—they have risen modestly since then). China is no longer a currency manipulator as part of an export promotion (mercantilist) policy.

But China does continue to violate other WTO rules with many state subsidies to export industries and limits and conditions for imports and foreign investment (such as requiring U.S. companies to share their patents as a condition for investing in or operating in China). A government subsidy of exports distorts resource allocation and thus lowers overall output in the same way but in the opposite direction as do tariffs. Both reduce the benefits and gains from trade and are to be resisted. The WTO exists to help remove such barriers and distortions in mutually agreed, rule based ways. A tariff that balances a state subsidy helps restore the efficient allocation of resources upon which maximum economic growth depends. These are allowed by WTO rules when it is established that a country’s exports violate WTO rules. President Trump is considering such targeted tariffs (his steel and aluminum are certainly not an example of this type of tariff) and hopefully they will conform to WTO requirements. “Trump-eyes-tariffs-on-up-to-60-billion-chinese-goods-tech-telecoms-apparel-targeted”

Trump’s bypass of WTO rules for his steel and aluminum tariffs, undermine the WTO and the international standards that have contributed so much to lifting the standard of living around the world. Despite its many weaknesses and shortcomings our interests are better serviced by strengthening the WTO rather than weakening it. “Trumps-tariffs-aren’t-killing-the-world-trade-organ”

“Whatever the WTO’s problems, it would be a tragedy to undermine it. If America pursues a mercantilist trade policy in defiance of the global trading system, other countries are bound to follow. That might not lead to an immediate collapse of the WTO, but it would gradually erode one of the foundations of the globalised economy. Everyone would suffer.” The Economist

As an aside, our bilateral trade deficits (e.g., with China) and surpluses (e.g., with Canada) are totally irrelevant and any policy designed to achieve trade balance country by country would damage the extent and efficiency of our international trade and thus lower our standard of living. See my earlier discussion of this issue in: “The-balance-of-trade”

“Even though trade policies are unlikely to change the long-run trade balance, they are not unimportant. Americans will be better off if the United States can use trade negotiations to open foreign markets for its exports, not because more exports will increase the US trade surplus, but rather because US incomes will be higher if more US workers can be employed in the most efficient US firms that pay high wages, and if those firms can sell more exports at higher prices. Similarly, US living standards will be higher if the United States reduces its trade barriers at home because this will give consumers access to cheaper imports and make the economy more efficient. Ultimately, therefore, the goal of US trade policies should not be focused on trade balances but instead on eliminating trade barriers at home and abroad.” This is quoted from the excellent and more detailed discussion of many of these issues that can be found here: “Five reasons why the focus on trade deficits is misleading”

There is another, very important negative byproduct of Trump’s transactional, confrontational, zero sum approach to getting better trade agreements. Mutually beneficial trade relations strengthen political and security relations and cooperation. These have been important non-economic benefits, for example, of NAFTA. Trump’s confrontational approach undermines these benefits. Pew Research Center surveys in 37 countries found that: “In the closing years of the Obama presidency, a median of 64% had a positive view of the U.S. Today, just 49% are favorably inclined toward America. Again, some of the steepest declines in U.S. image are found among long-standing allies.” Senator Ben Sasse delivered an exceptional speech on this subject followed by an outstanding panel discussion of the NAFTA negotiations at the Heritage Foundation. I urge you to watch the following video of that event: “The-national-security-implications-of withdrawing from-NAFTA”

Immigrants from Hell

What immigration policies best serve the national interests of the United States?

Every country on the face of the earth has citizens whose intelligence, enterprise, and moral character range from 0 to 10. In poorly governed countries, we might call them “hell hole” countries, their best and brightest (the 8, 9, and 10s) often immigrate to more promising environments. The United States, with our constitution of liberty, has attracted a disproportionally large number of them. This is a dominant factor in the economic success of America and our spirit of individualism and enterprise. https://wcoats.blog/2010/06/10/a-nation-of-immigrants/

Just as individuals and companies compete in the market place to maximize the reward for their efforts (those who serve the public best, profit the most), so do the countries of which they are a part. When and if individuals and companies are given the chance to protect themselves from and restrict such competition they generally take it. Free (i.e. competitive) markets rarely offer such opportunities but governments often do. Governments claim to restrict competition to protect consumers or protect jobs from cheap foreign labor, etc. But more often than not government measures to interfere in the market are the result of political pressure to serve and protect special interests, what most of us would call corruption. Examples of government measures to protect companies or individuals from competition include: import tariffs, teachers’ unions that protect the jobs of bad teachers, excessive product safety standards that foreign competitors as well as domestic start-ups find hard to meet, and restrictive professional licensing through which medical doctors (to name just one profession) have limited who and what medical services can be provided.

