Saturday, November 14, 2015

Trump vs Friedman:Trade Policy Debate


  1. I've read Human Action and other economic texts. I get what you wrote about comparative advantage. I understand we benefit from trade because our goods are cheaper, freeing up capital and decreasing opportunity costs. But there is still a disconnect in my head how a large trade deficit with China or Mexico is a net positive. To me, foreign reinvestment of those dollars would not make up for the good paying jobs that left. We owe China money, right? So how is a large trade deficit and a monetary debt a net benefit for US society? I'm sure I'm missing something obvious, but that's the missing connection in my mind so that "free trade is good" arguments don't suffice.

    1. AJO, concern about trade imbalances is a relic of the fractional reserve, gold standard era. Basically, with this, the banks in (let's say) America might have $2 million worth of gold [for this example, it doesn't matter if gold is defined as $20 or $35 or $10,000 or anything else] backing $10 million in notes. That would be a 20% reserve. Now, the people of America might spend $1 million of those notes on products from (let's say) Mexico. The Mexican people or companies that now (as a result of the transaction) hold these American notes have no use for them. So, they will exchange them for gold from the American banks. That would mean there is now $1 million worth of gold reserves backing $9 million worth of notes ($1 million deducted from both the previous reserve total and the note total). They would have dropped from a 20% reserve to 11% reserve. And they might now have greater fear of a bank run and insolvency. The banks would need to keep this risky position or contract their money supply (by calling in loans or whatever). The problem, as is obvious, was that the banks created more notes than they could actually redeem. And when some were redeemed, it, naturally, worried them. So, whenever there was a trade imbalance between countries, the bankers would panic and try to end it, to prevent the people from panicking and ending them.

      Now, in a fiat system (or a 100% gold standard system) there is no reason whatsoever to have concern about trade imbalances. The term itself is a bit archaic and silly. When you think about what it actually means, it's clear that it is no problem. Essentially, it means that people send more money for products then they send products for money. If you look at it as individuals, it will help. I personally have a horrible trade imbalance with Amazon. I keep sending them money, and they send me lots of products. Similarly, my employer has a horrible trade imbalance with me. They send me money, and I give them labor.

      If I, instead of buying from Amazon, choose to send my money to an exporter in China, they have my money and I have their products. We have both gained by the transaction (or both perceived we would at the time we made the transaction ... maybe I regret it later because the products are of poor quality or whatever), otherwise we wouldn't have made the transaction.

      The problem comes when people speak of America having a trade imbalance with China or Mexico or whomever. It is not America that has the trade imbalance. It's an aggregate of lots of people buying lots of things from other people in these countries, and fewer people (or at least less money) selling lots of things to people in these countries. But, and here's the point, everyone who makes the exchanges benefit (or at least believes they will benefit) when they make them. America doesn't have a trade imbalance with China. Lots of American people and businesses have freely chosen to give up their dollars for products that they value more. We, in aggregate, lose more dollars, but gain more products. In many cases the products purchased are capital goods which will be used by American manufacturers to produce other products more highly valued by the American (or foreign) consumers.

      There's a word limit here, and discussing the issue of outsourcing of jobs would be quite lengthy. I, therefore, recommend going over to and searching on outsourcing or trade imbalance and taking a quick look. There are some really good articles over there on this subject.

  2. Sorry about the one man discussion, but I re-read the free trade section in human action, a recent article by Stockman, and contemplated a little more. Maybe what I'm missing is that the Fed's cheap capital has not allowed markets to fully clear and employment and wages to shift? But also increases in money supply which have caused price inflation don't allow us to see the full price effects of sending manufacturing over seas? It just feels like the standard of living has gone down as manufacturing has left. So there may not be a connection, but that seems to be the American sentiment right now.

    1. "But also increases in money supply which have caused price inflation don't allow us to see the full price effects of sending manufacturing over seas? It just feels like the standard of living has gone down as manufacturing has left."
      Because I'm in manufacturing, I think about what you've written as well, specifically what I quoted above, quite a bit. Like you, I haven't been able to completely fit all the pieces of the puzzle together so I could formulate what I think is a sound logical explanation.

      We are dealing with Bastait's "seen and unseen" in terms of the effects of fiat currency. Ad Libertati in his post above pretty much puts forth the same argument that Rothbard makes about not worrying about the trade deficits:

      The thing is Rothbard ALWAYS qualifies that this isn't a problem because we aren't on a gold standard.(and Ad Libertati makes the same note)

      I think that's an important note- not to be glossed over in my mind.

      Why? Well, because the dollars reserve status has created an artificial value to the dollar that would not exist to the same degree otherwise allowing for said deficit.

      So stepping back for a moment, if even Rothbard is always careful to note that trade deficits aren't a problem partially due to there being no gold standard and we can make a reasonable case as to why the US Fed printing dollars is stealing wealth from people AND causing capital distortions, why would it be such a stretch to assume this distortion is also occurring on capital allocation for manufacturing?(on a global basis none the less?)

      To be sure, this is a simplification as there are a HUGE number of factors determining where manufacturing and what type takes place. Things such as taxes, infrastructure, weather...etc. et al...but I don't see why the idea that market distortion from money printing shouldn't be carried over to where/how capital is allocated for manufacturing.

      Now all that being said, I run my business with the reality firmly planted in my head...meaning automation and efficiency is what drives my ability to succeed(or fail) regardless of the money printing distortions.

    2. By pure coincidence, today I was reading "the Ten Great Economic Myths" by Rothbard.

      Myth #10 is "Imports from countries where labor is cheap cause unemployment in the United States".

      It would seem to directly address your earlier questions, and is worth the read:

  3. Thank you to both responses, I will read the linked articles. I work in manufacturing also, so it is an interesting topic to me.