Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
Were the Mercantilists Right After All?
An imaginary seaport with a transposed Villa Medici, painted by Claude Lorrain around 1637, at the height of mercantilism.
I have found my views on free trade “evolving” over the past year or so. The Red Fish of 2010 or so would have happily provided a lengthy dissertation on the benefits of NAFTA and free trade to any group who wanted to listen. Or didn’t want to listen. 2010 Red Fish was like that.
I read this morning over at The Federalist an interesting piece detailing the way many Republican Party candidates no longer support free trade. Why is a base that went ballistic a year ago over the attempt to force the Ex-Im Bank back into existence now ready to back candidates who don’t support free trade? And more importantly (to me), why am I starting to agree with them? It’s 2016 now, and Blue Fish is starting to make sense to me.
I used to hear more from Mickey Kaus in the Ricochet podcasts, particularly when he was so dead set against immigration for economic reasons. He would always tie that back to how NAFTA and other free trade agreements hurt working class people. In response, Rob and Peter would talk about how free trade lifts all boats, provides new types of jobs and new industries, and results in a net positive economic effect. I still believe that’s true.
But what I am now having a hard time reconciling, particularly as I watch Trump do what he does, is that the benefits of free trade, which are near-impossible to identify in individual lives, don’t seem to compare very well to the very real impact that free trade has on specific people who lose their jobs and see negative pressure on their wages. If we make that argument about immigration, why shouldn’t we make that argument about free trade? One is shipping the job overseas, and the other is importing the employee. But it’s the same effect on the American who lost his job or took a pay cut, no?
Okay, so goods are cheaper. But what does that mean to someone without a job? Again, a benefit that is generally available (cheaper goods in the market) and a specific harm (an employee who lost his job).
The new information (to me at least) that’s weighing heavily on my mind is a better understanding of how the rest of the world is manipulating markets, providing subsidies, setting up barriers, etc., to limit our access to their markets or pull our businesses away. Yes, Boeing is in fact moving a plant overseas because the Ex-Im Bank is no longer giving them what they did previously. In the real world, where dismantling the Ex-Im Bank means Boeing planes are moved to factories overseas, isn’t subsidizing Boeing a good way to spend taxpayer money? It’s better than endless unemployment insurance and welfare, right?
Is it right to disarm mercantilist protections in a world where we’re the only ones really doing that? Why aren’t we protecting those workers from foreign competition?
Ricochetti — explain to Blue Fish why he is just wrong on this.
Published in Economics, Foreign Policy, General
The reason is that it throws a monkey wrench into the most efficient operation of comparative advantage in international markets. Firms that ought to be moving overseas don’t, and firms that ought to be moving here don’t (because of retaliatory tariffs by our trading partners) and so consumers pay more for all those goods.
Any tax will create dead weight loss for the economy. The goal is to minimize it. I’m not sure how to accomplish that, but my instinct is that it is not through tariffs. I’d be in favor of whatever can be shown to be the optimal combination of (a low level of) taxes.
Doesn’t any tax do that? Doesn’t the payroll tax surely sends firms overseas that shouldn’t go and discourages overseas firms from locating here?
Yes, its why most conservatives also despise the payroll tax.
Yes, I agree with that. It becomes an empirical question of how to raise government revenue at the least cost to the economy.
“The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” – Jean Baptiste Colbert
Agreed it’s an empirical question.
I’m not adamantly opposed to any and all tariffs, ever, as revenue-raisers. Nor is my economist husband. It is possible to imagine scenarios where tariffs could be less-bad than other forms of taxation. (It’s, for example, hardly inconceivable that some form of tariff would be less bad than some form of taxation that already exists.)
That said, I’m not gung-ho on tariffs – especially not on the kind of prohibitively high tariffs intended to sizeably curtail trade among nations.
Quite right. Minor tariffs that don’t interfere too much with trade are one thing. 45% tariffs intended to punish particular countries or protect particular industries are another.