The government’s regulation of who may immigrate temporarily or permanently is another area heavily influenced by individuals and companies seeking to protect themselves from competition. Subjecting American firms and workers to competition from foreign firms and workers (either from “cheap” foreign labor making it there and exporting to us, or immigrating and making it here), promotes long run economic growth.

Immigrants don’t take existing jobs from Americans; they create new jobs needed to pay for the consumption they add to the economy. While it is true that a firm can profit more with a monopoly by charging more by supplying less, the income of the nation as a whole suffers when supply is monopolized. Thus while worker and firm monopolies (e.g. the United Auto Workers, and uncompetitive steel manufacturers protected by import tariffs on potential competitors) will increase worker and firm incomes in the short run, the country would be poorer than otherwise in the long run. If we closed the border to trade all together, the country’s income would suffer considerably in the long run.

In this note I review a few immigration issues from the perspective of what policies best serve the national interest. By national interest I generally mean policies that best promote broadly shared economic growth. The self-selection of the best and brightest from around the world to immigrate to the U.S. in our earlier history clearly helped make us the prosperous nation that we are today. Our poorest citizens live better than the average citizen in many of the world’s poorer countries.

Attract the best and the brightest. To continue our past history of attracting the best and the brightest from around the world, our immigration policy should favor admitting the most talented and those with the work skills most needed. If we do not continue to attract and admit them they will go elsewhere boosting the economic fortunes of other (competitive) countries. “Immigration-is-practically-a-free-lunch-for-America”

Of the approximately one million foreigners given permanent residency each year about 70% are extended family members of existing permanent residents. These are the parents and grandparents and aunts and uncles of existing citizens or green card holders most of whom do not intent to work and/or do not have skills relevant to our labor markets. From a given total of immigrants the extended family preference crowds out workers. If we want to promote faster economic growth, we should pull the family preference back to the nuclear family (spouse and children) and keep or increase the total number of immigrants allowed each year thus increasing those coming to work.

Attract the best and the brightest. Similarly we should replace the existing green card lottery with merit based selection criteria (i.e. with H-1B visas, which are currently limited to 85,000 per year). The green card lottery, which provides 50,000 immigrant visas per year from countries with a low number of immigrants over the preceding five years, is meant to increase the diversity of countries from which people immigrate. Such country quotas, even if immigrants from each country are accepted on merit rather than luck, diminish the average skill levels from a global total without diversified country quota. A case might be made, however, that America’s interests are served by the good will gained when citizens of a large number of countries have a better chance of immigrating to the United States.

Help those displaced. While increased worker productivity increases our standard of living, it also causes some workers to loose their old jobs and to acquire the new skills needed for the evolving work place. While some of these dislocations come from the competition of global trade, most is the result of improving technologies that increase labor productivity and from changes in consumer tastes. These costs, which fall on a few for the benefit of many, must not be minimized or ignored.

Many of us are no longer such big risk takers as were our ambitious ancestors. We prefer a bit more security at the expense of increases in income. In any event we need to provide an effective and efficient safety net for those of us whose skills are no longer appropriate in the labor market while retraining for the new jobs that replaced the old ones. Very importantly, a public – private partnership should improve the targeting of training of new entrance into the labor force for today’s and tomorrow’s needs and to better support the retraining of those already in the labor force but in no longer needed occupations. This is a reasonable price to pay by the rest of us who benefit from the raising living standards of improving productivity.

Restore the rule of law. There are 11 to 12 million illegal immigrants living in the United States. It is not in our national interest to go on ignoring the law. But it would be devastating to our economy (to the firms that employ them) and to the personal lives and welfare of these people to expel them even if we had the military/police capacity to do so. So the laws defining their status must be changed. There is almost unanimous agreement that the Dreamers (those brought into the country illegally as minors) should be given legal status (permanent residency) but less agreement about citizenship. In my opinion, all illegal immigrants who have been here for more than say five years and have not been convicted of a felony should be granted permanent legal residency. However, to become citizens they should be required to go through the same process and procedures as anyone else applying for citizenship (though from their American residence). https://wcoats.blog/2017/02/12/illegal-aliens/

What do Trump supporters want?

