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.
While we dread imports to a pathological degree, we yearn for exports also to a degree that isn’t healthy or sane.
There’s a definite relationship between them. Exports pay for imports and vice versa.
Back in the days of real currency exchange, an American exporters sold his goods to a British importer and was paid in British pounds. He couldn’t use British pounds to pay the wages of his workers, buy himself a nice suit or theater tickets, so he had to buy British goods in order to get rid of them. It worked the same way for foreign purchases, who could not use American dollars in their own country, so had to buy goods from America. That’s somewhat mitigated by electronic transactions today, something Hazlitt did not foresee.
Oddly, business people (like Donald Trump) who can understand domestic trade without a problem get a little weird when the discussion shifts to foreign trade. This leads to them seriously advocating things they would ordinarily consider insane in the domestic market – policies like foreign loans to stimulate exports, even to countries that have no means to repay the loans.
No one doubts this proposition when it is applied privately. If an automobile company lends a man $1,000 to buy a car priced at that amount, and the loan is not repaid, the automobile company is not better off because it has “sold” the car. It has simply lost the amount that it cost to make the car. If the car cost $900 to make, and only half the loan is repaid, then the company has lost $900 minus $500, or a net amount of $400. It has not made up in trade what it lost in bad loans.
And, yet we can’t seem to apply that same principle to a nation. Yes, it may help a special interest within the American economy, but at a net loss to the country as a whole. The long-term business and employment in America would be hurt, not helped, by foreign loans that were not repaid.
This is not a diatribe against foreign loans per se, but only against government guaranteed bad loans.
For the same reasons that it is stupid to give a false stimulation to export trade by making bad loans or outright gifts to foreign countries, it is stupid to give a false stimulation to export trade through export subsidies.
It is another case of trying to get rick by giving things away. It’s a short-term strategy for the benefit of a limited group that ignores the long-term universal consequences of a particular policy.