- MARCH 20, 2010
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The protectionism the G-20 doesn't want you to know about
Posted By Donald J. Boudreaux
Friday, April 3, 2009 - 10:23 PM
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How stimulus plans are the true weapon of wealth destruction.
By Donald J. Boudreaux
To much applause, G-20 leaders affirmed their resistance to protectionism in yesterday's communiqué. "World trade growth has underpinned rising prosperity for half a century," the leaders proclaimed. "We will not repeat the historic mistakes of protectionism of previous eras."
That's excellent news indeed, but it is only half the picture. Although they swore allegiance to free trade, the G-20 countries promised to simultaneously pump $1.1 trillion of government stimulus into the markets. The two ambitions are diametrically opposed.
Uniformly across history and national borders, widespread prosperity is rooted in consumer sovereignty -- that is, in the insistence that producers exist to serve consumers, and not vice versa. To resist protectionism is to protect consumer sovereignty, which allows us to buy what we want regardless of its national origin. In a world where the consumer is king, producers compete vigorously to make their products and services more attractive and to keep their costs of production as low as possible. This competition ignites creativity. And as economists since Adam Smith have understood, a market is more creative, efficient, and responsive in direct proportion to the numbers of consumers and producers in it.
Free trade has another, less appreciated benefit: It frees domestic resources for use in newer, more productive pursuits. Workers, land, steel, fuel, and other resources in the United States that were once used to make, say, shoes and television sets, are today used to design Web sites, to erect cellphone towers, to carry out research in pharmaceutical labs, to perform Lasik surgery, and to do countless other jobs that wouldn't exist if trade were less open.
Trade fuels economic change, precisely what many crisis-wracked countries desperately need. Resources must be reallocated from inefficient activities -- such as the bloated housing market in the United States, or its automaker behemoth -- to more viable pursuits, consistent with consumers' genuine desires and abilities to pay. Inevitably, some producers will go bankrupt while other new industries will soar.
This economic change, however, is rather inconvenient for leaders hoping to "stimulate" the global economy. Economic change is a painful adjustment, and not one that can be completed overnight. "Stimulus" only delays the necessity of undertaking this process. By adding massive amounts of government demand to the demands of consumers, stimulus -- like protectionism -- keeps resources employed in familiar yet wasteful ways. When the government bails out failing industries, sets up home-mortgage subsidies, and props up sagging companies that agree to keep employees on, it prevents those resources from moving to new, more promising sectors. Stimulus, like protectionism, prevents the economy from shedding inappropriate activities and taking on more appropriate ones.
Government stimulus shelters producers from the need to adjust today to the true state of consumer desires. As a result, the future becomes less robust and less prosperous.
In short, protectionism and "stimulus" are at odds with consumer sovereignty and economic vigor. It's best to avoid them both.
Donald J. Boudreaux is chairman of the economics department at George Mason University.
PHILIPPE WOJAZER/AFP/Getty Images
There are two problems with your advocatory of free trade. The minor problem is that the subset of people who are consumers is almost identical to that subset of people who are workers. Therefore protecting consumers at the expense of workers is a loser.
The more important problem is that bad things you ascribe to trade protection are not consistent with the American experience.
For most of our history we were a high tariff nation. Cambridge University economist Ha-Joon Chang taking issue with notion that Smoot-Hawley was a significant contributor to the Great Depression says:
“This is a misreading of history. The depression-era shift to protectionism was much less dramatic than is often claimed. The conventional story says that the world trading system collapsed because the US introduced the Smoot-Hawley tariffs in 1930. But this was not a radical shift in policy. America had been the most protectionist country in the world for the previous century, while Smoot-Hawley only raised average industrial tariffs from about 37 per cent to about 48 per cent, well within the historical range of US tariffs until then. Tariffs in other countries did rise after 1930, but only moderately, and economic historians have shown that trade shrinkage after the depression had more to do with shrinking demand and the drying-up of trade credits.”
To see the manifest advantages of protection over free trade compare the performance of the American economy from 1869 to 1900 under tariff protection with the period 100 years latter 1969 to 2000 under free trade. From 1869-1900 tariffs were above 40 per cent while from 1969-2000 they were below 10 per cent. From 1869 to 1900 GNP quadrupled while real wages increased 50 percent, and retail prices dropped significantly. Under free trade a century later real wages declined. Real wages of most Americans peaked in 1973 and are down since.
Professor Ha-Joon Chang concludes his article with:
“The reality is that free trade has never worked very well, especially for developing countries, but it is going to malfunction even more in the coming years. Rather than trying to nurse this ailing sacred cow back to health, we should slaughter it—and concentrate our energy on designing a new system of international trade that pragmatically mixes free trade and protectionism.”
His article is at at http://www.prospect-magazine.co.uk/article_details.php?id=10628
If you can do it you are not bragging. Protection can do it for the United States. Protection has demonstrated over more than a hundred years that it can do all the things free traders say protection can not do. Free traders on the other hand are braggarts and bluffers who have to cherry pick and spin their data.
I am a street guy so I'll tell you what I like about Professor Boudreaux's argument.
Protectionsim is just another word for guarantee and I see no natural or logical reason for why I am expected to guarantee the job and income of someone I have no relationship to.
Being in the same territorial boundaries is not a relationship, it is a coincidence, a circumstance if you will. If I am to be expected to guarantee the job and income of someone in Maine, why not in France as well? The downside to me is the same, it is a drag on my incentive and reduction in my own wealth.
I do not expect anyone to offer me that guarantee, and I see no reason to extend it to others.
It is reasonable to expect that if we be obligated to guarantee another his job and income, why not guarantee that he have a lovely and loving girlfriend or wife? Why not guarantee perfectly behaved children? How about a guarantee to a well trained dog? Why not guarantee all the wonderful things he wants?
To the street person it is idiocy or insanity to get wrapped up in guaranteeing to another those things he should produce from his own natural efforts. I am sorry but competition is part of the natural world, we compete and win, or we lose.
It always was and it always will be.
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