We have them. Bill Clinton allowed the sale of our Rare Earth mines to China, who promptly shut them down. The EPA has consistently blocked new mine openings ever since.
How about the hypothetical: candidate Rubio comes out with a tax plan part of which is to replace the payroll tax with a general tariff in a way that is revenue neutral (at least on paper).
For or against? Why?
I don’t know why Rubio has anything to do with it, but I could support such a plan only if the tariff were set at a rate that would cause only very minor disruptions in trade.
The payroll tax is too high at present, and is regressive, so I don’t like it. Reducing it would have a positive effect on hiring.
So, the question, again, is empirical. Where is the point at which the marginal benefit from reducing the payroll tax equals the marginal cost of increasing the tariff? That’s the goal.
Seconding AxeMan here.
What benefit are you referring to? Benefit to whom? The goal for either scheme is to raise revenue for government expenditures. The hypothetical assumes that the new tariff rate would be set such that it would replace the payroll tax entirely in a revenue neutral way. Payroll tax is regressive and discourages domestic hiring, right? A tariff would also be regressive (effectively a consumption tax), but wouldn’t discourage domestic hiring, right? Ability to purchase goods would be diminished by the tariff but would be enhanced by the elimination of payroll tax. I don’t understand the hesitation.
I’m referring to the benefit of increased hiring due to the reduced cost of employment. That is a benefit to employers and employees both, and therefore to the economy generally.
A reduction from, say, 6.25% to 4% on both the employer’s and employee’s side would, hypothetically, have a measurable benefit. I believe that further reductions would have smaller benefit, given the law of diminishing returns.
On the tariff side, a small increase from zero would have a small effect on costs. This cost would rise exponentially as the rate increased.
It’s not an all or nothing proposition to me.
Not quite. A tariff is nothing like a consumption tax in the way it affects the consumer economy. There would be knock on effects from a tariff in domestic employment as inputs became more expensive and hence manufacturers would hire less people or implement labor saving technologies. Tariff’s do affect domestic employment, just not in such an overt way as payroll taxes do.
I’m not sure I understand. Are you saying that increased domestic buying power/consumer benefit from an extinct payroll tax would be less than the decreased buying power/cost from a tariff taking the same amount of dollars from the system?
I’m also not sure why you say that the law of diminishing returns is optimized by an only 2 point drop in payroll tax. Why wouldn’t a full drop be better? What would happen to the other 4 points that would lower its effect?
Nothing like a consumption tax? I didn’t say it was the same thing or that it worked the same way, but I stand by the claim that the effect is the same: the extra cost of things is borne by those consuming goods in either case.
As far as knock on effects on domestic employment, we already experience the payroll tax already imposes a significant cost on hiring and a significant reduction in disposable income. Why do you think that an increase to the cost of imported foreign goods would have a worse effect on domestic hiring and/or total consumer cost than the benefits we’d experience with removal of the payroll tax?
It’s partly an empirical question, but I’m dubious we can reduce these things to mere economic calculations, for two reasons:
No. I’m saying that if reducing the payroll tax would create more benefit than the tariff would impose costs, we should do it, until the point where that’s no longer true. I’m not saying that there is such a point, or that we can easily find it.
I’m suggesting that any tax can reach a point where it starts to cause more harm than it’s worth (e.g., income tax of 70%). If the payroll tax has now reached that point, reducing it would cause more good than the lost revenue it costs. But then, at very low levels, there isn’t as much hiring to be gained by reducing it further. That is, at its current high level the tax makes a lot of hiring unprofitable. At 2%, say, it probably doesn’t. So reducing it from 2% to 1% probably won’t have as much good effect.
The bolded sentence is important, especially the second half.
Even when something can be proven to exist (say, mathematically), that needn’t imply anyone has found it. Finding things that may or may not exist is even harder.
Got it.
Here’s some back of the envelope scratching using some rough figures I aggregated from the web: