Category Archives: Uncategorized

Alfred Marshall on Free Trade

Here is a gem of a quotation by Alfred Marshall on free trade, unearthed by Doug Irwin on p. 221 of his 1996 book Against the Tide: An Intellectual History of Free Trade: 

“[Free trade] is not a device, but the absence of any device. A device contrived to deal with any set of conditions must become obsolete when they change. The simplicity and naturalness of Free Trade–that is, the absence of any device–may continue to outweigh the series of different small gains which could be obtained by any manipulation of tariffs, however scientific and astute.”

In the News: Trade Policy in 2020

The Washington Examiner‘s Sean Higgins quotes me in a piece looking at possible developments in trade policy in 2020, now that China Phase One and USMCA are finished:

Ryan Young, a trade policy expert with the libertarian Competitive Enterprise Institute, nevertheless sees the threat of renewed trade wars as low for the foreseeable future. The administration has an interest in not stirring things up too much before the fall elections, he said. “Of course, with this administration, things can change with a single tweet,” he said.

Read the whole thing here.

In the News: China Phase One Trade Deal

I am briefly quoted in a lengthy Washington Times story about the Phase One trade deal with China that was signed this week.

Fred P. Hochberg – Trade Is Not a Four-Letter Word: How Six Everyday Products Make the Case for Trade

Review of Fred P. Hochberg, Trade Is Not a Four-Letter Word: How Six Everyday Products Make the Case for Trade (New York: Avid Reader Press / Simon & Schuster, 2020)

Hochberg, who headed the Export-Import Bank from 2009-2017, has written a surprisingly good book on trade. Few economists have favorable views of Ex-Im. The agency’s longstanding corruption problems, cozy relationships with Boeing and other large companies, and its mercantilist economics make it almost indefensible on the merits (see my papers here and here). As with many ex-government officials, Hochberg is a much better economist when he doesn’t have to play politics.

Unfortunately, Hochberg says little in the book about his eight years at Ex-Im. This would have made for fascinating reading. It would have been useful to learn, in extended form, about Hochberg’s views on how Ex-Im works in practice, how he would defend the agency, and where he would criticize it.

Hochberg also presided over the most eventful chapter in Ex-Im’s 85-year history, which included its authorization lapse in 2014-15, when the agency practically shut down. Even after its eventual reauthorization, Ex-Im operated at a severely limited capacity for the remainder of Hochberg’s tenure. The Senate refused to confirm the new board members needed to approve large transactions. Ex-Im did not return to full capacity until 2019.

While Hochberg does refer to his old job several times, it is usually in passing, and never in detail. He does not once mention the great post-2014 Ex-Im political controversy.

By sticking instead to broader-brush trade policy and avoiding anything too controversial, Trade Is Not a Four-Letter Word comes across as a subtle job application for a higher-level position in the next Democratic administration, such as Commerce Secretary or U.S. Trade Representative. If the Ex-Im version of Fred Hochberg took such a job, trade policy would likely continue to be ridden with special-interest handouts and trade-unrelated inititatives. If, instead, the Fred Hochberg who wrote this book took office, trade policy would be not perfect, but it would be pretty good, and certainly an improvement over the last few administrations.

Unfortunately, I have a hunch which side of Hochberg would prevail if he re-entered politics.

Like many politicians who also know better, Hochberg almost bends over backward trying to argue that the American middle and lower-middle classes are net losers from trade. These are America’s largest voting blocs, and many of them live in swing states.

This is a difficult long-term case to make when living standards by almost every measure, from life expectancy to average height to access to air-conditioning, internet, and other technologies, have been improving for both rich and poor for more than a century. In terms of hours of work needed to afford everything from a refrigerator to a new car, goods are becoming more affordable and higher-quality over time, which benefits the poor most of all. This has been happening for decades, and the process is not slowing down. Trade, as Hochberg persuasively argues elsewhere throughout the book, is a major reason why. This doesn’t stop him from trying to appeal to likely voters, though his biggest successes come from reasoning through anecdote, and by omission.

