Trump Falls for the Most Basic Economic Fallacy
Protectionism is the economic theory that industries at home should be protected through trade deals and tariffs with those countries which produce similar products. Trump has railed against manufacturers for choosing to have their products made in countries like Mexico, and claimed that America’s economic drift toward service industry is “very bad”. This view has been smashed over and over again for hundreds of years. Unfortunately, economists are all Cassandrists, cursed to see the future but to never be believed. I have nothing to add that hasn’t been said more eloquently by my more highly credentialed betters, but here goes anyway.
To the extent that people in other countries are willing to work for less money to produce products for us, the exchange benefits both of us. We are able to buy products for less money, which leaves more money in our wallets to save or spend on other goods and services. It also benefits the countries where people are producing the products. People there are choosing to work in a factory because it provides them with a higher wage and better working conditions than other options available to them. Over time, these countries will be able to reinvest into their businesses, build capital, and raise wages and standards of living.
The immigration problem may in fact be solved by a shift in Mexico from an agricultural society to an industrial one. The poverty of Mexico’s farmers is caused in a large part by American farm subsidies. It costs a Mexican farmer more to grow corn than it costs for people to buy it from the United States. If they also can’t work in a factory, then the people of Mexico have no option but to migrate North in order to survive. No wall will stop them, as long as the escape from grinding poverty is their motivation.
Of course, the way to retain manufacturers in the United States is not to impose tariffs, but to lower the taxes and regulations imposed on industry, and to not raise the minimum wage. If companies producing air conditioners can operate at a lower cost, they will be able to stay in business. They will also hire people who would otherwise not have jobs. With firms in competition for the scarce resource of labor, the price of labor will rise. Eventually, there will be enough jobs paying higher wages in better conditions that people will leave the manufacturing industries anyway, and those corporations will move to areas with cheaper labor. When the whole world is no longer living in poverty, the manufacturers will employ robots.
During America’s industrial revolution, there were people who were even more terrified of the shift away from agriculture than people are today of the shift away from manufacturing. They insisted that if workers continued to migrate to urban factories away from the countryside, that people would starve. Of course, modern farming has continued to increase the amount of food per acre produced and lower the price of food. Farmers today have large machines that allow one man to do the work of a hundred in air conditioned comfort. People chose to work in factories because the pay was higher and more consistent, and the working conditions were better than farming, just as today they choose to work in service industry rather than manufacturing. If there is a shortage of goods of one type or another, the price will rise and workers will have an incentive to return to their old jobs.
The “service industry” is not just people flipping burgers for minimum wage. It includes all of the jobs that people push their children to enter because they provide the highest pay and best working conditions. Doctors, lawyers, architects, teachers, CEOs, and financial managers all provide services. Some have also worried that an economy based on a service industry would not be able to export goods to other countries. In fact, there is a huge advantage in export being a service economy in the age of the internet, because services have zero overhead. We are the world exporter of Entertainment, and when a digital copy of a movie is purchased anywhere in the world, that export costs nothing to produce and deliver.
Trump also has in panties in a bunch over China’s devaluation of their currency. To this I say, good! They are only making the dollar worth more by comparison, and doing a better job of propping up our failing economy than the Fed does by endless rounds of quantitative easing! Of course, they are generating a credit bubble that will eventually burst, and may affect the US economy when it does. In the short term, we have everything to gain by this exchange, however.
We live in amazing times. The average American has a standard of living that would make the richest king of Renaissance Europe jealous. We fly through the air, and move across the ground at incredible speeds. We work only 40 hours per week, or even less. Our economy could be even stronger, if the government took a few fingers out of the pie. The biggest threat to our economy is not Mexico or China, it is the taxes and regulations imposed on wealthy individuals and industries. If we give people with the means to leave the incentive as well, then they will be gone and take their wealth with them.