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Make America Safe Again: A Steel of a Deal
President Trump knows more about structural steel than any president since the great civil engineer Herbert Hoover. Media of every flavor took the President’s comments, about requiring the use of US steel in petroleum pipeline construction, at face value, as only a jobs program. While “free” trade advocates got the vapors about protectionism and warned of harm to the US economy from artificially high prices, no one bothered digging into the critical assumption.
A year later, President Trump threatened to impose steel tariffs. There was much back-slapping and hand-wringing, all having to do with the price of steel and supposed resulting gains and losses in jobs. In the midst of this noise, Mark Davis, a Texas radio talk show host, took a call from a welder. (Starts at 23:50.)
This welder is in the high end of the trade, working with pipe that must pass X-ray inspection after welding. The welder said that any skilled welder knows, the moment he sets torch to pipe, whether the material is domestic or from supposedly lower cost countries. The foreign pipe, supposedly identical in specification, is actually contaminated with impurities which cause a high rate of X-ray failure and re-welding. Now think about what such impurities imply for the long-term safety of critical infrastructure. Care to drive over bridges, live or work in skyscrapers, with hidden defects in the structural supports? We build pipelines both for efficiency and safety relative to rail tanker shipment, so why would we allow avoidable risk to be built in?
But, hey, that’s just an anecdote, isn’t it? Well here is another anecdote. My parents have used the same elegantly simple Dansk stainless steel flatware pattern for more than 50 years of marriage. They are getting full value out of the lifetime warranty. Of all the original pieces, run through dishwashers well over 10,000 times, one has developed pitting. Then there are the replacement and extra setting they bought more recently, made in China. Most of these are now pitted, even though they are made of supposedly the same kind of steel, with the same warranty. See for yourself.
So now you have two anecdotes. Perhaps prudent public servants should inquire closely into the actual state of steel coming onto our shores. And maybe you really do get what you pay for, even if you are not fully informed of the risks baked into the bargain.
Published in Economics
Talking of Chinese producers and consumers ignors the reality that consumers there matter only to the extent that discontent reaches a point threatening to the Party. Chinese producers benefit for the strategic political benefit of the Party.
You mean like building a bridge between two major earthquake faults with a 75% probability of a 7.0 or greater earthquake in the next 30 years with substandard Chinese steel?
How is that to be done?
Yes, it does ignore that, because it’s completely irrelevant to whether or not importing steel from China is a bad deal for America.
Actually before you have a market you have to have a philosophy. That is something people need to understand.
And one other thing important to understand is that for the investor class, it is to their advantage to polish and shine the particular philosophy that lets them accomplish the most for their investing through their philosophy.
So the investor class started to take over back in the 1980’s. The word “free trade” began to be bandied about and somehow “free trade” also became linked to the notion of “supply side economics.” Above all else, the cheapest price was supposed to be the determinant in judging how a thing was to be made.
From the end of WWII until that period in the 1980’s, the USA had a “family capitalism” in operation. Although there was corruption, it was not on the grand scale we are witnessing currently. Although institutions that were not overall favorites of the average person, for examples, institutions like banks and insurance companies, these institutions had regulations in place such that consumers actually received the advantage of having the item that they were paying for. So a person paid for hurricane insurance while living along the Gulf Coast, and the insurer they paid actually compensated them when a storm occurred and destroyed their home. No one sector of the economy was in control of the economy over all the others.
A statistic that is important to consider in this is this one: that for every dollar of profit created inside the USA, 8 to 9 cents went off to Big Banks at that point in time.
Now through many various things coming about, that era of Family Capitalism is dead and gone. “Free trade” and the various trade agreements that came about helped kill it off. So did “supply side economics.” Globalization went hand in hand to help with those elements in negating an ability of the Family Capitalism to persevere. The middle class in so many many places has disappeared.
End of Part One
Part two –
Now in Europe, where Family Capitalism has not yet been killed off by Vulture Capitalism, the average worker has seen a fairly decent increase in wages. For instance, since 1986, the average German worker has seen a 172 % increase in wages. The other European workers have seen wage increases between 80 and 159%, with Australian workers only gaining some 72%.
The American worker has seen almost nothing, as the increase has been a mere 1.5% – hardly a detectable amount of an increase over so many years.
The rise in the USA of Vulture Capitalism meant that since the end of the 1980’s, about the most high paying of jobs were those where one group of people went out and acquired companies that were undervalued. (The 1988 movie “Wall Street” details the practices of such activities and their effects on not only small family concerns, but also the workers that had made a living at those firms.)