Still, Hochberg gets the big picture right, and he paints it well. The six chapters on the six products he chooses as examples are the strongest part of the book. Trade makes modern life possible, he argues. Whether it’s taco salads, minivans, bananas, smartphones, college degrees (an odd choice, but think of it as a stand-in for human capital), or Game of Thrones, just about everything we enjoy today is a product of international trade. Moreover, this is a good thing. What we have today is far better than what we would have under closed borders. As other thinkers from Hans Rosling to Matt Ridley to Julian Simon have argued for a long time, living standards today are higher, health care is better, ideas are more rigorously tested, and technology improves faster. This is what happens when there is a relatively open global market for both supply and demand.

Narrowing down to policy specifics, Hochberg is strongly anti-tariff. One hopes he would maintain this stance in a cabinet role or in elected office. His long section on why trade deficits don’t matter—in short, because people get something in return for their money—is similarly excellent. It is also inconsistent with his Export-Import Bank tenure. Ex-Im is intended, at least in part, to reduce the U.S. trade deficit by increasing exports. But at least Hochberg knows better now, and is willing to say so publicly now that he is out of office, though he doesn’t mention Ex-Im’s role in the capacity.

His defense of some other policies is weak, such as his case for defending trade adjustment assistance. He does not favor similar measures for workers displaced due to non-trade factors, such as technology or changing fashions. His way of resolving this inconsistent stance is unconvincing. Essentially, he argues that trade-related job displacements are due to government policy, while other job displacements are not. Therefore, the government owes them something to soften the blow of trade-related job displacements. But trade decisions are made by private individuals, and the role of policy in those decisions is indeterminate; how does one calculate how many job losses, or which ones, is policy-related? In jobs that are cut for more than one reason, which is most cases, what proportion is policy-related?

Moreover, many non-trade government policies cost jobs. These range from barriers to entry to environmental requirements to minimum wages to cumulative paperwork burdens. By Hochberg’s criteria, these displaced workers deserve compensation, yet he doesn’t favor it. I would argue that rather that treating symptoms with compensation, it would be better to treat the root problem by getting rid of the bad policies in the first place. But that’s for another time.

Taken as a whole, Hochberg is neither a brave nor an adventurous thinker, but he gets the big picture. As a bonus, Hochberg’s prose style is informal and easy to read, though the Game of Thrones references get to be a little much at times. Trade has costs and benefits. Add them up on a ledger, and the benefits are greater, by far. However, Hochberg’s interventionist streak is almost reflexive and seemingly unthinking. Markets fail all the time, including in international trade. That does not mean policymakers can improve matters. Given knowledge and incentive problems, this is rarely the case. The view that market failures can be fixed by an idealized government is known as the Nirvana fallacy, and Hochberg would do well to take it into account.

Just as a fish doesn’t think of the water it swims through, so do Washington types rarely think about the complicated web of policy they make others swim through. It’s just there, and always has been. It’s nothing to question or give careful thought to in a big-picture sense. Trade Is Not a Four-Letter Word definitely has that Washington vibe to it. But if Hochberg moves more Washington types to favor freer trade at the margin, his book will have done more good than he has, or will, in office.

In the News: China Trade

I can’t read the article due to a paywall, but I am quoted in the Las Vegas Review-Journal about the just-signed Phase One of a trade agreement with China.

Senate Passes USMCA, Sets Bad Precedent for Future Agreements with China, UK, EU

The U.S.-Mexico-Canada (USMCA) trade agreement passed the Senate today, 89-10. As with the Phase One agreement with China that was also signed this week, USMCA is valuable damage control. Three years of unpredictable tariff increases, threats of increases, and diplomatic tensions will hopefully have more stability going forward. Unfortunately, while NAFTA needs some updates, few of them are contained in USMCA’s more than 2,000 pages.

As far as short-term policies, USMCA is not very different from NAFTA. USMCA’s real cost is long-term, which is why Iain Murray and I came out against USMCA last month. Its bad precedents will likely inform upcoming agreements with China, the United Kingdom, and the European Union. Unlike USMCA, these upcoming agreements are potentially transformative. It is important to get them right.

