The Oldest Fallacy in Economics: Donald Trump and Bernie Sanders have fallen for it

Foundation for Economic Education ^ | 08/25/2015 | DONALD J. BOUDREAUX

[SeekAndFind]

The quote of the day comes from pages 476-477 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

At one time, it was believed that importing more than was exported impoverished a nation because the difference between import and exports had to be paid in gold, and the loss of gold was seen as a loss of national wealth. However, as early as 1776, Adam Smith’s classic The Wealth of Nations argued that the real wealth of a nation consists of its goods and services, not its gold supply.\

Too many people have yet to grasp the full implications of that, even in the twenty-first century. If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a “deficit” or a “surplus” in the international balance of trade.

Yes. And it matters not how Americans (or, more generally, how denizens of whatever country is considered to be the “domestic” one) gain greater access to goods and services produced globally.

If the Chinese become zealous devotees of a religion whose doctrine requires that they serve Americans by shipping to Americans goods and services free of charge, then Americans are made better off.

If the Chinese innovate in ways that lower their costs of production — and distribution and, thus, enable them to sell goods and services to Americans at lower prices — then Americans are made better off.

If the Chinese invent new products and offer to sell these new products to Americans at prices that Americans find attractive, Americans are made better off.

If the forces of international competition oblige Chinese producers to lower their export prices to levels closer to their costs of production, then Americans are made better off.

If the Chinese government forces Chinese citizens to subsidize the production of goods and services sold to Americans so that Americans can purchase these goods and services at artificially low prices, then Americans are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off).

If the Chinese monetary authority buys US dollars with newly created yuan in order to (of necessity temporarily) make Chinese exports artificially inexpensive for Americans to buy, then Americans are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off).

The above reality is missed by people, such as Donald Trump (but hardly limited to him) who judge trade to be “successful” only if the jobs and businesses that it visibly — that is, directly — creates in the domestic economy are perceived as being greater than the number of jobs and businesses that it visibly destroys.

This error is among the oldest and most difficult to kill in economics — not only because this error is serviceable to domestic producers who greedily seek protection from competition, but also because it appeals to people who refuse to think beyond what is immediately and blindingly obvious.

A version of this post appeared at Café Hayek.

[expat_panama]

Money leaving the country for trade goods removes currency locally...

That's the comic book version people like to believe, where U.S. dollars are piled on to big steamships bound for China to buy cheap knock-offs.  As the years go by nobody in the U.S. has any dollars left any more and the Chinese are just swimming in dollars --like some oriental Uncle Scrooge. 

Back on the Planet Earth in real life we understand that the Chinese don't go shopping in China using dollars.  They have their own currency and it's called the Yuan.  In real life when we buy say, Chinese gold (they mine more gold than anyone) we can pay in dollars if we want but they have to turn right around and use the dollars to buy American stuff.  It's either that or we first sell them U.S. made stuff for Yuan first for Yuan before we can buy the gold. 

There is never a payments deficit. 

OK, sometimes there may be say, a goods trade deficit where we trade American goods for Chinese services.  The times we read about a so-called "trade deficit" is when we got a deficit in goods'n'services that was covered by a surplus in other stuff.  Example: a few years ago I made a small fortune when I sold my in Baidu stock to some guy in China.  He paid me money that I traded to buy Chinese gold and sold it to you so you could hoard it. That's what a 'trade deficit is in real life --I end up w/ lots of dollars and you end up with a big pile of gold.

What's not to like?

[samtheman]

Trump has said repeatedly now that he’s a free trader—but that a country just needs to be smart about it.

And he’s right about that.

And he's not the first, of course. Many others have said it: Free Trade, yes, but Fair Trade too.

[expat_panama]

Free Trade, yes, but Fair Trade too.

--and we're all in favor of motherhood & apple pie too, but personally whenever I buy something I'd rather not have to put up w/ some bureaucrat crying NO-FAIR NO-FAIR.  I worked hard to create my wealth and if it's OK w/ y'all I'd really like to keep it and use it as I see fit.

[central_va]

Tariff of 1789

Silly myth made out of concrete.......

"Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise:"[1]

[expat_panama]

Tariff of 1789

Welcome to the convo Cent, let me help you get up to speed on what we're talking about.

Sgt_Schultze was talking about a "tariff as a government financing system and it served".  I pointed out that the system that founding fathers were working to go into was a move from stupid tariffs toward freedom.  What we got is that in 1792 average tariffs were 15% and total revenue was about $4 million.  Now the rate's only just over one percent but import tax revenue's at $25,298 million. Yeah I know this is where y'all say that we can't compare 1790 to now  because they're totally different but if you guys are tooting a return to the good ol' days then we need to keep our eyes wide open.

The point is that lower rates mean more revenue and more freedom; Reagan tried to explain it decades ago.  Extreme leftist like Obama and his union thugs don't give a rat's patootie about America and the deficit, they just want "fairness", meaning they just want to stick it to any Americans trying to be free.

[khelus]

Re: Patriotism would keep it from happening except that the globalists aren’t loyal to the US.

They never have been. They see themselves as sophisticated citizens of the world for whom patriotism and national security are mere interferences in the unimpeded flow of goods, natural persons, and capital - for the benefit of global finance and corporate.

[central_va]

They see themselves as sophisticated citizens of the world for whom patriotism and national security are mere interferences in the unimpeded flow of goods, natural persons, and capital - for the benefit of global finance and corporate.

They are gloBULL fascists, easier to say.