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Increasing our Economy’s Pumpkin Spice Pie: Why Po...

Increasing our Economy’s Pumpkin Spice Pie: Why Power, Profit, and Politics Shouldn’t Mix

Despite globalized commerce’s incredible success in increasing standards of living worldwide, especially for the millions brought out of absolute poverty, the West has recently witnessed growing disdain for free trade. Instead of encouraging growth through globalization, western countries have become more and more nationalist and protectionist. The West’s resentment for liberalization manifested itself most recently in the current US elections, with the rise of two atypical candidates, Donald Trump and Bernie Sanders. Both candidates have expressed dangerously isolationist ideas under the guise of “helping” the middle and lower classes by keeping jobs in America.

People should be concerned about the increasingly popular, nationalistic narrative and protectionist rhetoric. It should be even more concerning when mainstream politicians like Hillary Clinton jump on the bandwagon by campaigning on an Exit Tax and promises of trade retaliation. This trade war mentality is a large part of what kept the United States in a decade of poverty throughout the 1930s. I think most would agree that the Great Depression is not something worth reproducing.

Sanders is a strong critic of international trade because of its effect on income inequality. (Photo: bostonglobe.com)

Sanders is a strong critic of international trade because of its effect on income inequality. (Photo: bostonglobe.com)

In many ways, today’s mainstream political ideas defy economic common sense. If there is one area where economists agree with each other, it is indeed the benefits of free trade and the harms of protectionism. The IGM Panel, from the University of Chicago, found strong consensus among economists about the benefits of free trade. Influential economist and Harvard professor Gregory Mankiw wrote, “Economists are famous for disagreeing with one another, and indeed, seminars in economics departments are known for their vociferous debate. But economists reach near unanimity on some topics, including international trade.” Mankiw explains this dissonance by saying that voters are often “worse than ignorant about the principles of good policy” and often “hold on to mistaken beliefs” for personal reasons. This is why we elect professionals to formulate complex policy for us. Unfortunately, politicians, whose primary incentive is reelection, “mold those mistaken beliefs into bad policy.” The benefits of free trade would be known if politicians understood economics and cared to present the truth more than they cared about appeasing their constituents.

(Photo: dailysignal.com)

The numbers speak for themselves. (Photo: dailysignal.com)

Self-interested politicians, however, have trumpeted ideas about the need to have economic power over other nations. We are frightened by China’s economic powerhouse due to its inexpensive labor, cheap goods, and “unethical” trade practices. We are frightened by our large trade deficits as China exports more than it imports, finding it more productive to sit on piles of foreign exchange (i.e. paper currency) than piles of goods. We are frightened that China is willing to hurt its own people by devaluing its currency, according to Trump, so that us Americans can enjoy cheaper goods. And we are frightened because Trump’s neckties are not made in the US, Detroit’s economy is “failing forward”, and the country may lose its status as the number one economic superpower (which it arguably already has).

The US Chamber of Commerce estimates that trade increases American’s purchasing power by $10,000 USD yearly, allowing Americans to purchase $10,000 USD more worth of goods and/or enjoy up to (using the average hourly wage of $21.68 USD) almost an hour and half of extra leisure daily. This trend shows in most of our household products such as microwaves, which used to cost 61 hours of labor in 1971, but now only cost 3. Similarly, fridges that used to cost 75 hours of labor, now cost less than half of that, 36 hours. This is without including changes in quality, which have been significant! And from these hours gained, one can enjoy a higher level of wealth and/or human enrichment (art, sports, hobbies, family time, work etc.).

The discourse of today’s leading politicians would leave you believing that patriotism, welfare, and making America great again means ensuring that every good is produced here for the glorious aspiration of full employment. Yet what is the point of full employment if there is no prosperity? The Korean War and WWII led to full employment but no one today would say that it made the soldiers and nations involved more prosperous. Hiring all unemployed people, in the way of “America Works” of Frank Underwood (House of Cards), to make them dig holes would lead to full employment but it would not make America richer; all it would do is turn America into an oversized slice of Swiss cheese. (The Keynesians among us may say that this would lead to economic growth from the worker’s consumption. This, however, is erroneous and is known as the broken window fallacy.)

Breaking a window so someone can fix it proves that all employment is not good employment. (Photo: bestaccountingdegrees.net)

Breaking a window so someone can fix it proves that all employment is not good employment. (Photo: bestaccountingdegrees.net)

This boils down to one of the biggest fallacies people have about the market – the belief that trade is a zero-sum game. This is simply wrong. It is a positive-sum game by nature. When one individual trades with another noncoercively he does so solely because he values what he will receive more than what he must give away, and vice versa for his trading partner. By allowing this exchange, we have created an overall higher level of utility for the same amount of goods than if there had been no trade. It is also important to note that capitalism does not redistribute wealth, it creates it through technology and productivity. China becoming richer does not mean that Americans must become poorer, in fact, America’s purchasing power,as explained above, shows quite the opposite. The same goes for trade with Mexico, Canada, Europe, India and the rest of the world. A person is not poor because another is rich.

This way of thinking may come from the fact that our political system results in zero-sum outcomes. Whether it is unions, corporations, guilds, majorities, powerful minorities, or countless other actors, we have created a new economic system where, rather than a majority consumers and their dollars, a minority chooses the winners and losers of the economy (see George Mason University professor Brian Caplan’s book “The Myth of the Rational Voter: Why Democracies Choose Bad Policies” for and engaging discussion of minority rule politics). Unlike free trade that increases the well-being of every party involved, cronyism – receiving economic or social gains through politics – often wrongly believed to be capitalism, has the disastrous effect of benefiting some party at the expense of everyone else.

As a result, tensions over political events are at an all-time high. Democrats are terrified by a Trump election, Republicans terrorized by a Clinton election, and many Americans shudder at the thought of either. And that is understandable since having the “wrong” president or “wrong” party in Senate and House of Representatives could seriously hinder one’s finances, rights, and beliefs. After all, should a Republican be forced to pay 25% more on their healthcare because Democrats are not as economically savvy? Should a Democrat be forced to pay for oil subsidies because Republicans are cronies? Not at all, but when you create a zero-sum environment, that is what happens.

On the contrary, free trade breaks down these walls and differences to allow billions of strangers of all races, genders, sexualities, religions, backgrounds, income levels and political beliefs to cooperate towards the creation of a common project for individualistic reasons. And everyone is better off because of it, not simply one powerful group. This beautiful, almost miraculous, event that is known as free trade is shown in the essay “I, pencil”, or here in video for the laziest of us, myself included.

(Photo: zerohedge.com)

(Photo: zerohedge.com)

The biggest danger of such rising populism, other than the inevitable decrease in living standards, is that it diverts discussions towards scapegoats. Globalism, China, Mexico and free trade are overly simplistic and incorrect answers for America’s worse than poor economic recovery. I am not denying that trade liberalization has destroyed jobs; it destroyed millions of jobs but so has every major advance in human history. In colonial America, 70% of the population lived off farming, by 2008, only 0.72%. Is making America great again about forcing everyone to grow their own crops and spend every hour of their life working in fields? No, no it is not.

Our discussion should not be driven by where our obsolete jobs went but much rather why new jobs haven’t replaced all the old ones and why some groups don’t feel richer? The answer is not because of unfair deals, Mr. Trump, or because of inequality, Mr. Sanders and Mrs. Clinton, or because firms are too greedy to manufacture in the US, Mr. Sanders again. No, I would argue that it is because of cronyism, governmental policy, and a stilted political power dynamic. But that is a whole other article.


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