The only thing that rivals and surpasses Vulture Capitalism has been the ability of the Cabal of people at the top of Wall Street, the Tim Geithners et al, who are able to arrange which firms on Wall Street receive certain beneficial favors including the prized favor of neglect on the part of oversight institutions like the SEC to reign in those who commit malfeasance and fraud.
It did not happen by accident that during the writing of legislation for the 1999 Banking reform and Modernization Act that Glass Steagal, which had served as the Super hero of all Congressional Acts that had protected America’s middle class was eliminated. Bill Clinton signed off on it; 99 Senators did as well. Only one Senator decried the fact that Glass Steagal had gone the way of the dodo bird, stating that within ten years there would be a serious economic catastrophe that would eliminate further the middle class.That catastrophe arrived in 2006 with the mortgage collapse. And was followed up by a General Collapse in Autumn of 2008.
This Senator had been Sen Durgan of Nebraska. It is not surprising to me that many firms-in-the-know now have moved their HQ to Nebraska, as it now has the only recession proof banking strategy still protected by a firewall of laws and regulations such that when the economy collapses again, those firms have a much better chance than the others elsewhere. Sidebar: due to all of these pressures, the amount of monies now captured by Big Money Concerns each time a dollar of profit is generated inside the US is 48 cents. Yep, in just 27 short years, 1983 to 2010, the amount of money going to Big Banks has risen from 8 or 9 cents to 48 cents.
The one person the middle class has had that seems to understand this is Pres Trump.
End of Part two
Like most economic theories (or any theory really) there are some assumptions buried under the surface. Here’s what the Mises Institute says about Ricardo…
“The only condition necessary for Ricardo’s principle to hold is that the division of laborcondition at is fulfilled. It is a necessary condition both for international and national trade, indeed, all trade. This division of labor condition clearly is severely violated today, by the way of taxes, tariffs, regulations, national money monopolies and other Government devices.”
I think it extends beyond that. That it requires full employment etc. But even the Austrian school admits the Ricardian view is off base in the real world.
There’s nothing wrong with that. All theories abstract from reality to get at the heart of the issue. And sometimes it’s OK to apply those theories in the everyday because the effects of the stuff they leave out is small. But sometimes not. And I think this is one of those “sometimes not” times. We all here want free trade. But to get from here to there isn’t a straight line. Game Theory suggests that straightforward, easily interpreted strategies like Tit-for-Tat can lead from competitive to cooperative behaviors after a couple iterations. Over the long term, it benefits both players. But until the behavioural messages get received and acted on, things look messy indeed and returns to both players suffer. But you can’t shy away from that period of conflict. The goal is to arrive at an end point where both sides embrace freer trade … not just us.
No. And neither is mine. But we aren’t stage managers are we? Which is more awful, a politically contrived tariff on steel which might apply to 7% of the market or the existing schedule of preposterous tariffs that forms the rarely challenged status quo?
But Trump …
Part Three
So the one influential and powerful person that seems to understand this is Pres Trump. Those in the middle class understand this – especially those who have lived inside the rust belt areas of the nation.
This is why he opposed the TPP. This is why he opposes immigration. When I grew up, in my “slightly above” working class neighborhood, the three richest families were a family where the father was a VP at a bank, a family where dad was a construction contractor, and a third family whose dad was a plumber. The immigrants have those trade jobs now. China smelts the steel. A dozen or more third world nations produce the clothing, so the New England and Southern textile towns are now struggling to aid the part of their populace that has succumbed to drugs.
I am rather tired of the terms people use about economics. In any event, there is never any pure form of Keynesian economics, or Miesian economics or Austrian school of economics. Without the Glass Steagal style of protections added to whatever diluted form of the above that is adopted, then the robber baron style of economics rides into town and into the equation and that is where it ends the middle class. Someone much wiser than me once stated that without a vibrant middle class, there was no ability what so ever for a nation to retain its democracy.
