The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.
This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.
What a brilliantly timed topic, given who is about to be president. Hazlitt admitted that government have scary economic policies that scare the snot out of actual economists.
What is the use of talking about refinements and advances in economic theory when popular thought and the actual policies of government haven’t even grasped Adam Smith’s 200-year-old message.
Present-day tariff and trade policies are not only as bad as those in the seventeenth and eighteenth centuries, but incomparably worse.
The case for free trade has been stated thousands of times in the past 240 years, but people still don’t seem to grasp it. This confusion rests on a whole network of fallacies, the chief of these being that the immediate effect of a tariff on special groups somehow negates the long term effects on the whole community.
An American manufacturer of cars goes to Congress and asks for an imposition of a tariff on imported cars so that the foreign car manufacturer cannot “undercut” the American companies prices. By imposing a duty (or tariff) of x %, the lower priced foreign car magically costs as much as the domestic car and mysteriously makes the two cars “competitive”. Of course, the manufacturer is not thinking of profits when he asks for this. He’s trying to prevent the unemployment of his workforce and the loss of their “purchasing power.” Wink, wink, hint, hint.
Of course, there’s that fallacy again of merely looking at this manufacturer and his employess and not at the economy as a whole.
But suppose Congress didn’t buy the argument and repealed the tariff, or didn’t put it in place at all. The manufacturer might go out of business and thousands of workers would be laid off (think Detroit) and all the businesses they patronize would be hurt. This is the immediate result, but there are other results that are more beneficial, but harder to trace, so we ignore than. The consumers now can buy cars cheaper and these cars might be of better quality. They may have several hundreds or even thousands of dollars left over, which would mean they could buy something else.
By buying Japanese cars, they furnish the Japanese with money to buy American goods here, which employs more Americans in other industries. American employment on net balance has not gone done, but American and Japanese production on net balance has increased. Labor in each country is now more fully employed because of our trading relationship. Consumers are able to buy what they want where they can get it the cheapest.
Theoretically, if the tariff on Japanese cars is high enough, American manufacturers would find it profitable to compete against Japanese cars, but American consumers would be forced to subsidize the American auto industry. More Americans would be employed in the American auto industry, but there would be no net addition to the country’s industry or employment. American consumers would be paying for higher priced cars, which would mean they would have less money to spend on other things.
Of course, it’s easier to make the argument for the visibly auto industry than for the beleaguered American wallet and the cost to hundreds of other seemingly unrelated industries. It’s harder to quantify it, unless the tariffs are so egregious that they cause widespread unemployment.
Think Smoot-Hawley. This is a primary example of the real effect of a tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results in the net loss to the country in the form of wages. The American car manufacturer doesn’t see any actual increase in profit because the tariff goes into government coffers, so he has no incentive to raise wages. And, yet, the consumer has less money to spend because of the overall increase in car prices.
Only minds corrupted by generations of misleading propaganda can regard this conclusion as paradoxical. What other result could we expect from a policy of deliberately using our resources of capital and manpower in less efficient ways than we know how to use them? What other result could we expect from deliberately erecting artificial obstacles
to trade and transportation?
Tariffs have been described as a means of benefiting the producer at the expense of the consumer. This is only partially true. It hurts all consumers, but it doesn’t necessary benefit all producers. It only helps protected producers at the expense of all other American producers. It benefits certain special interests, which is what makes them attractive. Lowering an existing tariff might, temporarily, damage the protected industry and its employees.
Hazlitt paid special attention to the subject of tariffs as a means to collect revenue … which is how the American government was funded prior to the general income tax. A broadly applied, relatively low tariff of this sort tends to have limited effects on the economy as a whole. These should not be confused with protective tariffs that protected specialized industries. These are qualitatively different.