Wednesday, December 16, 2009
The Wrong Priorities
It just came out the House passed a $174,000,000,000.00 jobs creation package. This comes at the heels of the already $800,000,000,000.00 stimulus package passed earlier this year with the same goal. With so much money being spent by as large a bureaucracy as the US federal government, it's difficult to tell how and when the money will be spent. The aim of this newest stimulus effort is public works and infrastructure, but the questions raised are will this work and can we afford it? We all know our government is in severe debt right now with lost jobs each month and GDP growing at a snail's pace. It's also clear that with an overhaul of the health care system around the corner, increased troop levels in Afghanistan, and a proposed cap and trade bill, we are banking our financial future on the foresight of our elected officials that have now have dipped low enough to count "jobs saved" as an accurate measure of success. If we can't quickly and efficiently spend stimulus dollars from the first stimulus package what makes anyone believe we will this time? What's clear is that the Democrats in Washington don't see fiscal responsibility and responsible use of federal power as the highest priority, but rather that themselves will be seen as the catalyst of recovery and they'll do so at literally any cost. The failures of our financial system and the Bush administration are behind us and the lessons learned should be used to further the goal of economic expansion and prosperity in the United States. Instead this administration is spending money with the kind of recklessness you'd think we've learned from. Economists have many tools at their theoretical disposal and deficit spending is one of them, but this has been taken to a level never seen before in our country. We need strong leadership and somehow confidence in our system needs to be addressed, not simply government spending for the sake of government spending. We are allocating dollars like it's monopoly money and if this pattern continues, that's exactly what the dollar will be.
Wednesday, December 9, 2009
The Case Against The Obama Tariff
As the global recession continues to plague the United States, President Obama has taken steps both large and small in an attempt to both stimulate the economy and create jobs. The largest piece of legislation aimed at stimulating the economy was an almost eight hundred billion dollar stimulus package geared towards infrastructure improvements and job creation. One of many smaller supplements to this stimulus is a tariff on Chinese made passenger and small truck tires. A tariff of 35% will be imposed during the 2010 year, followed by 30% and 25% in 2011 and 2012 respectively. This move is in response to perceived dumping of Chinese goods on the U.S. market by Chinese manufacturers. (Wiseman) This is a relatively small move as it relates to the global marketplace and even within the tire industry, however it could have larger implications of where this administration views its role and authority in regulating Chinese-U.S. trade relations. The Obama administration is pleasing a small segment of the U.S. workforce while potentially compromising a fruitful trading partner, most likely our largest trading partner of the future. I will make the case that the short term gains domestically from this policy do not outweigh the long term ramifications as a whole, and therefore is not justified.
As word of the planned tariff on Chinese made passenger and small truck tires spread to leadership of China, the following statement came from Beijing, “China strongly opposes this serious act of trade protectionism by the U.S. This act not only violates the rules of the World Trade Organization but also violates the relevant commitments made by U.S. government at the G-20 financial summit.” It comes as no surprise that China is opposed to such an action. A domestic market for China in which total capacity will rise 16% in the next year and is currently four times greater than domestic demand,(Wiseman) a significant tariff such as the one currently being employed will greatly hamper continued job growth and increasing market share of the U.S. tire market. Retaliatory protectionist measures are sure to follow from China, and when it comes to trade, China has the upper hand. Currently we have a large trade deficit with China, for the 2009 year it already over 165 billion dollars. However, free trade with China will improve the standard of living for both countries in the long term. As China continues to grow and specialize, the U.S. will specialize in goods which it has a comparative advantage, and jobs will grow for both nations.