It is one thing if somebody’s lovely steel silverware is no longer available because China has a hold on the type of steel utilized for producing kitchenware now of sub standard quality when compared to the older stuff. But it is indeed another thing entirely if the steel utilized to build our weapons and armaments is inferior because the robber barons, although always present to let everyone know the patriotic need for another 100 billion to be added into the budget for “defense” are actually more concerned about their profits than about the welfare of our nation and its military. In the lead up to WWII, there were plenty of people who sold our steel to the Japanese, and after the war was won in 1945, the vets coming back home complained about how often when they got hit is was with shells that had a “Made in US” engraving. But at least back then we did produce steel. Fast forward to a new type of warfare, and the robber barons will be no where to be found when the military needs steel and we can’t obtain it from China because they happen to be the enemy fighting us. And we can’t get it here because the supply side and free trade types talked everybody out of making it here.
Individuals are frequently smarter than the market – for a few transactions.
Bu nobody is smarter than the market over the long term, or for all transactions.
Hey Ekosj,
You spend a lot of time explaining we live in an imperfect world therefore free trade is impractical qed. I think that’s too reductive but maybe appropriate for a comment section. On game theory, the latest rage, why choose tariffs as your tit for tat? They seem to be ill suited for the task. That’s doubly true if you are trying to combat a single bad actor (I’ll assume China is a cheat here). Doesn’t that just put a tax on me and my business here? What I find wrong with your argument is you identify a foreign policy problem (again assuming it is a problem, cheaper goods may be a good thing) and try to solve it by granting some domestic protection to a favored industry at the expense of other sectors with less political clout. Explain how that adds up?
Not at all, the Asian countries I mentioned may harm themselves like other protectionist economies ( the rest of the third world for god’s sake) but the Asian tigers uniquely (because they could) drove some sectors forward with export led growth. Export led growth remains an effective strategy for the medium term for some sectors but their economies are not deep or robust. Japan has been stagnating because China, Korea and Taiwan replaced them in export markets and they haven’t allowed their economy to adjust. The Japanese companies that continue to do well, exist outside of Japan. Japan Inc is in China, Singapore, Taiwan, the US, Europe L.A., not in Japan. We must deal with China but not by harming ourselves in ways we know are harmful. We can’t use export led growth because we already lead in most sectors. If we become protectionist like other third world countries we’ll get to the point where others lead and maybe we can poach their commercial successes, but I doubt they’ll let us. If California stopped imports of important basic commodities and materials like steel and Aluminum would it help them? Should other states emulate them? I proposed alternatives as you asked. Address them.
The only real power any consumer has is the ability to say “NO!” After you get burned a few times with saying “yes” when you shouldn’t, you learn to say the word. But if you’re the dude who bought the boatload of pipe that failed a lot of weld x-ray inspections you usually hear “NO! I don’t think you need to come into work any more.” That’s how a free market works. It’s not magic. It’s not theory.
My own anecdote: some years ago I found myself working with a materials engineer who was devising a super duper pyroelectric energy measurement device. Call him Mr. Mystery–as I did every time I greeted him coming into the coffee room–because his name was pronounced, but not spelled, like that–and somehow he never got the joke. Generally he cried on my shoulder (for I am a sympathetic sort who is also slow of foot) about the problems he was having, even though my knowledge of physical chemistry is not at all deep. Shallow enough, that learning this thing basically did some calculus on the power of a laser beam giving an electrical output proportional to the energy of the beam, I said “Wow, I had no idea crystals could do math!” (A lie, I knew about analog computing from a young age.) Anyway, poor Mr. Mystery struggled and struggled, cried and cried–even invited me to a meeting with the consultant he’d hired just to confirm his suspicion that the consultant was basically blowing bright blue smoke, or to restrain him from killing the over-credentialed buffoon. Mr. Mystery eventually found the problem–that the crystal wafers he got from a Chinese source tended to go south with regularity in a month or so. Now, generally, if you need a rare earth material your supplier is going to know that jellyfish is edible, i.e., be Chinese. But Mr. Mystery soon discovered that a quarter of the population of the planet is Chinese. He got a new supplier.
[edited to include anecdote. Because I’m old and garrulous. Also to include the afterthought that tort law is available to you when you are well and truly chingered (border slang is not prohibited by CoC) by a tortfeasor, a legal term not border slang.]
I am confused. Am I the only one that enlarged the markings on the pitted knife? It reads “Dansk, Destons, Germany, IHQ.” Perhaps the “Made in China” is on the other side? And if it is, what does it say about these nice Scandinavians, or is it Germans, whose economic models some want to emulate?
If a foreign government wants to subsidize our purchases of products, I say even better.
… just made a change at the margin of the existing schedule of preposterous tariffs, which makes the rarely challenged status quo even more preposterous than before he did anything.
