Tariffs – February 15th, 2015

This is my favorite part of why I started the blog. Maybe I got a little rough with Jason the other day after he tried to give Keynes credit for I don’t know what, but I would much rather fill in gaps and give references than rip on Jason. He’s doing a hell of a job, and his heart is definitely in the right place. I’m glad he is doing what he is doing.

He did great explaining the Smoot-Hawley Tariff, and that whole spiel. However, in my opinion, Tariffs can’t be discussed without mentioning John C. Calhoun. There is no shortage of things that could be said about the man. He was a representative, then The Secretary of War, and then The Vice President under John Quincy Adams and Andrew Jackson. Then he became a Senator, then secretary of State under Tyler and Polk, and then a Senator again until his death.

He started off his career as a nationalist, advocating a strong central government and high tariffs, but after the Tariff of Abominations in 1828 he changed his view and championed states’ rights, nullification, and low tariffs.

As a disclaimer, I should probably get this out of the way right here: Calhoun was from South Carolina and was not merely a proponent of slavery but one of its greatest defenders throughout his career. This is regrettable, but if we are unable to learn from a man on one subject, though we may find him lacking in other areas, we stand to deprive ourselves of great insights.

He got slavery wrong, but he got the tariff question right (at least after the Tariff of Abominations). And, he was the first to recognize that a tax on imports ultimately becomes a tax on exports.

Let me also make one caveat before I get started in this: There are two types of tariffs, revenue-generating tariffs, and protectionist tariffs. The first is the class that are low, around 5-10%. The whole concept here is volume. The tariff isn’t meant to impede trade, but merely to skim a little off the top. Well, over 100 years before Arthur Laffer developed the Laffer Curve, Calhoun realized that a tariff of 38% wasn’t intended to generate revenue, but was instead generated to prevent trade.

When tariffs are at 10% trade continues more or less unimpeded, the Home manufacturer gets a slight advantage over and above the advantage he has of location, considering a European manufacturer has to contend with higher shipping cost. However, at the end of the day, we’re talking about home field advantage at a baseball game, not loaded dice.

When tariffs are at 38%, that shuts out foreign markets making them prohibitive. Domestic industry is left with no outside competition and is therefore able to charge much higher prices than they would be able to otherwise.

Now in this case it was steel, which as it turns out was very important to farmers to use in everything from axes to plows. This drove up the costs involved in the production of cotton and this is where the tax on exports comes in. With Cotton Farmers having to pay 30-40% more for farm implements than cotton farmers in India and Egypt, they are beaten out of European markets and have a much harder time finding buyers in foreign markets. This is exactly the raw deal that caused the Southerners to seek independence when Lincoln won the presidency. Not slavery; as Lincoln said, he “had no desire nor authority to interfere with slavery where it existed” but he did favor “protection for home industry.” It’s worth reading Lincoln’s first inaugural address to see his total ambivalence towards the slave question and his willingness to shed blood if South Carolina refused to submit to the tariffs. As a further aside, the Southern constitution capped tariffs at 10%, while Lincoln endorsed the Corwin Amendment (also referred to in his first inaugural) which would make slavery a permanently protected institution and whose amendment would be irrevocable.

But let’s get back to tariffs. We can see the same sort of thing today. There is a high tariff on steel, and that puts U.S. automakers at a disadvantage. Thus, we are less competitive on the global market and U.S. auto exports are weakened.

A more striking example is the tariff on sugar. Coca Cola uses high fructose corn syrup for domestic production simply because sugar is too expensive in the U.S. due to the protective tariff. However, if you can find Coke bottled in Mexico, you’ll see that its sweetening ingredient is real sugar. It’s cheaper to have a bottling plant in Mexico that uses real sugar, and then import the coke to the U.S. than to import the sugar and bottle in the U.S.

Thus, if you are in the particular industry that is being favored by the tariff, and if the tariff only applies to the one item you make (say steel for instance) you might consider supporting it. If the tariff passes, you’ll Do well, but the trouble comes when other people seek and succeed in getting protective tariffs.

You win when you do steel and there is a protective tariff on steel, but what happens when there is also a tariff on beef, and sugar, and wine, and shoes and televisions and cars and tires and so on. Now you are no better off, and indeed we are all worse off.

 

John Maynard Keynes & Theory

I guess I shouldn’t neglect the show the way I did last week. I got caught up in a 5 hour binge and man, did I miss out.  As always, Jason does a fine job at political analysis and picking apart Bernie Sanders in particular. What is curious is that while Jason would no doubt agree with Tom Woods and the rest of us that Bernie is wrong about everything (link is a free book by Woods on that subject), he seems to give the Bernie Sanders of 80 years ago a free pass… “Keynes got a lot of stuff wrong, but he also got some things right too.” I’m sorry, but since we’re so keen at pointing out how Bernie doesn’t answer any questions directly or give any concrete details, I may have to refer to Jason as Jason Bernie Sanders Stapleton. Where did Keynes ever get anything right?

