Tag Archives: Paul Krugman

Interventionists Love You and Demand You Change, or Else

19 Friday Aug 2022

Posted by in Central Planning, Industrial Policy, Uncategorized

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Statistics and measurement might not be critical to the exercise of the authoritarian impulse, but they have served to enable the technocratic tyranny idealized by contemporary statists. Certain influential thinkers have claimed our ability to compile statistics helps give rise to the bureaucratized state. I ran across a great post that led with that topic: “The Brutalization of Compassion” by David McGrogan. The mere ability to compile relevant statistics on a population and its well being (income, jobs, wages, inequality, mortality, suicide, etc… ) can motivate action by authorities to “improve” matters. The purpose might be to get ahead of rival states, or the action might be rationalized as compassion. But watch out! McGrogan quotes a bit of cautionary wisdom from Lionel Trilling:

“‘When once we have made our fellow men the objects of our enlightened interest,’ he put it, something within us causes us to then ‘go on and make them the objects of our pity, then of our wisdom, ultimately of our coercion.’”

Ultimately, to pursue their vision, interventionists must impose controls on behaviors. In practice, that means any variance or attempted variance must be penalized. Here’s McGrogan’s description of the steps in this process:

“The conceptualisation of the population as a field of action, and the measurement of statistical phenomenon within it – the taking of an ‘enlightened interest’ in it – gives rise to both ‘pity,’ or compassion, and the application of ‘wisdom’ to resolve its problems. What is left, of course, is coercion, and we do not need to look far to identify it in the many means by which the modern state subjects the population to a kind of Tocquevillian ‘soft despotism,’ constantly manipulating, cajoling and maneuvering it this way and that for its own good, whether through compulsory state education or ‘sin taxes’ or anything in between.”

Follow the Scientism

I can’t neglect to mention another important condition: the hubris among apparatchiks who imagine the state can improve upon private institutions to achieve social betterment. They will always fail in attempts to replace the action of the private markets and the price mechanism to process information relating to scarcities and preferences. Absent that facility, human planners cannot guide flows of resources to their most valued uses. In fact, they nearly always botch it!

Government provision of public goods is one concession worth making, but the state capacity needed to fulfill this legitimate function is subject to severe mission creep: we frequently see efforts to characterize goods and service as “public” despite benefits that are almost wholly private (e.g. education). Likewise, we often hear exaggerated claims of “harms” requiring state intervention (e.g. carbon emissions). These situations often hinge purely on politics. Even when legitimate external benefits or costs can be identified, there is a pretension that they can be accurately measured and corrected via subsidies or taxes. This is far-fetched. At best, it’s possible to vouch for the directional appropriateness of some interventions, but the magnitude of corrective measures is variable and essentially unknowable. Too often we see government failure via over-subsidization of politically favored activities and over-penalization of politically disfavored activities.

One of the most egregious errors of intervention is the over-application of the precautionary principle: if risks are associated with an activity, then it must be curtailed. This often relies on measurements of highly uncertain causes and effects, and it involves aggregation subject to its own biases.

Just as questionable is the ability of “experts” to model natural or behavioral processes such that outcomes can be “predicted” over horizons extending many decades forward. That interventionists tend to ignore the uncertainties of these predictions is the most blatant and damaging conceit of all, not least because the public and the media usually have limited knowledge with which to assess the phenomenon in question.

Public Health Tyranny

The Covid pandemic presented a compelling excuse for precautionists in government and even private institutions to impose radical controls under a set of claims they called “the science”. These claims were often false and really antithetical to the principles of scientific inquiry, which calls for continually questioning hypotheses, even when they represent “consensus”. Yet a series of questionable scientific claims were used to justify abridgment of basic freedoms for the general population, most of whom faced little risk from the virus. This included lockdowns of schools and churches, business closures, cancellation of public events (except of course for protests and riots by Leftists), deferred medical care, vaccine mandates, and mask mandates. The damage these measures inflicted was fierce, and in the end we know that it was almost entirely unnecessary. Still, the public health establishment seems all too willing to ignore the facts in its readiness to repeat the whole range of mistakes at the slightest uptick in what’s now an endemic infection.

