Economic Ignorance Is No Excuse, Sean - The American Spectator | USA News and Politics
Economic Ignorance Is No Excuse, Sean

As a radio talk show host, I’m used to hearing from my listeners, in addition to well-reasoned insights about news and issues of the day, occasional outbursts of misinformation and cult-like self-delusion.

From 9/11 “truthers” and those who think that it’s possible nobody was killed at Sandy Hook, to anti-vaxers and gullible GMO-fearing soccer moms, ignorance, often combined with a remarkable level of condescension, abounds in America.

Most such idiotic viewpoints have one beneficial characteristic: the harm caused by people holding these views is small and tends to hurt primarily those who hold the views (or, sadly, their children). If you say it’s possible nobody was killed at Sandy Hook, people will simply think you an ignorant ass. If you don’t vaccinate your child, the harm you inflict on your child is much greater than the harm you inflict on mine. If you insist on non-GMO foods, you’ll waste much of your disposable income for no good reason at all.

But there’s another area of ignorance in America, one simultaneously more widespread and more likely to cause harm to others than the views noted above. It’s one that demonstrates the tremendous damage done to our country by “Progressive” control of all levels of education. I speak, of course, of ignorance of even the most basic economics.

It’s incredibly disheartening to see the percentage of Americans who are perfect examples of Frédéric Bastiat’s “bad economist”:

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.

A plague of “bad economists” — including politicians, reporters, celebrities, and the millions who believe the economic hairballs these ignorant opinion-leaders cough up — have emerged recently like cicadas to annoy the nation with their constant mindless buzzing. What they’re buzzing about generally is trade, and specifically, in recent days, the trial balloon floated by President Donald Trump’s press secretary, Sean Spicer, to pay for “the wall” along much of our southern border by imposing a 20-percent tax on goods imported from Mexico.

In the interest of politeness, I will say this in the kindest way possible: This is the worst political thinking since Nancy Pelosi posited that unemployment insurance and food stamps are huge job creators for the American economy. In a way, it’s worse than Pelosi because we know that leftists don’t understand economics. We usually expect (slightly) better from Republicans — at least in their rhetoric.

In short, everything Sean Spicer uttered about the economic impact of this tariff, including the math he used to justify the tax rate, was utterly, completely, totally, stunningly ignorant. (Yes, that was the kind version.)

First, the math: Spicer said that a 20-percent tax would raise $10 billion needed to pay for the wall (as if it will only cost $10 billion). He explained that the number came from the concept of taxing our roughly $50-billion trade deficit with Mexico, not the total amount of our imports from Mexico.

It is, however, impossible to tax just our trade imbalance, because it is impossible to identify just which imports created it. If we import (using 2015 data) $295 billion worth of goods from Mexico and export $236 billion of our production to them, how are you going to tell me which $59 billion of the $295 billion worth of stuff you want to tax 20 percent, and how are you going to explain why purchasers of those goods are penalized while those buying the other 80 percent of the imports are not?

Even if the idea of this tax had any economic merit, which it doesn’t, to raise $10 billion (and assuming business behavior would not change because of the tax — again an error we normally expect from the left), the proper amount would be just over 3 percent, not 20 percent.

But the math error is small compared to the conceptual error, which comes down to these key points:

  • A tax on imported goods will be paid entirely by Americans. After all, the American government has no way to enforce a tax on a company that doesn’t even operate in the USA. Instead, the tax will be added at the border and paid by the first purchaser of the goods, who will then pass the cost along to the intermediate and final purchasers.
  • Much of the discussion about Mexico is, due entirely to Rust Belt politics, centered on the automotive industry. As a useful article at CNN Money notes, the vast majority of Mexican workers associated with the industry make parts, not cars. This means that one of the first effects, but certainly not the only harmful effect, of a border tax on imports from Mexico will be to make American cars more expensive. Soon, American car makers will lose sales, and then jobs, to the Germans and the Japanese and Koreans.
  • These secondary effects of such a tax will be devastating to the United States. An enormous number American jobs depend on affordable imports of inputs into their businesses. These workers don’t have the visibility of Michigan’s outdated unionized auto workers but massively outnumber them. The border tax will cause substantial unemployment in the United States hurting overall tax revenue.
  • When Mexican workers and firms sell fewer items to the United States, they earn fewer dollars with which to buy American imports. So ironically this tax, proposed as a tax on Mexico, is actually a tax on Americans and a missile aimed at the manufacturing sector of our economy, which Donald Trump claims to value so much.
  • A thought experiment for you: What if your favorite beer is from Mexico and its price was suddenly raised (by your government)? What would that mean for your beer-buying behavior, the impact on government revenue, the impact on jobs both here and in Mexico and, perhaps most importantly, on your happiness?

The paradigm of a bad economist came to me via listener email a few days ago with these words: “President Trump’s stating there will be a 20% tax is a part of the negotiation process. It is no different than me telling you I want $6000 for my automobile as a starting point. You counter-offer me and we agree upon a price. President Trump says 20%, Mexico negotiates, and say we reach an agreement of 10%. We win, Mexico feels they outbid Trump, everyone’s happy.”

My response to this dangerous reasoning by a well-intended interlocutor may offer a way for you to be the “good economist” in your water-cooler or cocktail-party conversations, a way to think about the various import taxes (e.g. “Border-adjustable tax”) that you will soon heard proposed by economorons in Congress, liberal think-tanks, newspaper op-ed pages, and the Trump administration:

“So what you’re saying is this: I have a six-shot revolver with bullets in two chambers. In order to get you to do what I want, I’m going to spin the cylinder and point it at my own head and pull the trigger. But if you negotiate with me, I’ll take out one bullet before I play.” (If you’re an exceptionally cultured person, this answer might remind you of one of the funniest movies ever…)

Among actual economists and one notable former economist, the benefits of trade are non-controversial. That doesn’t mean there aren’t losers. It does mean that the net benefit to the nations which engage in free trade is large and that the true benefit is in our imports, not our exports. Most Americans, suffering for generations through vapid but appealing economic populism of politicians of all political stripes, don’t intuitively understand this.

So let me offer you one more suggestion for how to think about these concepts: If we are buying products from another country and thereby run a trade “deficit” with them, that imbalance is a proxy for the combination of lower prices and/or higher quality that Americans are able to receive for our money by buying from the foreign source. The trade “deficit” is a manifestation of the gain, not the loss, to Americans from engaging in these mutually beneficial transactions.

If there is a Home Depot near you and another hardware store that sells many of the same items for higher prices, you are likely to shop at Home Depot. This will maximize your trade deficit with Home Depot. In that scenario, has Home Depot harmed you? Of course not. But that won’t stop the other store from complaining.

Many bad economists talk about the few losers from free trade, as if their existence makes trade immoral. However, the true immorality comes from politicians telling tens or hundreds of millions of Americans that we must reduce our purchasing power, our ability to improve our lives with whatever we earn so that they can buy votes with our money.

When it comes to any tax on imports, just remember: It’s a tax on you.

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