–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –-
When Congress inserted “Buy America” protectionist provisions that required some goods (such as steel, cement, and textiles) financed by the stimulus bill to be made in America, our government invited a trade war with important economic partners. Now China and Canada are imposing their own protectionist regulations, potentially destroying well-paid American jobs in the export sector. Other countries may follow suit.
This week China reported that the government now requires stimulus projects to use domestic suppliers when possible, even though in February it promised to treat foreign companies equally. The Chinese $585 billion stimulus package has resulted in a World Bank growth forecast of 7.2% for China this year, far above other industrialized countries.
And on June 6 the delegates at the Federation of Canadian Municipalities passed a resolution calling on “local infrastructure projects, including environmental projects such as water and wastewater treatment projects, [to] procure goods and materials required for the projects only from companies whose countries of origin do not impose trade restrictions against goods and materials manufactured in Canada.”
The tragic losers of “Buy America” are free trade agreements and potential job growth in the American economy. Seductively, “Buy America” promises workers they can have it all — cheap goods from China, oil from Canada, as well as protection from global competition. But real life just doesn’t work that way. In reality, “Buy America” is shorthand for fewer jobs as other countries retaliate.
Many markets no longer have national boundaries but global reaches. America sits at the center of global markets for technology, equipment manufacturing, finance, banking, fashion, and advertising — to name but a few. When international markets expand, America grows. When barriers are erected to trade, jobs — and also wages —shrink.
Trade creates jobs not just through investments of foreign companies at home, but also by increasing employment at exporting firms. This effect, though less obvious, is far more significant. That’s why “Buy America” hurts employment.
Andrew Bernard, a professor at Dartmouth College, together with economists Bradford Jensen and Peter Schott, find that firms that trade goods employ over 40% of the American workforce. They conclude that approximately 57 million American workers are employed by firms that engage in international trade.
They analyze American imports and exports using customs documents that accompany shipments of goods crossing the border, along with reports of firms’ employment. The resulting information provides the most precise picture available of the employment effects of American trade.
Back in February, Caterpiller spokesman Jim Dugan declared, “Our position is that, while ‘Buy American’ may sound good, in fact we’re very concerned that if this stimulus legislation contains the ‘Buy American’ provision, other nations and regions of the world would follow our lead and pass similar provisions.” He was right.
Trade also benefits millions of families who cut their shopping bills by buying low-cost imports. To take just one example, the amount that Americans spend on clothing has declined by 21% in real terms over the past 20 years, yet our closets are fuller than ever.
The benefits of free trade, such as increased employment, higher economic growth, and lower prices, are often taken for granted. But the disadvantages of free trade — such as the occasional instances of shuttered plants and lost jobs where American firms are not as efficient as international competitors — are all too visible.
Trillions of international dollars pass through America each year not because we are isolated, but because we are the hub of the world. Terrorists twice attacked the World Trade Center because the building symbolized international trade. They destroyed a building and murdered thousands of innocent Americans, but they failed to vanquish world trade. Sadly, politicians who erect barriers to trade are hostile not only to trade but to our country and to our jobs.
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“If these theories are testable in a scientific manner where do you conduct the controls?”
The economy.
“if you abstract enough reality from the data you can produce a nice curve that in the abstract simulates reality.”
Economics is more then simple curves. It is also linking the relationship between factors. It is about looking at what is happening *right now*, figuring out why, and what led to it. That is how the theories were developed, much like science.
“how many CEOs or entrepreneurs are economic professors or fellows, hmm seems the only jobs these people get are professor and fellowships”
Very few business men are economics professors. But most will have some knowledge of economics. And even if they didn’t, it doesn’t stop them from making decisions which fit with economic theory. The law of supply and demand will apply, whether you know about those laws or not.
“physicists stay in schools and think tanks and engineers actually do the real world work”
Very few people who study economics become those ivory tower intellectuals you dislike. Most go on to become financial advisers, businessmen, bankers ect. Some even become CEOs.
“they work well in the normative world where you can abstract reality into something manageable as opposed to the ugly real world.”
