Populist Wasteland
by

I have to admit that I like Jerry Brown. No, I don’t like the California governor’s destructive liberal policies. What I like is his honesty. Recently, Governor Brown signed a ridiculous bill that will raise California’s minimum wage to $15 an hour (that’s $30,000 a year for a full-time worker). But unlike President Obama and other Democrat politicians, he did not try to justify this legislation with twisted Keynesian arguments that this would somehow be good for the economy. Brown signed the bill admitting, “Economically, minimum wages may not make sense.” Rather, he insisted that they make sense “morally and socially and politically.”

Democrats routinely accuse Republicans of being “anti-science” (while being very selective in their own use of “science” for political purposes). The more prevalent dismissal of science, exercised by politicians from both parties, however, pertains not to the physical sciences but to the science of economics. Jerry Brown’s display of intellectual integrity, choosing not to sully economics with false or misleading studies and warped “economic theory” was refreshing. Instead, Governor Brown moved the discussion to the moral, social, and political realms where claims need not rest on such mundane things such as empirical evidence.

Listening to Bernie Sanders, I think it is safe to say that he has less of a grasp on economic theory than does Jerry Brown. But Bernie, too, shows a degree of intellectual integrity in that he does not pretend that his ultimate objective is economic growth but rather income equality, or as he puts it, he wants an economy based on “morality” rather than on “greed.” Listening to Sanders supporters, I think it is also safe to say that they are less enamored with his actual policy positions than they are with his general claim that the “system” is fundamentally corrupt to the detriment of working people. In this regard, many of his supporters share a key characteristic with Donald Trump’s: policy isn’t as important as taking down the “establishment.”

This attitude should be of concern to conservatives. It was Edmund Burke, after all, who warned that the destruction of the existing order in France wouldn’t end well. If you are going to wipe away the existing “establishment” you should put some considerable thought into what you want its replacement to be. Revolutionary France got the Reign of Terror. Bernie Sanders promises to bring us all the glories that socialism has brought to Europe (perhaps he thinks the Germans will bail us out like Greece) and will put most aspects of our lives in the control of government. Donald Trump will bring us, well, who knows. I find Jerry Brown’s straight talk refreshing, but that doesn’t mean I’d ever vote for the guy. All this policy stuff is pretty important.

Bernie Sanders and Donald Trump share a populist economic message. Typical of economic populism, it is not so much economic fact that drives the argument, but rather defining victims and villains. And when economic “facts” are part of the argument they are, more often than not, simply falsehoods. The focus is not on penetrating economic analysis but on selling a concept of a corrupt world that they (and only they) can reform.

Both Bernie and The Donald have expressed antipathy for free trade. Sanders thinks that market economies, in general, are rigged for the benefit of the rich and powerful. Trump is, at least in practice, a capitalist. But he also makes the case that free trade, in many cases, is unfair and harmful to U.S. workers. It is, perhaps, not surprising that a notion shared by both Sanders and Trump is incorrect.

Donald Trump thinks the U.S. is getting “killed” by our trading partners based on the fact that we run trade deficits. And, to make things simple, he puts most of the blame for these deficits on “cheating” by our trading partners through currency manipulation. For instance, he wants to put upwards of a 45% tariff on Chinese goods because, he says, the Chinese government keeps the Chinese yuan up to 40% undervalued, thus making their exports into the United States artificially (and unfairly) cheap. These claims don’t stand up to scrutiny and show a fundamental lack of understanding of world trade almost as unnerving as that displayed by the socialist Sanders.

The trade deficit is one of those figures that does not convey a lot of meaning. All it says is that we have been importing more goods and services than we are exporting. A trade deficit is neither inherently good nor bad. Often times the cause is simply that we have greater wealth than our trading partners, and having comparatively more wealth, we buy more from others than they buy from us. China’s current huge trade surplus is largely the result of its consumers having relatively little disposable income. Per capita income in China is about 14% of what it is in United States; in Mexico it is about 19%. If you think a trade surplus is necessarily a sign of economic strength, look to Japan which for the past 35 years has routinely racked up trade surpluses but which has suffered from economic stagnation that makes the Obama economy look robust.

It is true that, all other things being equal, if we didn’t import items but rather made them here in America that we’d have significantly more jobs. But the key here is that other things would not be equal. We import, and companies shift production overseas, for real economic reasons. The primary reasons are that either the particular good simply isn’t available in sufficient quantity at home — such as natural resources — or that it costs a lot less to make the goods in other countries. If we were to shut down imports with excessive trade barriers such as high tariffs, as Trump advocates, the result will possibly be the “saving” of jobs in certain protected industries but the cost will be to the consumers of those products who will now be spending significantly more, which means they will have less money to spend on other items, resulting in lost jobs in those other areas. And slapping high tariffs on imports will not go unrequited. Our trading partners would undoubtedly retaliate on products we export, costing more jobs in our export industries.

As free trade has expanded since the early 1980s, not only have our imports ballooned, but so have our exports, rising from about $275 billion annually in the early ’80s to well over $2 trillion now (goods and services). Our 2014 total trade deficit of $508 billion amounted to about 22% of our exports — which is actually slightly less than what it averaged during the 1980s, and almost exactly what it was in 1983, the year prior to NAFTA taking effect. So, even if we are running a trade deficit, world trade is an important contributor to our economy.

The notion that engaging in trade wars is economically destructive is not controversial among economists. If Trump and Sanders want to attack trade, the intellectually honest way to do so is not with false economic arguments, but with Jerry Brown’s moral, social, and political ones which don’t need to be tethered to economic facts. But even then, causing Americans to pay more for the same goods, and to create unemployment in some areas in order to protect some directly affected enterprises, is an exercise of dubious moral or social value, even if doing so may curry some short-term political favor.

But in addition to prescribing a false solution, the whole premise of Trump’s argument, that China and other countries are “killing us” because of currency manipulation, is simply false. For instance, Trump’s source for his claim that China’s currency is undervalued by as much as 40% is a mystery. The consensus among currency specialists is that China’s currency is currently overvalued. The Chinese yuan continues to face downward pressure, not by actions from the Chinese government, but by market forces as investors pull money out of China’s faltering economy. China engages in anti-competitive practices (including violation of intellectual property rights) that have yet to be adequately addressed, but it is hard to deal with real problems if your focus is elsewhere.

Certainly currency valuations have little impact on business decisions to relocate operations to other countries. If I am a U.S. company looking to shift operations to a foreign country, any pricing advantage I may have selling my product denominated in a weak currency to the U.S. market is offset if I then want to convert that weak currency back into U.S. dollars. Companies make decisions on relocating operations based on structural conditions that they think will be in place for a considerable period of time such as the supply of appropriately skilled labor, wage rates, regulations, and tax structures.

Supposed currency manipulation and other unfair foreign competition has been a target of politicians long before Donald Trump and Bernie Sanders. But addressing the problems of maintaining global competitiveness is considerably more complex than attacking simple populist bogeymen, be they Sanders’ corporations and billionaires or Trump’s nefarious foreign governments. California, for instance, has been losing jobs not just overseas, but to other states like Nevada, Texas, and Virginia. California isn’t losing jobs to other states due to currency issues but due to the relative high cost of doing business in California, ranging from high taxes, high labor costs, high energy costs, and heavy environmental regulations — all of which have been driven by government actions that Governor Brown might argue have moral, social, or political benefits, but for which we cannot ignore the economic costs.

Bernie Sanders is ideologically incapable of understanding the benefits of trade and of how to allow U.S. businesses to compete more effectively. Donald Trump seems more interested in engaging in politically expedient populist rhetoric than in understanding the issues. But whether they couch their arguments in terms of economics or morality, both of these two presidential contenders’ trade policies will hurt the working people they claim to champion.

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