I looked this quote up, and found where you got it from and how you doctored it. The actual last sentence of that quote is: “This division of labor condition clearly is severely violated today, by the way of taxes, tariffs, regulations, national money monopolies and other Government devices, but that still has not been enough to stop people from trading for mutual benefit.”
Indeed, the author goes further to completely refute the entire premise you’ve been arguing, by saying:
“However, this massive intervention does not make Ricardo’s principle invalid, it only tells us that if there are no comparative advantages, free trade is the solution. The only condition for free trade is freedom to trade. I suggest giving the Nobel Prize to Ricardo (despite the detail about not being alive) for showing that free trade applies everywhere, at all levels of society, at all times. It is universally valid.”
The emphasis is mine, not in the original.
Agreed. But why does Trump’s addition, which might approach 1% of the existing tariffs, dominate the conversation when the other 99% of our tariff schedules remain in place year after year with little public discussion.
I’d be surprised if 1% of severe Trump critics knew that all Japanese trucks have been subjected to a 25% tariff for 50 years. Or that many fruits and vegetables are protected by 40% tariffs.
It’s a managed trade regime and it’s a managed opinion regime in Washington.
Actually it is entirely relevant. “Bad deal for America” is more than short term economic metrics/effects. See the National Security Strategy, which recognizes what Chinese authorities have been saying for years. Military strategists organize planning with DIME because they recognize planning at the strategic level, ignoring interactive effects with Diplomatic, Informational, and Economic tools of national power, fails. Same holds for national economic rule-making which ignores effects on other tools of national power. I do not think you want to live in a world where the super power is led by Xi Jinping.
Great catch. Thanks. Sending for correct illustration. As noted in OP, one of the original set pitted.
Tariffs are and should be a political decision and economics should be a very minor consideration in the case of the United States. Why? The United States is a huge market that can do quite well without many imports. It has far more impact on others than on us – and that is the point. To have a negative impact on others. That’s as it should be and that gets lost in the conversation of those espousing free trade.
Free trade is, was and will always will be a chimera. Why? Because all countries have governments who are ruled by politics and not by economics. All this Austrian school stuff is simply nonsense.
The steel and aluminum tariffs are something that generates a huge amount of sound and fury, but signifies nothing as far as American consumers are concerned. It won’t generate a lot of American jobs. Or cause the loss of a lot of American jobs. Or cost the American consumer large amounts of money. It is twaddle.
It is likely to have oversized political impact on others, however. And that is exactly the point. As it should be.
Taxes are and should be a political decision and economics a very minor consideration in the case of rich white men working in the private sector. Why? Rich white men have a lot of money can can do quite well without as much as they have right now. The taxes have far more impact on others than on us, and that is the point. To have a negative impact on others. That’s as it should be and gets lost on people espousing lower tax rates and flat taxes.
I don’t think that buying steel from him is going to make him a superpower any more than buying food from my supermarket would make the manager there President of the United States.
Also, the finding in the National Security Strategy, which is a political document, comes from the Commerce Secretary, not the military. We’ve already discussed how the Commerce Secretary is wrong about how the tariffs will create jobs.
Just before I read this I was thinking that there are two sets of active untruths in the free speech debate:
• Things that are called “free trade” that aren’t; the steel discussion has a lot of this going on.
• An implicit and sometimes explicit trope: “free trade has never been properly tried” (or was part of a idealized state of nature in which people lived in tribes or something.)
If the Chinese are doing something stupid and Americans are benefiting, why would you take it away?
It’s a sad state of affairs when neither party is even ostensibly free market.
Europe, here we come.
But then you’re just taxing Americans to subsidize Americans. It’s a wash (at best). Foreign government are giving us a free lunch, and our government is going to confiscate the windfall.
Yeah, seriously. Just admit you have no interest in the truth and all you want is to feel like you’re bashing people you hate and cheerleading for your tribe, whatever that means in this instant.
Free markets are not all or nothing. They’re a sliding scale. You can have more or less free markets. And imposing further restrictions on free trade isn’t going to do some double reverse backspin that actually puts us in a better situation.
Status quo bias. Recency bias. Steel tariffs are in the news. Obviously, all tariffs should be eliminated.
Ontario sells electricity to the United States below cost (while charging Ontarians an arm and a leg for it).
How come no tariff on Canadian electricity? Selling a commodity below cost is the classic definition of dumping, is it not?