Standard Issue Cronyism

In the wake of the pandemic, we’ve witnessed a surge in calls for government to enhance the security of our nation’s supply chains. Too large a share of the critical goods required by domestic industries are produced overseas, which has made supply disruptions, and the threat of future disruptions, especially acute. Right on cue, advocates of industrial policy and planning have arranged for the federal government to provide $85 billion to domestic producers of semiconductors under the so-called CHIPS Act. But semiconductor producers are in no need of government incentives to “re-shore” production:

“… there has been even more chipmaking investment dedicated to the U.S. market, even as federal subsidies have languished. Construction is now underway at four major U.S. facilities and will continue with or without subsidies—something even Intel reluctantly acknowledged when it delayed the groundbreaking ceremony on its much‐ballyhooed Ohio facility to protest congressional inaction. This is because, as numerous experts have explained over the last year, there are real economic and geopolitical reasons to invest in additional U.S. semiconductor production—no federal subsidies needed.”

Moreover, the global shortage of computer chips appears to be ending. The subsidies will unnecessarily enrich industrialists and their shareholders, provide a source of graft to bureaucrats and various middle men, and likely over-allocate resources to domestic production of chips. Industrial planning of this kind has a long history of failure, and this time won’t be different.

Climate Fascists

We also see repeated over-application of the precautionary principle and rising dominance of industrial policy in climate and energy policy. Enormous sacrifices are imposed on consumers for the sake of minuscule changes in global carbon emissions and the “expected” long-term path of future “global” temperatures. The interventions taken in pursuit of these objectives are draconian, limiting choices and raising the cost of virtually everything produced and consumed. They distort the direction of physical investment, disfavoring reliable sources of base load capacity needed for growth, and also disfavoring the safest and most reliable zero-carbon alternative: nuclear power. The renewable energy sources foolishly pushed by the state and the ESG establishment are environmentally costly in their own right, and they don’t work when natural conditions are unfavorable. As one wag says about the climate provisions of the ironically named Inflation Reduction Act, “Gonna be a lot more Solyndras coming”.

And talk about sloppy! Our “trusted representatives” in Congress could hardly be bothered to pretend they’d done their homework. They neglected to provide any quantitative carbon and temperature impacts of the legislation. This must be a case of true honesty, because they really have no idea!

Delusions of Central Planning

One great weakness (among many) of arguments for state industrial planning is the assumption that government agents are somehow more competent, efficient, and “pure of heart” than agents in the private sector. Nothing could be more laughable. On this point, some of the most incisive commentary I’ve seen is provided by the masterful Don Boudreaux, first quoting Georgetown philosopher Jason Brennan before adding his own entertaining thoughts:

The typical way the left argues for the state is to describe what economists in the 1850s thought markets would be like under monopoly or monopsony, and then compare that to a state run by angels. Both halves of the argument are bad, and yet philosophy treats this as if it were rigorous and sophisticated.

“Far too many policy proposals are nothing more than prayers to the state-god. ‘We entreat you, Oh Powerful and Sacred One, to relieve our people of this or that misery, blemish, and market imperfection! We beseech you to bestow upon us – your faithful servants – cosmic justice, safety from new pathogens, unkind thoughts, and microaggressions, and protection from each and every burden of reality that we can imagine being cured by an omniscient, benevolent, and omnipotent deity! If we obey – and sacrifice to you without complaint our treasure and our freedoms – you will provide!’

I do not exaggerate. Pick at random any proposed government intervention offered by the likes of Progressives or national conservatives, and you’ll discover that the workability of this proposed intervention, when evaluated honestly, rests on nothing more solid than the above absurd faith that the state is – or, when in the right hands, will be – a secular god.”

On the idealization of government’s ability to “plan the economy” rationally, here is more from Boudreaux, first quoting the great Deirdre McCloskey:

Deep in left-wing thought about the economy, and in a good deal of right-wing thought, too, is the premise, as Isaiah Berlin once put it with a sneer, that government can accomplish whatever it rationally proposes to do. As has been often observed about leftists even as sweet as John Rawls, the left has no theory of the behavior of the government. It assumes that the government is a perfect expression of the will of The People.

“And nothing is more unscientific – indeed, more mystical – than is this still-commonplace practice of most Progressives, and also of very many conservatives, to analyze the economy and society, and to offer policy recommendations, using such a juvenile ‘understanding’ of the state. Yet such an ‘understanding’ of the state permeates the work even of some Nobel laureates in economics – laureates such as Paul Krugman and Joseph Stiglitz. This ‘understanding’ of the state is inseparable also from the work of pundits too many to count…

That these professors and pundits think of themselves as scientific – and are widely regarded as being especially intelligent, thoughtful, and scientific – testifies to the strength of the cult of democratically rubber-stamped coercion.”

