Will conservatives resist protectionism and industrial policy

Are President-Elect Trump's border tariffs the right way to go? Ronald Reagan imposed "voluntary restraints" on Japanese auto exports, thereby creating 44,100 U.S. jobs. But the cost to consumers was $8.5b.

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WASHINGTON, JANUARY 18, 2017 – Conservatives have long believed that the free market is the form of economic organization most consistent with other freedoms, including freedom of speech and religion.

Donald Trump never presented himself as either a conservative or an advocate of free markets.

Whether he has any carefully considered economic philosophy at all is less than clear.

He promoted the idea during his campaign that the reason for growing unemployment among low-skilled workers was bad trade deals. Since the election, he has promoted ideas such as tariffs on imported goods and has put pressure on individual companies to reverse plans about where to manufacture their products.


This sounds very much like a government-imposed industrial policy; it is really a form of socialism.

Beyond this, it seems to misdiagnose the real economic problems we face. How conservatives respond will tell us whether economic principles or partisan politics are at work.

To resolve any problem facing society, it is important that it be properly diagnosed. The reason for the very real problem of unemployment may be something far different and more complex than the analysis Mr. Trump has presented. It seems clear that robotics and other technological advances are responsible for the loss of most jobs, not trade.

A Ball State University study of the 5.6 million manufacturing jobs lost between 2000 and 2010 shows that trade accounts for 13 percent of job losses and productivity improvement accounted for more than 85%.  The study declared:

“Had we kept 2000-levels of productivity and applied them to 2010 levels of production, we would have required 20.9 million manufacturing workers in 2010. Instead, we employed only 12.1 million.”

Douglas A. Irwin, a Dartmouth College economist, notes that Chinese imports may have cost almost 1 million manufacturing jobs in nearly a decade, but “the normal churn of U.S. labor markets results in roughly 17 million layoffs every month.”

In his book “An Extraordinary Time:  The End of the Postwar Boom and The Return of the Ordinary Economy,” Marc Levison notes that Ronald Reagan imposed “voluntary restraints” on Japanese auto exports, thereby creating 44,100 U.S. jobs.

But the cost to consumers was $8.5 billion in higher prices or $193,000 per job created, six times the average pay of a U.S. auto worker. Over the long run, notes Lawrence Katz, a Harvard economist who studies labor and technological change, automation has been much more important than trade in accounting for job loss. “It’s not even close,” he says.

In the 2016 presidential campaign, no candidate talked about automation on the campaign trail. Technology is not as convenient a villain as China and Mexico and there is no clear way to stop it. And many of the leading technology companies are in the U.S. and benefit the country in many ways.

Globalization is indeed responsible for some job loss, particularly trade with China in the first decade of this century, which led to the rapid loss of 2 million to 2.4 million net jobs, according to research by economists including Daron Acemoglu and Dagid Autor of M.I.T.

Still, over time, automation has had a far bigger effect than globalization and would have eventually eliminated these jobs anyway, said Autor.

When Greg Hayes, the chief executive of United Technologies, agreed to invest $16 million in one of its Carrier factories, in response to pressure from then President-elect Trump to keep some jobs in Indiana instead of moving them to Mexico, he said that the money would actually go toward automation.

“What that ultimately means,” he declared, “is there will be fewer jobs.”

The Carrier bailout, in which the air-conditioner company was given $7 million in tax incentives in exchange for scaling back some offshore plans, is, to those who genuinely believe in free enterprise, bad politics, bad policy and bad precedent.

Carrier had plans to close two facilities in Indiana, transferring that work to Mexico and moving or eliminating about 1,800 jobs. Carrier will still close one of its Indiana facilities and is still moving most of the jobs to Mexico

According to National Review, “At least 300 of the jobs ‘saved’ in this deal were never scheduled for transfer to Mexico to begin with. Carrier, bolstered by that $7 million corporate welfare handout, will keep a few hundred positions in Indiana, at least for a time.”

It is planning a multi-million dollar automation investment that will eliminate many of them. Seeing to the long-term economic policy of the U.S. is not an occasion for flitting between crises, real or perceived, and intervening with the force of the presidency. We are not going to ensure that there are good blue-collar jobs for Americans who work in places like Carrier factories 30 years hence by bribing and pressuring a few companies here and there to keep a few hundred workers in exchange for some political goodwill.

We are not going to ensure that there are good blue-collar jobs for Americans who work in places like Carrier factories 30 years hence by bribing and pressuring a few companies here and there to keep a few hundred workers in exchange for some political goodwill.

What Trump and Pence have done is not economic policy at all, but pure politics of a not especially fruitful kind.”