The next time you hear the guy on business news doing that jibber jabber about the interest rates and the inflation whatsits, think back on your words. It’s all economics.
“Anyone with a basic knowledge of business knows that, but sadly most economic fellows don’t have that.”
Do you have a basic knowledge of business, then?
To Anon,
It doesn’t look like you have practical experience with modeling. There is only one science that pretend to be strict and logical - math. All other sciences use math as tool to build mathematical/quantitative models. Every model uses many assumptions and conditions to accommodate real world scenarios.
Once you done with assumptions and conditions your perfect model produce perfect numbers, but while they match your perfect model they may be far away from real world.
I used to do financial models and saw may of them falling apart well before last recession.
1. Tell me about at least one model that can reliably forecast economy for 2-3 yrs ahead.
2. Tell me why nobody used it in 2006…
Here is another simple example:
Everybody tells protecting market is bad for economy, country will self suffocate. Look at UK in 1970’s (That is your ‘black box’ model
Look at China today that have general import tariff of 9.8% and enjoys 8% growth (That is my ‘black box’ model
).
Opppsss…
Nice try, but you fail on so many levels it’s laughable. If these theories are testable in a scientific manner where do you conduct the controls? Oh you don’t mean they are scientifically testable, you mean if you abstract enough reality from the data you can produce a nice curve that in the abstract simulates reality. I really don’t think social “scientists” understand what science means.
Let’s see how many CEOs or entrepreneurs are economic professors or fellows, hmm seems the only jobs these people get are professor and fellowships, but you keep thinking that real business people go to the ivory tower intellectuals. It’s the same reason why physicists stay in schools and think tanks and engineers actually do the real world work of advancing technology.
It’s not that intellectuals have no value, it’s they work well in the normative world where you can abstract reality into something manageable as opposed to the ugly real world. You need theorists, but you don’t simply rely on their ideas without recourse to reality. Anyone with a basic knowledge of business knows that, but sadly most economic fellows don’t have that.
Free trade works only in the normative world, so while it may appear inevitable there, it’s not working in reality. Primarily because there is no real “free trade”, because all nations cheat. In a perfect world it would work, sadly we don’t live in a perfect world. So keep on repeating that free trade is the way ..can I get an AMEN!
Nice try, Frank.
Economics is testable. Every theory from demand, supply, share market prices, interest rates, utility, opportunity cost, inflation, free trade, tarrifs, waste and economic growth are all based on data observation from the real world.
These theories are all able to be linked to reality, and are based on real life observations. So to claim they are not testable, or do not apply to real life, is incorrect. And almost laughable to anyone with even basic economic knowledge.
Every time economic statistics come out, you can see the relationship between that number, and other factors in the economy.
Real people, in real business, make decisions based on economics every day. And they make decisions which comply with economic theory. They see with their own eyes that economics does apply to the real world.
Even this recession is explainable in economic terms, and complies to economic theory.
Yet you can dismiss all of this proof with a wave of your hand, and simply claim economic theory does not apply. Just because you don’t like the idea that an inefficient American industry can get chucked out on it’s ass if it can’t compete with the real world.
Economics has more in common with science and psychology then it does with religion. Why not read some economic theory Frank? See for yourself.
If you do, and suddenly become an economist, it is no different from reading a science book and suddenly learning about the laws of physics.
I wold imagine that I am quite a bit younger than the majority of bloggers concerning this issue, but I will be praying that when I solidify my expertise I will not be as close minded as many of you economical ‘experts’. There are many different arguments posted, but I think that this issue needs to be looked at as a possible future problem. Wisdom would require foreseeing problems that very possible could occur. People do not need to fly of the handle at any remark that imagines the possibility of US crisis. The facts are stated…’Buy American’ weakens foreign trade, many countries economically idolize American ingenuity, therefore other countries could follow suite which would create less global trade. Diana states and cites that 40% of the US workforce is employed by world trade (57 Million Americans), and the decline in free trade would significantly diminish an already unstable job-market. Personally I do not believe that any country is prepared to run itself independent of foreign trade so all of you hot heads…calm yourself. Acknowledge the possibility of a problem and understand the America is obviously not the super power it once was, so preparation is priceless.