Conclusion

Humans have proven to be incredible documentarians. The advent of measurement techniques and increasingly sophisticated methods of accounting for various phenomena has enabled better ways of understanding our world and our well being. Unfortunately, a by-product was the birth of scientism, the belief that men in authority are capable not only of measuring, but of fine-tuning, the present and future details of society and social interaction. Those pretensions are terribly mistaken. However, the actions of Congress and the Biden Administration prove that it’s adherents will never be persuaded, despite repeated demonstrations of the futility of central planning. Their words of compassion are no comfort — they must coerce the ones they “love”.

Price Controls: Political Gut Reaction, Gut Punch To Public

06 Thursday Jan 2022

Posted by in Price Controls, Shortage

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In a gross failure of education or perhaps memory, politicians, policymakers, and certain academics seem blithely ignorant of things we’ve learned repeatedly. And of all the dumb ideas floated regarding our current bout with inflation, the notion of invoking price controls is near the top. But watch out, because the Biden Administration has already shifted from “inflation is transitory” to “it only hurts the rich” to “it’s fine because people just want to buy things”, and now “greedy businessmen are the culprits”. The latter falsehood is indeed the rationale for price controls put forward by a very confused economist at the University of Massachusetts-Amherst named Isabella Weber. (See this for an excerpt and a few immediate reactions.) She makes me grieve for my profession… even the frequently ditzy Paul Krugman called her out, though he softened his words after realizing he might have offended some of his partisan allies. Of course, the idea of price controls is just bad enough to gain favor with the lefty goofballs pulling Biden’s strings.

To understand the inflation process, it’s helpful to distinguish between two different dynamics:

1. When prices change we usually look for explanations in supply and demand conditions. We have supply constraints across a range of markets at the moment. There’s also a great deal to say about the ways in which government policy is hampering supplies of labor and energy, which are key inputs for just about everything. It’s fair to note here that, rather than price controls, we just might do better to ask government to get out of the way! In addition, however, consumer demand rebounded as the pandemic waned and waxed, and the federal government has been spending hand over fist, with generous distributions of cash with no strings attached. Thus, supply shortfalls and strong demand have combined to create price pressures across many markets.

2. Economy-wide, all dollar prices cannot rise continuously without an excess supply of a monetary asset. The Federal Reserve has discussed tapering its bond purchases in 2022 and its intention to raise overnight interest rates starting in the spring. It’s about time! The U.S. money supply ballooned during 2020 and its growth remains at a gallop. This has enabled the inflation we are experiencing today, and only recently have the markets begun to react as if the Fed means business.

Weber, our would-be price controller, exhibits a marked ignorance with respect to both aspects of price pressure: how markets work in the first instance, and how monetary profligacy lies at the root of broader inflation. Instead, she insists that prices are rising today because industrialists have simply decided to extract more profit! Poof! It’s as simple as that! Well what was holding those greedy bastards back all this time?

Everyone competes for scarce resources, so prices are bid upward when supplies are short, inputs more costly, or demand is outpacing supply for other reasons. Sure, sellers may earn a greater margin on sales under these circumstances. But the higher price accomplishes two important social objectives: efficient rationing of available quantities, and greater incentives to bring additional supplies to market.

So consider the outcome when government takes the advice of a Weber: producers are prohibited from adjusting price in response to excess demand. Shortages develop. Consumers might want more, but that’s either impossible or it simply costs more. Yet producers are prohibited from pricing commensurate with that cost. Other adjustments soon follow, such as changes in discounts, seller credit arrangements, and product quality. Furthermore, absent price adjustment, transaction costs become much more significant. Other resources are consumed in the mere process of allocating available quantities: time spent in queues, administering quotas, lotteries or other schemes, costly barter, and ultimately unsatisfied needs and wants, not to mention lots of anger and frustration. Lest anyone think this process is “fair”, keep in mind that it’s natural for these allocations to take a character that is worse than arbitrary. “Important people” will always have an advantage under these circumstances.