It isn’t a matter of reading a few books from Austrian authors that would cause sane men who adhere to the rules of logic to abhor Keynes, though only a few books would be necessary and would justify it. It is slugging through the General Theory of Employment, Interest, and Money that causes a person to hate Keynes, as would be the natural inclination of any honest man who loves liberty.

There is nothing true and original in the General Theory; it is full of overly technical language, using terms that are never defined and which actually change definitions without notice. It is an anathema to science because it is so unclear. What good is technicality if there is no precision? As for what is true, how can he be given credit for getting things right that Adam Smith got right 150 years before?

As for Milton Friedman making the remark, “We are all Keynesians now.” How are we supposed to answer to this? How does this somehow exonerate Keynes of all his errors? It doesn’t. Keynes’s “General Theory” has been the most destructive piece of literature to mankind’s liberty and well-being ever written, with only Karl Marx excepted.

It isn’t merely a matter of Galbraith and Samuelson misconstruing the teachings of Keynes. To say so is akin to blaming Lenin, Stalin, and Mao for the failures of Marx’s teachings.

Here we can segway into theory and what that means. It is not true the problems were that Keynes was purely theoretical and that we need economics that works in the real world. Jason knows better than this; that is exactly the argument put to us when we criticize some big government work project that is supposed to create jobs, and we come back with the arguments from Bastiat about the seen and the unseen. They say that is all theory, but FDR/Obama is actually creating jobs.

Economics is a purely theoretical science, but Keynes didn’t even use theory. He tried to use mathematics and statistics devoid of logical deduction from the premises of the axioms of human action. He examines wage “levels” from one year to the next, as well as employment “levels” and interest rates, but never bothers to look at why individuals do the things they do as Jason does in his show. Why a person wouldn’t expand his business when the top marginal tax rate is 70%.

But let’s get back to theory. Economics is no less a science than physics, but it cannot be treated in the same way as physics. The physicist has a lab in which he is able to set a control and a variable; he can control the settings and the environment. After the first leg of the experiment is concluded, he is able to reset the control and the variable and run the experiment again, under the same conditions, and then he can change a feature and run it a 3rd time.

With economics, this is an impossibility. There is no lab, and there is no way to control for certain conditions. Everything is a variable. Thus, if we were to attempt to make sense of economics by way of a posteriori reasoning our results would be biased. Paul Krugman looks at the bailouts of the banks and auto makers in ‘08 and ’09, and the sluggish recovery, and breathes a sigh of relief that it wasn’t worse but says it would have been better if only the bailouts were bigger and were done sooner. While Bob Murphy sees the same things (insert protracted recession in place of sluggish recovery) and says things would have been a lot better a lot sooner if only they hadn’t done a bailout at all.

Galileo had a remedy in the question of whether a 10lb ball would fall to the earth faster than a 5lb ball; he climbed to the top of the Tower of Pisa and tested his theory. But what remedy do we have for the question of the recession and recovery since ‘08? We can’t go back in time.

However, that doesn’t mean Economics isn’t scientific. It is much more like Geometry, where by new facts are revealed through deductions that proceed from already accepted truths about the nature of the subject in question, either man or a right triangle.

The Pythagorean Theorem isn’t something that must be proven empirically, but is the product of deductions about the nature of that triangle. Likewise, the theory of supply and demand is also a logical procession based on very simple and widely accepted principles of human action. Each man acts to improve his condition; ceteras paribus a man will prefer more than less, and sooner rather than later. Men act rationally and have an ordered value scale. From this, we understand if the demand for a product increases the supplier will use this as leverage to increase the price asked for the product. The higher prices induce others to enter into the field and compete.

It is true this can be observed, and that this isn’t a contested theory; I use it because of how simple it is, but the fact that economic laws can be observed doesn’t make economics less theoretical.  Theory is only a way of describing the world. Geometry is theoretical, but it is applicable, and can be seen and demonstrated in the world and so can economics, as long as you’re not a Keynesian and would jettison Euclidean geometry in favor of a new way of doing geometry- that’s a reference to what Keynes actually says in the General Theory!

Economics consists not in statistics, equations, quotas and ratios. It involves logical thought about how humans act under different pressures, restrictions, and mandates. Keynes never considers any of this.

And, really, if you want to know what’s wrong with Keynes, if you doubt anything I’ve said here, pick up “Failure of the New Economics” by Henry Hazlitt. He actually goes through the General Theory chapter by chapter, paragraph by paragraph, and in some cases line by line to dismantle the confusions that Keynes has brought to the science.  There is also a free audio version here.

In this case I would recommend obtaining a hardcopy of the General Theory or the Kindle version and listening to the audio version; this is actually the quickest and the easiest way to get a firm grasp of the material.  It sounds daunting, but it really is quite fun. It’s like one big riddle. Read a paragraph of the General Theory, see if you can make sense of it, and determine if it is true or not and then switch over or listen to Hazlitt unpack it and pronounce a verdict.