To Dale,
Wow!! You are the only ‘Free Trade’ supporter who actually answer questions. Thank you!
I hope you fogive my english :).
Here are few questions:
1. ‘Free trade’ claims -> that protectionism is bad. Including improt tariffs.
China imposes general import tariff of 9.8% and still doing fine.
2. You made the point that capital was running out of Britain to chase higher profits from unrestricted trade.
You were right but you missed bigger picture.
Capital running away from regulations, taxes and chasing higher return associated with cheep labor and few laws.
It is not about ‘free trade’.
As long as 3rd world countries allow abuse their labor capital will flow there. On top of this 3rd world quickly closing education & technology gap. As long as West enjoys orderly society and benefits of retirements/health care/etc our labor will cost more than in 3rd world. Instead of addressing this disbalance ‘free trade’ concentrates only on final cost. Make 3rd world countries provide benefits to their citizens and US can compete.
Economics is not a science it is a religion. It is more like the theory of intelligent design:
1. It is a theory which attempts explain the observations of the world, but it is not testable in a scientific manner.
2. Is feared by those who don’t understand it, and attacked by those who are not in a position to critique it.
3. It is unsupported by real world proof, as opposed to the alternatives which are obvious from real world evidence.
4. It’s proponents realize that their position is irrational and insist if you don’t agree you are too stupid to see it. So the only way they can argue for economics is to repeat empty mantras over and over until it seems to be accepted.
5. It’s proponents tend to be intellectuals, who also tend to be reluctant to accept that theory and reality often differ.
6. The proponents of economics seem to believe that just because they are in they have ideas that work in a theoretical vacuum that it also works in the real world.
7. The proponents of economics tend fall back on the ancient debating tactic that as they can’t possibly be wrong, this means the opponent *must* be wrong. AKA: “You’re wrong because I say so” argument.
Please why not post some quotes from the gospel of Adam Smith or Keynes or whatever secular saint you would have us believe over reality. You place your faith in empty mantras and theories, the majority will deal with reality. I wonder why it is the majority that fails to believe in your creed, I’m sure you’ll put that off on the masses being too stupid to grasp the wonders of your faith. It’s okay I’m very big on accepting people’s irrational beliefs, people have been inventing myths and religions for centuries, so don’t worry lots of people still believe in god, much like many still cling to the belief in free trade.
Economics is not a religion. Quite the opposite. It is more like the theory of evolution:
1. It is a theory which can explain the observations of the world in a concrete testable manner.
2. Is feared by those who don’t understand it, and attacked by those who are not in a position to critique it.
3. It is supported by real world proof, as opposed to the alternatives which are disproved by world proof.
4. It’s critics realise that their position is irrational as long as Economics remains cohesive theory. So the only way they can argue against economics is to attack it, rather then support their own contrasting views.
5. It’s critics tend to be anti-intellectuals, who also tend to be reluctant to learn about economics for themselves.
6. The critics of economics seem to believe that just because they are in the majority in the forum, this means they are correct.
7. The critics of economics tend fall back on the ancient debating tactic that as they can’t possibly be wrong, this means the opponent *must* be wrong. AKA: “You’re wrong because I say so” argument.
It should be pointed out that today because of environmental reasons many mines are ether closed or not allowed to open and the difficulties of starting mines are a difficult thing just the opposite of Mexico.
I have read that minerals such as tungsten are not mined in the US due to these reasons and its mostly imported from China.Note its a strategic metal of critical nature so if you ever went to war with China you would be in a really bad situation.
And it was pointed out in the article that because of these policies the US is even less ably to pay off deficits in trade simply because they are not producing metals such as this.Really its almost as if the US wants to rune itself rather than upset any vocal minorities.
Actually I prefer the world becoming interdependent after all if you depend on China as much as they depend on you the chances for war are far less.
I really think if it was not the case it should be made into one.Great idea I would say to keep the world at peace.
Frank Castle wrote:It’s like I said economics is much like religion, the acolytes know and the rest of the unwashed masses must take their pontifications as gospel, despite evidence to the contrary. I know enough about economics to understand that there is theory and reality.