Dear Jeff (Giesea),

Thank you for reaching out to non-Trump supporters in the search for dialog and better understanding. I fully agree with you that we need civil discussion, which requires assuming the good intentions of those across the table.

As a Trump opponent, I voted for Gary Johnson, the starting point for me is to understand what you and other Trump supporter hope the Trump administration will do. Why did you and so many others support him? I don’t buy the liberal press’ (sorry for using short hand and thus inaccurate, but convenient labels) contention that most of his supporters are racists, bigots, etc. who actually liked and supported Trump’s rudeness, potty mouth, etc. Most of his supporters probably overlooked these character flaws (just as Hillary supporters overlooked rather than embraced her decades of dishonesty). But what did you and the others support? Trump’s protectionist, anti-immigrant, anti- Muslim rhetoric seems to reject long standing Republican Party and conservative positions. His threat to challenge the freedom of the press to criticize him hardly squares with conservative respect for the constitution.

You kindly responded to my question of why you supported Trump with six points only one of which referred to Trump (that you thought he would provide “big, bold thinking and executive-style leadership.” The other five referred to problems with current leadership and directions. In short you want change. Now we need to discuss what those changes should be.

It is now time to turn to a discussion of policy issues, something almost totally lacking in the most ugly, ad hominem campaign I have ever seen. In fact, as President elect Trump begins to spell out his positions he is already walking back many of his earlier more extreme positions, or at least what we thought were his positions. The way forward with the dialog you are helping to promote is to seriously undertake an examination of specific policy issues to see what we can agree on and where we disagree and why.

I think everyone agrees that our immigration policy is broken and needs to be fixed. So let’s explore what we each think needs to be fixed and the best way to do. Our rapidly aging population (more and more retired people relying on a shrinking working age population to grow our food etc) will require more immigration to survive. The important issues are who those immigrates should be, how to most effectively control the process, and what to do about existing illegals. Let’s have that discussion.

If we have learned anything about Obama Care it is that slipping through legislation that enacts significant changes on the basis of a narrow majority is a serious mistake. Significant changes should require broad support and that will certainly be true in the Trump administration as well.

What is behind Trump’s protectionist rhetoric? He is not likely to actually violate very beneficial international trade law and slap large tariffs on China for currency manipulation (something they are demonstrably not doing any more). When in the campaign he said that he would demand that Boeing stop sourcing its aircraft parts abroad in order to bring those jobs home, he seems not to have considered that the resulting higher cost of Boeing’s planes would reduce global demand for them thus costing American jobs (not to mention his general attack on free market efficiency). I expect to see such demands vanish, but what are the improvements in our trade agreements that Trump (and you) thinks are desirable? Lets have that discussion.

The separation of church and state and the freedom of religion enshrined in our constitution are fundamental to our values as a nation. There is no blood test to determine if you are a Muslim or a catholic or a Jew. Religion isn’t and can’t be a test of who is allowed to visit America. But striking a proper balance between our freedom and our security is a serious challenge. The Patriot Act, passed in the wake of 9/11, was a serious intrusion on our freedom in the false name of security in my view, but lets discuss with the new Trump administration how best to balance the powers of government to protect us, against the risks of big brother overly controlling us.

Many of us have rebelled against the excesses of “political correctness” on university campuses and else where (I have written several blogs on the subject). The traditional goal of the university is the unrestrained pursuit of truth. But in its place good manners (civility as you rightly put it.) are essential if we are to live peaceably together and flourish. I would love to see Trump and Hillary together call upon their supporters to respect, though not necessarily agree with, the views (and property) of their opponents—of everyone.

Thank you again for promoting this dialog.

Emigration and Immigration

During the height of the Cold War, the Berlin Wall was built to keep the citizens of East Germany from leaving. We cheered as it and similar barriers to emigration from the Soviet to the Free World fell in 1989. But the right to leave awkwardly confronts the right of countries to choose who may or may not enter. The right to leave has little meaning if you have no place to go.