Donald Trump has threatened to punish with a hefty border tax companies that send U.S. jobs overseas and has threatened foreign producers with oppressive tariffs. Conservative economists Stephen Moore and Larry Kudlow, writing in Investor Business Daily, warn of the danger in such plans:

“The last American president who was a trade protectionist was Herbert Hoover. Obviously, that economic strategy didn’t turn out so well—-either for the nation or for the GOP…Does Trump aspire to be a 21st century Hoover with a modernized platform of the 1930 Smoot-Hawley tariffs that helped send the U.S. and world economy into a decade-long depression and a collapse of the banking system?”

While Trump is correct when he complains about China’s unfair trading practices, Moore and Kudlow point out, including pirating our technologies and patents and counterfeiting our goods,

“…clapping Trump’s punitive tariff on imported Chinese goods will hurt Americans at least as much as it does Beijing…Many voters may have forgotten that Trump’s proposed 35% tariff on imported goods is nothing more than a tax added to the cost of the products they buy. Not only would it be the biggest tax increase on U.S. consumers in modern times, it would hurt the most vulnerable people in our economy. Walmart has been one of the greatest anti-poverty programs in world history, and it has achieved the ‘everyday low prices’ that greatly benefit the poor and middle class in part through low-cost imports.”

Economists agree that prices at discount chain stores would rise sharply under the kinds of tariffs Trump has proposed, hurting retail businesses across the country, resulting in store closings, widespread layoffs and a weaker economy.

Last year, notes conservative Harvard economist Greg Mankiew,

“A panel of 51 leading economists of differing ideological views were asked to respond to the statement: ‘Adding new or higher import duties on products such as air-conditioners, cars and cookies to encourage producers to make them in the U.S. would be a good idea.’ Of these economists, 100 per cent said they disagreed with the statement.”

Shortly before his inauguration, Donald Trump threatened GMC to levy punishing taxes for importing small Chevrolet Cruze cars from Mexico. The Wall Street Journal reported that,

“The truth is the Detroit automaker uses a factory in Lordstown. Ohio to assemble most of the Cruzes it sells in the U.S.”  Washington Times columnist Don Lambro wrote that, “Micromanaging businesses by imposing higher trade taxes on employers and pushing consumer prices through the roof is no way to run a dynamic economy.”

There are many other questionable aspects to the Trump economic agenda. He has promised a tax cut that will reduce federal revenue by $7 trillion over 10 years and has promised an infrastructure initiative that may cost an additional trillion. He has promised a massive military buildup and has pledged not to make changes in Social Security and Medicare.

At the same time, he has pledged to move quickly toward a balanced budget. How this makes economic sense is difficult to understand.

How conservatives will respond to the Trump economic agenda will be interesting to see. Already, House Speaker Paul Ryan said,

“We’re not going to be raising tariffs.” The conservative Club for Growth said that the Trump threat “of a ‘big border tax’ is bad policy and bad precedent.”

Indeed, Trump’s threat to punish companies with a border tax if they displease him and punish foreign countries with high tariffs may be beyond his presidential authority. Article 1, Section 7 of the Constitution declares that,

“All bills for raising revenue shall originate in the House of Representatives.” Section 8 says, “The Congress shall have power to lay and collect taxes (and) duties.”

Rebecca M. Kyser, a professor at Brooklyn Law School, discusses the idea promoted by Donald Trump of imposing a tariff on imports through an executive order. She declares:

“It’s unconstitutional. That’s because the path to imposing tariffs along with taxes and other revenue-generating measures clearly begins with Congress and in particular the House, through the Origination clause. When presidents have raised (or lowered) tariffs in the past, they have tended to do so using explicit, if sometimes wide-ranging, authority from Congress.”

The challenge before Republicans and conservatives may end up as a decision between doing what is economically best for the country and is consistent with a free market philosophy and what is politically necessary to keep good relations with the White House.  Politics or principle? It will be interesting to see which prevails.

 

 

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Allan C. Brownfeld
Received B.A. from the College of William and Mary, J.D. from the Marshall-Wythe School of Law of the College of William and Mary, and M.A. from the University of Maryland. Served as a member of the faculties of St. Stephen's Episcopal School, Alexandria, Virginia and the University College of the University of Maryland. The recipient of a Wall Street Journal Foundation Award, he has written for such newspapers as The Houston Press, The Washington Evening Star, The Richmond Times Dispatch, and The Cincinnati Enquirer. His column appeared for many years in Roll Call, the newspaper of Capitol Hill. His articles have appeared in The Yale Review, The Texas Quarterly, Orbis, Modern Age, The Michigan Quarterly, The Commonweal and The Christian Century. His essays have been reprinted in a number of text books for university courses in Government and Politics. For many years, his column appeared several times a week in papers such as The Washington Times, The Phoenix Gazette and the Orange County Register. He served as a member of the staff of the U.S. Senate Internal Security Subcommittee, as Assistant to the research director of the House Republican Conference and as a consultant to members of the U.S. Congress and to the Vice President. He is the author of five books and currently serves as Contributing Editor of The St. Croix Review, Associate Editor of The Lincoln Review and editor of Issues.