I wrote:
Hi Frank.
Odd that I see anti free trade people as having a religious view.
I am getting tired of repleting myself that’s its not just theory its been tried repeatedly.For the best example do a Google search on Britain and Margette Thacher on trade.Her country was turning into a third world as a result of constantly protecting unions and keeping cheaper products out.
A lot of wealth was still in Britten but it was largely invested outside of the country and want to guess what one of the reasons might be.
I will give up event trying to reply unless someone shows they even listen.
AND Frank Castle also wrote: I know far more about the reality of economics than any person who has been a professor or fellow and never worked in the real world. Theory is fine for books but rarely survives outside the rarified air of the ivory tower.
Ya that’s easy to claim.I used to see this a lot when I hung around the news group sci.physics and yes sometimes the experts do get stuck on dogma.I used to hang there a lot testing my own theory of the mechanism of how time and space got created.Oddly I am probably right but yet the theory never caught on.Yes there is a web page on Incompetent and unaware and we all need to be careful not to fall into that trap.I was terrified that I had.Since no one here appears to actually read or remember any of the disagreements I post I wont bother to find that page link.Find my web site if you want to know more.To much like religion here.
June 24th, 2009 7:04 am GMT - Posted by Rick
I find it fascinating to read the faith based economics crowd that promote “free trade” regardless of what the facts in front of their eyes are. There is no “free trade” in the world. Every other country protects their own interests and manages their affairs as they see it to benefit their own country.
I reply:That’s one of the main points that if you do not get free trade why in the world would you want to give free trade to another country.Its possible that the politicians may have failed some and that’s something that would need to be fixed.
June 23rd, 2009 10:06 pm GMT - Posted by It makes you think
It is incredible to see the amount of armchair economists who have suddenly appeared as a result of this crisis.
I replied:Finally a bit of light at the end of the tunnel, thanks.
To add a bit more.
Remember one of the main reasons for wanting free trade is because of the way products today must be manufactured to be cheap.
When I first learned about manufacturing one of the first things you learn is that even the cost to make a door handle for a car was something like $20,000 years ago when the textbook was written.
So if you markets were small and you only made the 1 car or computer the costs would be astronomical and not much better if you built one for only one state.
If the US were to have 10005 import taxes and every one else applied the same costs to importing products from the US we wold all go back to horses and buggy days.Even tractors must be made in quantities to become cheap.We need the world more than the world needs the US now.
When everything was hand made anywise free trade was not so important.
You are absolutely right Frank. Balance of trade means exactly what it implies. BALANCE! Large trade deficits and surpluses are undesirable. Japan has had stagnant growth for years as it could not maintain it’s trade surplus. The natural tendency is for currency to inflate when that currencies nation has over time sustained large trade deficits. Eventually the purchasing power of said currency is so weakened the imported goods they once purchased in mass become unaffordable. This in turn causes economic contraction for the exporting country.
The overwhelming motivator to ignore the principal of balance is greed. I can buy more if it is cheaper. I can sell more for less with better profit margins. I can bring more of another nations wealth to my nation if I export successfully and in quantity. Neither scenarios are ever sustained. It is all in the “Wealth of Nations” by Adam Smith printed in 1775.
To Rick,
May be you and me are wrong.
But our decorated economists like preaching and don’t go down to little details to explain were our logic went wrong.
So repeat 20 times ‘free trade’ is good for US. Still didn’t get? repeat anther 100.
BTW She use China us example of growth in ‘free trade’ environment. She forgot mention that China imposes general tariff of 9.8% on all imports. According to Dina’s logic China should self-suffocate.
Both tendencies are present
1. ‘Free Trade’ creates some jobs
2. ‘Free Trade’ kills some jobs
Instead of general blah…blah…Blah… We cannot choose one other another without quantities things. I love to see numbers that prove any point. So far Diana oversimplified things to the point of no-sense. She claimed:
1. 40% of US workforce profit from ‘free trade’.
Does it mean that 60% of work force will benefit from restrictions?
2. ‘Free trade’ promotes free competition.
In most cases ‘Free trade’ doesn’t promote free competition because it focus on good’s price while leaving outside of the scope how goods were produced. West/US labor enjoy social benefits (good work environments/pension plans/health insurance/vocations etc) that drive up cost of our goods.
3. Cheep clothing from China. Price went down 21% over 20 yrs. 1-2% annual inflation should give us more that 21% over 20 yrs.
It’s like I said economics is much like religion, the acolytes know and the rest of the unwashed masses must take their pontifications as gospel, despite evidence to the contrary. I know enough about economics to understand that there is theory and reality. Economists don’t seem to grasp the difference between the two.
The patent naivete of this article is evidenced by the title, this buy American push isn’t starting a trade war, it’s simply joining in a war that’s been raging and America has been losing.
I know far more about the reality of economics than any person who has been a professor or fellow and never worked in the real world. Theory is fine for books but rarely survives outside the rarified air of the ivory tower.
I understand that “free trade” does help the rich get richer and allows other nations to edge up on America and that’s apparently what some people want. Fortunately, the unwashed masses outnumber the acolytes of “free trade” and despite it’s “inevitability” free trade will need to wait until good times return to fool people with it’s false promises.
I find it fascinating to read the faith based economics crowd that promote “free trade” regardless of what the facts in front of their eyes are. There is no “free trade” in the world. Every other country protects their own interests and manages their affairs as they see it to benefit their own country. As we did prior to WW2. It was only after that we were so rich by comparison to the rest of the destroyed world that we allowed other countries liberties with trade to enrich them. Now we have been so rich, so powerful, so entitled for so long we don’t see that we are in fact giving away our birthright and probably won’t see it until we are truly humbled by the world. I hope it doesn’t take that long for sanity to prevail. Anyhow, below is a tutorial on how to calculate GDP. Clearly one can see that two important components are the trade deficit that subtracts and if business investment is going into China and elsewhere in the world rather than in the USA it subtracts. In the USA, the gdp “growth” Diana speaks of is the consumer spending and government spending driven by foreign credit. The virtuous growth driven by exports and business investment is what drives our trade “partners” gdp and is what we need here. Not growth driven by credit. More people should educate themselves and they would realize that there is no way to justify with facts a structural trade deficit and every reason for countries like China to try and promote a structural surplus to enrich their country at our cost.
———————————————————
Tutorial: How to calculate the GDP
The basic formula for calculating the GDP is:
Y = C + I + E + G
where
Y = GDP
C = Consumer Spending
I = Investment made by industry
E = Excess of Exports over Imports
G = Government Spending
This formula is almost self-evident (if you take time to think about it)!
GDP is a measure of all the goods and services produced domestically. Therefore, to calculate the GDP, one only needs to add together the various components of the economy that are a measure of all the goods and services produced.
Many of the goods and services produced are purchased by consumers. So, what consumers spend on them (C) is a measure of that component.
The next component is the somewhat mysterious quantity “I,” or investment made by industry. However, this quantity is mysterious only because investment does not have its ordinary meaning. When calculating the GDP, investment does NOT mean what we normally think of in the case of individuals. It does not mean buying stocks and bonds or putting money in a savings account (S in the diagram). When calculating the GDP, investment means the purchases made by industry in new productive facilities, or, the process of “buying new capital and putting it to use” (Gambs, John, Economics and Man, 1968, p. 168). This includes, for example, buying a new truck, building a new factory, or purchasing new software. This is indicated in the diagram by an arrow pointing from one factory (enterprise) to another. In essence, it shows the factory “reproducing itself” by buying new goods and services that will produce still more new goods and services. NOTE: There is a money-flow relationship between personal savings, S, and investment, I, but this does not figure directly in calculating the GDP. See Exercise 3 below.
The next component is E, or the difference between the value of all exports and the value of all imports. If Exports exceeds imports, it adds to the GDP. If not, it subtracts from the GDP. Thus, even if a nation’s people work very hard to produce products for exports, but still import more than they export, the nation’s GDP will be negatively impacted. This is one of the reasons trade deficits are frequently a political target. Because the balance of trade can be either positive or negative, we can rewrite the equation, showing the components of E, using X for Exports and M for Imports:
Y = C + I + (X - M)+ G
You may see the formula for the GDP written this way, and it may be easier for you to remember in this format.
The final component is G. The government buys (with your tax money) goods and services (G). These purchases are a measure of those goods and services produced. Be aware that many people make the mistake of thinking that the money paid in taxes and spent by the government is “lost” and therefore subtracts from the GDP. Tax money may indeed be spent inefficiently but this fact has no bearing on the calculation of the GDP.
NAFTA and most other “free trade” agreements are merely a race to the bottom for American workers and their wages.
Trade with other nations IS a good thing, however, all to often, the nations with which we’re trading are not free, thus major manipulations occur and far worse.
How is it a good thing to shift our wealth to a communist, socialist or dictatorial setting?? They will only end up owning us in the long run.
Trade deficits really are going to be the death of us as a nation. I certainly don’t relish the thought of being owned by the Chinese or other similar regime; do you?
The US is quite simply being prepared to become a future Russia, in that the Army and supplying the Army is the only thing that matters, and that the rest of the populations are to be subservient to this state of affairs, employment be damned. As long as the Armed Forces are happy the rest can go to Hell.
How bad does our trade deficit have to get before you will admit you are wrong? We are giving away our wealth, and we’ve turned competitive advantages into disadvantages. The whole game of free trade hasn’t been about trade, but more about global wage arbitrage. You don’t need and econ degree to know (although I have one), that real wages are falling for the majority of Americans.
As a non-american, I find this debate very interesting. But first, a little background. Approx 80 of my country’s corporations are foreign-owned - almost all of them, except some of the car and electronic manufacturers are American. I’ve gotten fat at MacDonalds, KFC and Burger King. I drink way too much diet-coke. I buy Chinese crap at Walmart and Costco. I wish we had Targets here but alas have to wait to shop there during shopping trips - 2 or 3 a year. I buy stuff on ebay that’s unavailable here - usually from the US. I can speak Starbuck’s lingo surprisingly well - it took awhile but I got it eventually. I watch all kinds of American TV shows which are generally paid for by American corporate advertising. I watch Hollywood movies, way more than I admit to my urbane friends (and I suspect that they might do the same). Once in a blue moon, I’ll pick up and might buy a National Enquirer. When I smoked I used to smoke Camel Filters. Most people at restaurants here seem to drink either Bud or Coor’s light. I buy my gas usually from a large American vendor. I eat Haagen-Daz or Ben and Jerry’s, etc.
Now, you protectionists are telling me to turn my back on American products and become nationalistic? What the heck do you expect me to do? Its madness of course, but free trade is a hard path and it takes confidence every once in a while to get you through the hard times.
America, please don’t let this bump - and I know it is a very hard bump for many of you - but you know the whole world is feeling it - don’t let this bump lead you and the rest of the world into the beggar-thy-neighbor policies of the 30s that massively contributed to the last war to end all wars…
It is incredible to see the amount of armchair economists who have suddenly appeared as a result of this crisis.
They begin with the assumption that recessions and free trade are ‘wrong’. And this makes them think economic theory must be ‘wrong’. And this makes them think that suddenly their opinion becomes valid.
But there is a problem with speaking about economic issues when you have no economic knowledge. The problem is that you are commenting on a system you don’t understand.
Your logic might be completely wrong. But as you have no economic knowledge, you will not be in a position to see that you might be incorrect.
And if an economist tells you that you are incorrect, are you going to listen to him? Nope. Because any argument he might provide you will be based on economic theory. And as you don’t understand economic theory, you will just dismiss his words.
So the economist will walk away shaking his head, while you remain confident in your own conceit.
Did you study economics at university? Do you work in big business? Did you even take economics-101 at high school?
Only YOU can know how much economic knowledge you have. And only YOU can know if you are speaking about things you know nothing about.
But here in cyberspace, everyone is an expert. Any economist who reads your words will be able to see your flaws quite easily. But who believes economists anyway?