A study done in the 1990’s compared the dollar amount U.S. consumers spent as a result of imposed tariffs. It compared that data with the number of jobs saved as a result of the tariff, and how much each of those jobs paid. According to the study U.S. consumers were estimated to have paid $1,285,000 annually for each job preserved in the luggage industry due to barriers to trade. For each textile worker saved, $199,000 was spent. For softwood lumber jobs, $1,044,000, and $1,376,000 for each job in the benzenoid chemical industry. (Blinder) All of these numbers are significantly higher than the dollar amount paid per year to each of those workers paid respectively. One should also consider the fact that for each of these industries workers will still be laid off as a result of lowered domestic and foreign demand due to the current global recession. According to the Mackinac Center for Public Policy, a tariff imposed by President Bush in 2000 on imported steel goods reduced national income by between .5 to 1.4 billion dollars. (Lafaive) While surely not perfect studies, this demonstrates empirically that there is significant evidence to suggest that trade protectionist ideas might sound good to the domestic producer, but the consumers are the ones that pay, as well as foreign relations. From 2004 to 2008, 5,168 jobs were lost in the U.S. tire industry, surely not all from foreign Chinese competition. Statements made by the U.S. domestic tire industry suggest that in this particular market the low quality, and therefore low price passenger and small truck tires is an area already realized to have a foreign advantage and domestic supply has shifted towards higher quality and higher price tires that China can’t as easily compete with. The U.S. tire industry was not the group that requested this tariff, but rather the United Steelworkers union. The administration was pushed around by a special interest group under the guise that a great many jobs would be lost if no action was taken.
Many economics have argued that in the long run free trade will create more jobs and wealth than protectionism and that if the public can understand this economics concept, they will be more likely to be supportive of more free trade policy. An example of this idea was put forth by Alan Blinder, “Some lawyers are better typers than their secretaries. Should a lawyer fire his secretary and do his own typing? Not likely. Though the lawyer may be better than the secretary at both typing and arguing cases, he will fare better by concentrating his energies on the practice of law and leaving the typing to his secretary.” (Blinder) In this particular case, the U.S. has an advantage in terms of capital and technology, while China has the advantage in labor. This clearly explains the emergence of more and more low quality low price goods being imported from China. Instead of artificially inflating the price of low quality tires by domestic suppliers, the government should be promoting free trade and competition which should increase the supply of higher quality tires using more capital, technology, and research and development than the Chinese and could actually create more jobs. It is easy to fear the perceived ability of the Chinese to produce all goods at a lower price than domestic suppliers, but it was Ricardo that put forth the idea of comparative advantage and in this case, the U.S. surely has one in high tech products. According to Adam Smith, “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” (Blinder)
It seems it is the nature of the local population to see protectionism as in the best interest of their own country because as people lose jobs and domestic industries shrink, it is clearly attributable when a foreign supplier is entering the market aggressively. They wouldn’t as easily attribute the low prices they enjoy, and also the expansion of other related domestic industries to foreign competition. Adam Smith stated, “To expect, indeed, that the freedom of trade ever should entirely be restored in Great Britain, is as absurd as to expect then an Oceana or Utopia should ever be established in it. Not only are the prejudices of the public, but which is much more unconquerable, the private interests of many individuals, irresistibly oppose it. (Smith). The people clearly see a lost job as a terrible thing, as they should, but they are also somewhat blinded to the big picture. It is much easier to point to an empty factory and blame foreign competition, than it is to see another factory still open and know its existence is due to free trade.
The Obama administration is doing its best to restore the economy of the U.S. as well as the world, and also to restore the image of the United States. This latest act of protectionism might have been decided on with the best intentions for the U.S. worker, and very well might save jobs here at home. However, the long term existence of the U.S. as a global financial leader depends on free trade and its trade partners. Alienating China for perceived dumping of low quality products that the U.S. already has lessening interest in pursuing in the market place will only hamper efforts of economic coordination and a global financial relief effort. It can’t be proven how many jobs will be created, it can’t be proven how much the consumer will pay, but has been shown in history that the burden of the load will be on the U.S. consumer, and a full return of the global economy relies on the United States consumer having the income and desire to purchase goods from the global marketplace. Restricting the ability to find low price products if one desires, is a short term fix to a long term problem.
As word of the planned tariff on Chinese made passenger and small truck tires spread to leadership of China, the following statement came from Beijing, “China strongly opposes this serious act of trade protectionism by the U.S. This act not only violates the rules of the World Trade Organization but also violates the relevant commitments made by U.S. government at the G-20 financial summit.” It comes as no surprise that China is opposed to such an action. A domestic market for China in which total capacity will rise 16% in the next year and is currently four times greater than domestic demand,(Wiseman) a significant tariff such as the one currently being employed will greatly hamper continued job growth and increasing market share of the U.S. tire market. Retaliatory protectionist measures are sure to follow from China, and when it comes to trade, China has the upper hand. Currently we have a large trade deficit with China, for the 2009 year it already over 165 billion dollars. However, free trade with China will improve the standard of living for both countries in the long term. As China continues to grow and specialize, the U.S. will specialize in goods which it has a comparative advantage, and jobs will grow for both nations.