Immigration, especially in the U.S. and Europe, has become a very divisive and difficult public policy issue. Individual freedom and economic efficiency call for the free movement of people. The common market of Europe (the European Economic Community) requires the free movement of labor, capital, goods, and services among its members. This is a desirable and worthy goal, but in typically “take no prisoners” fashion, the European Union has applied this requirement without serious attention to the needs and sensitivities of recipient countries with regard to who enters and works in their country.

During the cold war, when our sympathies were with those behind the Iron Curtain wanting to get out, the East-West participants in the CONFERENCE ON SECURITY AND CO-OPERATION IN EUROPE in Helsinki in 1975 agreed to:

“Make it their aim to facilitate freer movement and contacts, individually and collectively, whether privately or officially, among persons, institutions and organizations of the participating States, and to contribute to the solution of the humanitarian problems that arise in that connection,

Declare their readiness to these ends to take measures which they consider appropriate and to conclude agreements or arrangements among themselves, as may be needed,…”[1]

The emphasis at that time was on “cultural exchange” and cross border employment. The right to emigrate, however, was a step too far.

Aside from the political dimension of a “right to migrate,” there are clear economic efficiency benefits from the free movement of labor, supplementing those of the free movement of goods and capital.[2] Leaving aside the special case of war refugees, people generally move, whether within their own country or to a new one, in order to take better jobs. One exception is the Brits who vacation or retire to sunnier parts of Southern Europe. They obviously bring their pension incomes with them. The Polish plumbers in England and the Filipina nurses throughout the world increase their own incomes but fill worker needs in their host countries as well. In short, immigration is generally a win win scenario.

Within the overall annual limits the U.S. has placed on immigration, the number of H-B1 work visas (those requiring high skills or education) has been squeezed by preferences to extended family members of existing green card holders, thus depriving American industries of the skilled workers they need. If foreign workers are not allowed to immigrate here, capital will tend to move abroad in order to produce what is needed overseas and import it. Opposition to immigrants by workers who fear that they will lose their own jobs are generally misinformed or motivated by other concerns.

Immigration can also ease the economic problems associated with an aging and shrinking population. Japan’s population is now smaller than it was in 2000 but more problematic is that it is also older. The percentage of those over 65 in Japan’s total population has increased from 17% in 2000 to 24% now. Its working age population has declined 9%. As a result, a growing share of income from those working is required to support those who have retired. This problem has been partially addressed by an increase in the number of Japanese women entering the labor force, but it has not been enough. Relaxing Japan’s very restrictive immigration laws would also help. As a general rule most Japanese are quite insular and not comfortable living and working with foreigners. According to The Economist: “The country has remained relatively closed to foreigners, who make up only 2% of the population of 127m, compared with an average of 12% in the OECD.”[3] But Japan’s demographic crisis is leading to a gradual liberalization of immigration requirements.

Workers who worry about immigrants taking their jobs are generally confusing the impact of technology on some existing jobs and job skills, and to a lesser extent the impact of increases in cross border trade. The disruptive, but income enhancing, impact of ever changing technologies does impose costs on those who must learn new skills, but it is the relative openness of Americans to such innovation and growth that has made America the wealthy country that it is.

However, there are limits to the pace of change (and the pace of immigration) that societies can comfortably absorb. The backlash of public concern with immigration, which played an important role in Britain’s recent vote to leave the EU, seems to reflect the upsurge in the pace of immigration in recent years. It also seems to have reflected misinformation about the extent of British control over that pace. While EU membership carried an obligation to accept the free flow of labor into the UK from other EU member countries, only half of the UK’s immigration was from that source. The UK government fully controlled the other half.

Donald Trump has linked his anti-immigration rhetoric to public concern with terrorism. His campaign website states that: “Trump is calling for a total and complete shutdown of Muslims entering the United States until our country’s representatives can figure out what is going on.”[4] This statement, dated December 7, 2015, has been followed by increasingly nuanced (if that word can be used for Trump) formulations of Trump’s anti-terrorist immigration “policy” proposals. On April 16, 2016, “Donald Trump’s speech on foreign policy Monday focused in large part on his proposal to suspend immigration from dangerous parts of the world and impose a new system of ‘extreme vetting’ that would subject applicants to questions about their personal ideology.

“We should only admit into this country those who share our values and respect our people,” said Trump, proposing what he called an “ideological screening test.”[5]

Typical of Trump’s campaign, he is either ignorant of existing visa requirements or deliberately misleading his audience. At least since 9/11, visa applications from all but a few countries, whether work or tourist, require an extensive background check.[6] All green card recipients swear to uphold the American Constitution and its laws. These are reasonable and appropriate requirements and they have been in place for a long time.