 

The Fallacy of Irrational Action from Richard Thaler

It’s been dry lately, and busy. It’s been a combination of being super busy, a string of shows that aren’t particularly controversial, and a bit of writer’s block. It’s been one of these constantly, every time I sit down to write. Well, one of the latter two when I do sit down to write, and then for the days where I don’t get that far it’s from being so busy and exhausted.

I’m here now and I have found time to read quite a bit lately. I looked into behavioral economics, a school of thought that Jason talked about a long long time ago. It’s interesting. I’m not sure all of it is really economics, either by Sowell’s definition or by the Misessian definition, but much of it does seem plausible. There are some very basic and fundamental problems with behavioral economics. Since the show hasn’t been giving me a lot of material lately- or what material there is, is either out dated or purely political- I’m going to take on Richard Thaler.

In his book, “Misbehaving” Thaler attacks one of the fundamentals of economics, as it has been known since the late 1800s. Thaler takes pride in demolishing “homo-economicus.” That is the “old” notion that men base all their actions according to calculations regarding their own value scale, opportunity costs, values, costs vs profits, and their time preferences, and assessments of the probability of varying unknown future events. In other words, men act rationally and are self-interested.

The Austrian School teaches that all men act, and that the purpose of each act is to relieve a felt sense of uneasiness. Or, to put it another way, each act aims at exchanging the actor’s current condition for a better condition. It is purposeful action that employs means to attain ends.

Furthermore, there is a logical structure of the mind, so that individuals prefer some things to others, our limitations of time and resources create the necessity for us to prioritize how we spend our time and resources. This leads to what is referred to as a value scale.

Individuals organize their desires in a linear sort of way, a man prefers A to B, and B to C, and C to D, and so on. Not that every person writes all this out in long hand, but merely that this is how we operate, this is how we must operate. We must act and each act precludes other acts. So that on a given afternoon you must make a choice between taking a walk or going to a movie, or going fishing. If you choose to do any of those, it is proof you prefer that activity more than the other possible activities.

Thaler presents some challenges to this notion, one being how people would respond to the different scenarios. For instance if given two choices: A, where you are guaranteed to win $100, and B, where you have a 50% chance of winning $200 and a 50% chance of winning nothing, most folks chose the sure thing. When presented with a second choice: A, a sure loss of $100, or B, a 50% chance of losing $200 and a 50% chance of losing nothing, most people take the gamble.

In each case it was just about 2 to 1.  But this isn’t really the realm of economics at all. The main point of this study is trying to understand how people make their choices, not a study of human action.

Somewhere in that book he presents a problem that actually had me questioning the whole notion of a value scale for about 5 minutes. He mentioned two guys who won tickets to a game. One man sold the tickets for $1,000. The other man went to the game. Neither could understand the logic of what the other was doing. Clearly an example of subjective value theory at work.

Consider this: suppose “YOUR TEAM” is going to the Super Bowl. You enter a raffle at work or at the local chamber of commerce or whatever and you win! Now you have two choices: you go or you don’t go and you sell the tickets for $2,000. For the sake of argument, let’s pretend there is no travel expenses, just suppose the Super Bowl is in your home town… Now, what do you do? If you go, it clearly demonstrates you prefer attending the game over $2,000. But suppose you don’t win any tickets. You can either buy the tickets for $2,000 and go, or you can not spend the money and watch it on T.V. In this case, if you don’t go it is because you prefer $2,000 to attending the game.

It seems plausible that this could happen, but how could this fit into that neat Misessian/Rothbardian value scale?  I put the book down and began to question how this could be. How can a person prefer A to B and at the same time prefer B to A? I considered if this were my situation, If I could go to the Super Bowl for free, why I would go, and why I wouldn’t go if my team did go to the Super Bowl but I had to buy the ticket.

I began to think over the fundamental premises of economics. Men use means to attain ends. Each act is intended to exchange one’s current condition for a more desirable condition. And that was it, in a flash, it made perfect sense.

Before the tickets are acquired, my condition is $X in the bank. After the tickets are acquired, I either have $X in the bank and the tickets. If I won the tickets, or $X-$2,000 if I had to buy the tickets. And, of course, $X+$2,000 if I decide to sell the tickets. Depending on what that $X is, my choice would be different. If $X=$500, I’m selling the tickets if I win them and I will not buy them if I don’t win them, obviously.  If $X=$1500 I may go to the game if I win the tickets, but I will not buy them if I don’t win them. And if $X=$6,000 I  will buy the tickets if I do not win them.

Now that’s perfectly logical and reasonable. There are actually 3 sets of value scales, not one.

1. $6,000 and tickets
2. $4,000 and tickets

1. $1,500 and tickets
2. $1,500 and no tickets

1. $2,500 (after selling tickets that were won)
2. $500 and no tickets.

Maybe the Austrians do have some cracks somewhere, but not here. Men do use reason (many times flawed). Men plan, quite imperfectly sometimes, and men do act in order to better their condition, even if they regret their actions later and their condition is actually worsened.

I do think we are homo economicus, but that doesn’t mean we are always right, or that we don’t make gross errors in our calculations. But, all the theory of homo economicus states is that we do make calculations.