A study done in the 1990’s compared the dollar amount U.S. consumers spent as a result of imposed tariffs. It compared that data with the number of jobs saved as a result of the tariff, and how much each of those jobs paid. According to the study U.S. consumers were estimated to have paid $1,285,000 annually for each job preserved in the luggage industry due to barriers to trade. For each textile worker saved, $199,000 was spent. For softwood lumber jobs, $1,044,000, and $1,376,000 for each job in the benzenoid chemical industry. (Blinder) All of these numbers are significantly higher than the dollar amount paid per year to each of those workers paid respectively. One should also consider the fact that for each of these industries workers will still be laid off as a result of lowered domestic and foreign demand due to the current global recession. According to the Mackinac Center for Public Policy, a tariff imposed by President Bush in 2000 on imported steel goods reduced national income by between .5 to 1.4 billion dollars. (Lafaive) While surely not perfect studies, this demonstrates empirically that there is significant evidence to suggest that trade protectionist ideas might sound good to the domestic producer, but the consumers are the ones that pay, as well as foreign relations. From 2004 to 2008, 5,168 jobs were lost in the U.S. tire industry, surely not all from foreign Chinese competition. Statements made by the U.S. domestic tire industry suggest that in this particular market the low quality, and therefore low price passenger and small truck tires is an area already realized to have a foreign advantage and domestic supply has shifted towards higher quality and higher price tires that China can’t as easily compete with. The U.S. tire industry was not the group that requested this tariff, but rather the United Steelworkers union. The administration was pushed around by a special interest group under the guise that a great many jobs would be lost if no action was taken.
Many economics have argued that in the long run free trade will create more jobs and wealth than protectionism and that if the public can understand this economics concept, they will be more likely to be supportive of more free trade policy. An example of this idea was put forth by Alan Blinder, “Some lawyers are better typers than their secretaries. Should a lawyer fire his secretary and do his own typing? Not likely. Though the lawyer may be better than the secretary at both typing and arguing cases, he will fare better by concentrating his energies on the practice of law and leaving the typing to his secretary.” (Blinder) In this particular case, the U.S. has an advantage in terms of capital and technology, while China has the advantage in labor. This clearly explains the emergence of more and more low quality low price goods being imported from China. Instead of artificially inflating the price of low quality tires by domestic suppliers, the government should be promoting free trade and competition which should increase the supply of higher quality tires using more capital, technology, and research and development than the Chinese and could actually create more jobs. It is easy to fear the perceived ability of the Chinese to produce all goods at a lower price than domestic suppliers, but it was Ricardo that put forth the idea of comparative advantage and in this case, the U.S. surely has one in high tech products. According to Adam Smith, “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” (Blinder)
It seems it is the nature of the local population to see protectionism as in the best interest of their own country because as people lose jobs and domestic industries shrink, it is clearly attributable when a foreign supplier is entering the market aggressively. They wouldn’t as easily attribute the low prices they enjoy, and also the expansion of other related domestic industries to foreign competition. Adam Smith stated, “To expect, indeed, that the freedom of trade ever should entirely be restored in Great Britain, is as absurd as to expect then an Oceana or Utopia should ever be established in it. Not only are the prejudices of the public, but which is much more unconquerable, the private interests of many individuals, irresistibly oppose it. (Smith). The people clearly see a lost job as a terrible thing, as they should, but they are also somewhat blinded to the big picture. It is much easier to point to an empty factory and blame foreign competition, than it is to see another factory still open and know its existence is due to free trade.
The Obama administration is doing its best to restore the economy of the U.S. as well as the world, and also to restore the image of the United States. This latest act of protectionism might have been decided on with the best intentions for the U.S. worker, and very well might save jobs here at home. However, the long term existence of the U.S. as a global financial leader depends on free trade and its trade partners. Alienating China for perceived dumping of low quality products that the U.S. already has lessening interest in pursuing in the market place will only hamper efforts of economic coordination and a global financial relief effort. It can’t be proven how many jobs will be created, it can’t be proven how much the consumer will pay, but has been shown in history that the burden of the load will be on the U.S. consumer, and a full return of the global economy relies on the United States consumer having the income and desire to purchase goods from the global marketplace. Restricting the ability to find low price products if one desires, is a short term fix to a long term problem.
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