And then there are concerns about the preservation of a country’s culture, a legitimate goal. And then there is plain old racism and protectionism (the protection of monopoly returns to jobs from entry restrictions via closed shop unions or licensing requirements and to firms from import tariffs).

So what should a country’s immigration policy be? Aside from war refugees, whom the U.S. and most countries have taken a moral/humanitarian obligation to accept,[7] a country’s immigration policies should serve the economic needs of the country and respect the cultural traditions and security concerns of its citizen’s. The United States has benefited enormously and famously by accepting all people seeking a better life who are committed to our laws and values. However, pragmatism calls for regulating the rate of immigration to numbers that can be readily assimilated and limiting it to people of good character committed to abiding by our laws and values.[8]

U.S. immigration laws suffer from a number of defects. The overall number of immigrants permitted per year has not kept pace with the growth in our population and economy. But more important, as noted earlier, the number of actual workers, and especially high skilled workers, has been seriously crowded out by a preference for extended family members of existing residents (not core family, but extended family).

The U.S. has a special problem because of a relatively large number of illegal immigrants who have become an important part of our labor force for some time. It is important for our laws to effectively limit immigration to legal channels while enlarging those channels. It is also essential to resolve and normalize the status of those who came here illegally in the past. Several years ago a bipartisan group of U.S. Senators, the so-called Gang of Eight, fashioned immigration reform legislation that addressed these issues. Border Security, Economic Opportunity, and Immigration Modernization Act of 2013 No one was happy with every provision of the draft law but it enjoyed broad support as a compromise and was passed by the Senate. It was never brought up in our dysfunctional House of Representatives.

The Senate immigration bill is a good basis upon which to renew the discussion of immigration reform in the U.S. Hopefully, following the November elections in the United States its Congress can return to the important business of fashioning laws that promote economic growth, well being, and fairness. This should include adopting a comprehensive immigration reform law.

[1] CONFERENCE ON SECURITY AND CO-OPERATION IN EUROPE FINAL ACT concluded in Helsinki, Finland, August 1, 1975, Page 38.

[2] https://wcoats.wordpress.com/2016/08/03/trade-and-globalization/

[3] The Economist, August 20, 2016, page 31.

[4] https://www.donaldjtrump.com/press-releases/donald-j.-trump-statement-on-preventing-muslim-immigration

[5] The Washington Post: https://www.washingtonpost.com/national/trumps-immigration-plan-raises-many-unanswered-questions/2016/08/16/754fba76-6382-11e6-b4d8-33e931b5a26d_story.html

[6] Some countries, such as England and German and other parts of Europe do not require a US visa to enter the US, though they should have criminal checks when applying for a Passport in their own country.

[7] Of the 4,812,993 Syrian refugees registered outside of Syria (several million displaced Syrians remain inside Syria) as of March 2016, only 7,123 have settled in the U.S as of July 2016. Germany has accepted 600,000 and about 4.5 million have been registered in Turkey, Lebanon, and Jordan. It is estimated that there are an additional 2 million Syrian refugees that are unregistered. https://en.wikipedia.org/wiki/Refugees_of_the_Syrian_Civil_War

[8] Six years ago I wrote these proud words about our immigrants. Please note the last sentence: https://wcoats.wordpress.com/2010/06/10/a-nation-of-immigrants/ My comments on Syrian refugees almost a year ago are also worth rereading (in my humble opinion): https://wcoats.wordpress.com/2015/11/19/what-to-do-about-syrian-refugees/ as are my comments on immigrants and terrorists two months ago: https://wcoats.wordpress.com/2016/06/11/the-challenges-of-change-globalization-immigration-and-technology/

Fairness or Envy?

After many decades of impressive and relatively steady increases in the standard of living (increases in real per capital income) of all quintiles of the American income distribution, since 2000 all quintiles have lost ground. In the run up to 2000 incomes in the top quintile increased more rapidly than those in the lower quintiles resulting in a less equal distribution income.

Mean income

The mean real incomes of each quintile are lower now (2014) than they were in 2000. However, the percentage decline has been larger for the middle and lower income quintiles (see table below) leaving the more unequal income distribution in place. Some of the relative gains of the top quintile are attributed to the growing premium for higher education, but as claimed by the Occupy Wall Street demonstrators, some have not been earned by providing higher valued products.