Trade agreements should stick to trade issues. That is the real lesson of the USMCA battle. USMCA is filled with trade-unrelated provisions covering labor, regulatory, environmental, and other policies. It contains naked giveaways to business, labor, and environmental interests. To the extent these provisions touch trade at all, they make it more cumbersome—opposite USMCA’s purpose. These same special interests will almost certainly ask for more, and receive, larger handouts in future agreements.

China is struggling to choose between freedom and continued despotism. The United Kingdom is leaving the European Union. And the EU itself is undergoing changes both internally and on its place on the world stage. The U.S. must engage each of them in ways that ensure mutual peace and prosperity. Part of that larger agenda is free trade. Our upcoming trade agreements with them must be open, transparent, and contain as few trade-unrelated complications and special interest giveaways as possible. These side agreements risk scuttling needed reforms and inflaming diplomatic tensions, while increasing corruption.

USMCA sets a bad precedent for these more important upcoming agreements. Its ratification makes it much harder to overcome political inertia and move global trade policy in a simpler, more open direction. USMCA may be a fait accompli, but it is not too late to learn from it and do future agreements the right way. This means sticking to trade and, to the extent possible, leaving politics out.

Minimum Wages Rise Across the Country

Twenty four states rang in 2020 with minimum wage increases. Most of the increases are modest, so the tradeoffs will be, too. But there was curiously little discussion of those tradeoffs. This is a common tendency among both the media and the general public. They often prefer to either deny that tradeoffs exist, or else play them down. This is unfair to affected workers.

The New York Times editorial board, for example, in a recent editorial titled “Double the Federal Minimum Wage,” opens:

Opponents of minimum-wage laws have long argued that companies have only so much money and, if required to pay higher wages, they will employ fewer workers.

Now there is evidence that such concerns, never entirely sincere, are greatly overstated.

Not only does this piece downplay unemployment tradeoffs, it is one of only two types of tradeoffs it mentions. The editorial also calls for increasing tipped workers’ wages, but those workers mostly disagree, preferring sometimes-informal tipped income over a higher formally reported wage.

Regarding unemployment, the Times piece cites the famous 1993 Card and Krueger study that found no unemployment increases in the aftermath of a New Jersey minimum wage increase. That study relied on survey data, in which business owners sometimes give less-than-honest answers, so as not to appear stingy or heartless. Card and Krueger also did not control for outside economic factors, or what statisticians call “the dreaded third thing.” These relevant third things include macro-level financial, economic, and monetary policy conditions, and local government policy changes other than minimum wage increases. By focusing on only one industry, fast food, Card and Krueger also did not see how other sectors responded to the same increase and possibly affected each other’s behavior.

Job cuts are one of the rarest tradeoffs to minimum wages. It is a drastic measure employers will take only if they have to. Instead, employers typically make much subtler, but more widespread cuts in other areas so they can avoid firing people. This is why, while most studies do find job losses from minimum wage increase, they are typically modest. This is not a victory for minimum wage increase advocates. It means they are not looking very hard for tradeoffs.

My recent paper focuses on those many tradeoffs. When wage pay goes up, non-wage pay goes down to roughly cancel it out. That means cuts to vacation time and perks like free food or parking, less generous insurance, less workplace flexibility, less attention paid to working conditions, and on and on. The mix of tradeoffs is different at every company, and for every affected worker inside a given company, but their rough effect is to roughly cancel out the benefits of the increase. Moreover, larger companies take advantage of minimum wage laws to artificially hobble smaller competitors by raising their labor costs. That is where the debate should be. Jobs are a small part of a much larger picture.

While the House passed a $15 federal minimum wage bill last year, the Senate is not likely to take it up. The more than 50 increases that have just taken effect are all at the state and local level, but minimum wages will almost certainly be a significant campaign issue in 2020. Regardless of November’s election results, next year’s incoming Congress will likely attempt another increase next year, just as most Congresses have over the last 80 years or so.

For more on minimum wages, see my paper “Minimum Wages Have Tradeoffs.”