Links - Economic Idiocy

Stupid is as stupid does

The Clinton campaign of 1992 had a mantra that went “It’s the economy, stupid”. As someone who was not a supporter of Bill Clinton, I chose not to realize how true and succinct this bit of wisdom was.

If only the truth were, “It’s the economic wisdom, stupid”. Alas, we don’t live in that world.

Yet I will keep fighting the good fight. Here are a two recent pieces in that spirit.

First, Allison Schrager brings a quick smackdown to Harris campaigns latest pandering—a better world through price controls.

Gouging is often hard to define, let alone spot in the wild. It could be argued that the proposed policy is harmless because food price inflation is low now, anyway. But as in the example of the immigrant merchant, having an anti-gouging law on the books invites regulatory abuse. Targeting big companies, as the Harris plan seems designed to do, is not harmless, either. Food prices as a share of income fell as the food industry consolidated and took advantage of economies of scale. Limiting food companies’ ability to set prices in response to market conditions will only curb their growth and willingness to operate in less populated areas—further increasing the prices that many consumers pay. We can expect fewer goods available during the next event that increases demand or reduces supply. Good luck finding food during the next hurricane.

Second, Don Boudreaux offers a great piece serving as your periodic reminder that trade deficits are misnamed and misunderstood happenstance that the economically illiterate get hung up on.

In contrast, when someone speaks of, say, “the US trade deficit with China,” absolutely no economically meaningful content is conveyed. In a world of more than two countries, the trade that the peoples of any pair of countries have with each other has no economic relevance whatsoever. Bilateral trade deficits or surpluses are economically meaningless.

We know what a protectionist such as Oren Cass refers to when, for example, he complains that the “US-China trading relationship became the most imbalanced in world history.” He refers to the value of American imports from China far exceeding the value of American exports to China. According to Cass and other protectionists, we Americans are therefore supposed to be alarmed. But the only alarming thing about Cass’s complaint is the gross economic misunderstanding that it reflects and fuels.

Even if we disregard the possibility that the Chinese are investing in America some of the dollars they earn by exporting to America, there’s no reason whatsoever to suppose that any two countries in our world of nearly two-hundred countries will buy and sell to each other the same amounts. Such an outcome could happen, but, were it to do so, it would be bizarre and surprising.

Let’s say that Americans in 2024 import from China $300 billion more than Americans export to China. Cass and other protectionists will point in panic to this ‘US trade deficit with China.’ But to anyone who understands economics, this panic is laughable. To see why, suppose that the Chinese spend all $300 billion on goods imported from countries in Europe, and then Europeans in turn spend this $300 billion buying exports from the U.S. In this hypothetical example — which isn’t remotely far-fetched — America can indeed be said to have a $300 billion trade deficit with China, but every cent of this $300 billion nevertheless returns to America as demand for American exports. This $300 billion of demand for American exports just happens to come from Europeans by way of the Chinese, rather than directly from the Chinese.

Nothing of significance in the American economy changes in consequence of this $300 billion of export sales being made to Europeans rather than to the Chinese. But to listen to people such as Oren Cass and other protectionists who write about America’s trade deficit with China, you’d think that something momentous — and ominous — is afoot.

These are but two of the ways politicians and technocrats attempt to gain our favor if not actually guide our lives. It is hard to escape the lure of these intuitive yet disastrously wrong attempts at mastering the world. Too many people start their thinking on these topics already past the event horizon. However, unlike an actual blackhole, I have confidence and optimism that all minds can be pulled free of the doom that awaits falling into these chasms.