Income table

Most of us do not resent and in fact are grateful for those whose wealth resulted from inventing and giving us products we greatly enjoy. However, we are rightly angry at both political parties for increasingly supporting crony capitalists—those who benefit from their connection with and influence on the government—who benefit at the expense of the rest of us. They are capturing economic rents at the expense of the rest of us rather than enjoying the fruits of greater productivity.

The broad political consensus in the United States that we are each entitled to the wealth we each create, but must fairly share in the cost of providing our national defense, public goods and a satisfactory safety net for the poor, seems to be falling apart. In the economic sphere, the left increasingly favors one group, the working class represented by labor unions, against the professional and entrepreneurial classes. Classical liberals (i.e., economic conservatives) champion fairness – a level playing field – and the freedom to get rich if you work harder, or create a better product, or a more efficient way of producing what people want. They champion measures that facilitate entrepreneurship and economic growth without much regard for its impact on income distribution. Trade – globalization – is an essential part of promoting economic efficiency and thus growth, allowing, if not forcing, firms to shift resources into goods for export in which they are relatively more efficient in order to pay for the cheaper imports enjoyed by the average middle class consumer.

The Republican Party more so than the Democratic Party, though not by much, has increasingly been failing to preserve a level playing field in various areas (Wall Street, defense industry etc.). But the embrace of protectionism offered by Donald Trump reflects either class warfare or ignorance of globalization’s enormous contribution to our standard of living. The big trade and industrial unions of old—think of the United Auto Workers in Detroit—followed a different drummer. They were not interested in fairness but rather fought to bring economic rents (monopoly returns) to themselves at the expense of other workers via a deal with their employers to create, defend, and share monopoly returns. This worked with the auto industry, where auto workers earned at least double the prevailing wages for nonunion workers with comparable skills as long as GM, Ford and Chrysler could hold off competition from German and Japanese (plus a growing list) auto producers via a combination of tariffs and safety standards. Globalization gradually destroyed this monopoly arrangement and almost killed the American automobile industry until U.S. automakers relocated to southern, non-union states.

While good working conditions are win win for workers and employers, pushing up wages above their competitive level either drives firms to other locations (non union states or abroad) or kills them all together. Voters supporting protectionist policies either don’t understand that they lower the standard of living for most people (here and abroad) by lowering the overall productivity of workers or they seek to exploit monopoly rents for themselves at the expense of other workers.

Such thinking was dramatically illustrated by the recent strike of workers at Tesla Motor’s giga battery factory project in Nevada. As reported in the Washington Post on March 2: “On Monday, hundreds of workers walked off their jobs at the giant battery factory that Tesla Motors is building in the desert outside Reno, Nevada. It wasn’t your typical picket: They weren’t protesting bad working conditions, or making a show of force around contract negotiations. Rather, they were protesting other workers — specifically, the fact that they were from somewhere else.” Their complaint was that workers from out side Nevada were willing to work for less than the $35 per hour that members of the local union were making. These were not “foreign” workers from South of the border. These were workers from Arizona and New Mexico. The out of state workers obviously found their “low” wages with Tesla in Nevada better than the wages they would receive staying at home so they were better off coming to Reno.

The Post further reported: “That dispute explains an important debate underway right now in all sorts of skilled trades: Builders say there’s a labor supply problem, which needs to be fixed by bringing more people into the field from across the country and across the border. Worker groups say there isn’t a supply problem — it’s just that builders aren’t paying enough to make the jobs worth someone’s while.”

Trump’s pledge to protect America workers from cheap Chinese and other imports so they can produce them in the U.S. at a higher cost, is bad economics and bad policy. He is pledging to benefit one group of workers at the expense of other workers and at the expense of the standard of living more generally. This is not what the Republican Party has stood for in the past and not what it should stand for now. It should stand for fairness and equal opportunity for workers and entrepreneurs to benefit from doing things better and thereby raising their incomes and the income of the nation. The principle of fairness is widely held in the United States but has always had to battle for dominance against the temptation of the zero sum claims of special interests for government to serve their interests at the expense of others and at the expense of fairness. Donald Trump and Bernie Sanders are appealing to special rather than general interests at the expense of fairness.