Regulatory and financial burdens are imposed on those who play by the rules, but not everyone does. Black market mechanisms come into play, including opportunities for illegal side payments, rewards for underworld activity, along with a general degradation in the rule of law.

Price controls also impose rigidity in relative prices that can be very costly for society. “Freezing” the value of one good in terms of others distorts the signals upon which efficient resource allocation depends. Tastes, circumstances, and production technology change, and flexible relative prices enable a smoother transitions between these states. And even while demand and/or input scarcity might increase in all markets, these dynamics are never uniform. Over time, imbalances always become much larger in some markets than others. Frozen relative prices allow these imbalances to persist.

For example, the true value of good A at the imposition of price controls might be two units of good B. Over time, the true value of A might grow to four units of good B, but the government insists that A must be traded for no more than the original two units of B. Good B thus becomes overvalued on account of government intervention. The market for good A, which should attract disproportionate investment and jobs, will instead languish under a freeze of relative prices. Good B will continue to absorb resources under the artificial tradeoff imposed by price controls. Society must then sacrifice the gains otherwise afforded by market dynamism.

The history of price controls is dismal (also see here). They artificially suppress measured inflation and impose great efficiency costs on the public. Meanwhile, price controls fail to address the underlying monetary excess.

Price controls are destructive when applied economy-wide, but also when governments attempt to apply them to markets selectively. Posturing about “strategic” use of price controls reveals the naïveté of those who believe government planners can resolve market dislocations better than market participants themselves. Indeed, the planners would do better to discover, and undo, the damage caused by so many ongoing regulatory interventions.

So beware Joe Biden’s bluster about “greedy producers” in certain markets, whether they be in “Big Meat”, or “Big Oil”. Price interventions in these markets are sure to bring you less meat, less oil, and quite possibly less of everything else. The unintended consequences of such government interventions aren’t difficult to foresee unless one is blinded with the scientism of central planning.

Labor Shares the Burden of the Corporate Income Tax

03 Friday Nov 2017

Posted by in Taxes

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As expected, a reduction of the corporate income tax rate from 35% to 20% is included in the GOP’s tax reform bill, a summary of which was released today. That rate cut would be a welcome development for workers, consumers, and corporate shareholders. It should be no surprise that the burden of the U.S. corporate income tax is not borne exclusively by owners of capital. In fact, it might hurt workers and consumers substantially while imposing relatively little burden on shareholders.

John Cochrane’s post on the incidence of the tax on corporate income is very interesting, though by turns it rambles and may be too technical for some tastes. He notes that the incidence of the corporate tax can fall on only three different groups: shareholders, workers and customers:

“As an accounting matter, every cent [of taxes] corporations pay comes from higher prices, lower wages, or lower payments to shareholders. The only question is which one.“

Cochrane quotes Lawrence Summers and Paul Krugman, both of whom are of the belief that the incidence of the corporate tax must fall primarily on capital and not on labor. That’s consistent with their view that a reduction in corporate taxes amounts to a gift to shareholders. But Cochrane isn’t at all convinced:

“The usual principle is that he or she bears the burden who can’t get out of the way. So, how much room do companies, as a whole, have to raise prices, lower wages, lower interest payments, or lower dividends?”

In fact, owners of capital can get out of the way. Capital is very mobile relative to labor. Here’s a counterfactual exercise Cochrane steps through in order to illustrate the implications of ownership bearing the incidence of the tax: if equity markets are efficient, share prices reflect all available information about the firm. If wages and product prices are unchanged after the imposition of the tax, then shareholders would suffer an immediate loss. Once the tax is discounted into share prices, there would be no further impact on current or future shareholders. Thus, future buyers of shares would escape the tax burden entirely. As a first approximation, the share price must fall to the point at which the ongoing return on the stock is restored to its value prior to imposition of the tax.

Cochrane notes that evidence on the reaction of stock prices to corporate tax changes is mixed at best, which implies that the incidence of corporate taxation falls more weakly on shareholders than many believe. That leaves consumers or workers to bear a significant part of the burden. Workers and consumers are mostly one and the same: economy-wide, higher prices mean lower real wages; lower wages also mean lower real wages. So I’ll continue to speak as if the incidence of the tax falls on either labor or capital, and we can leave aside consumers as a separate category. Cochrane says:

“It used to be thought that it was easy to lower payments to shareholders — ‘the supply of savings is inelastic’ — so that’s where the tax would come from. The newer consensus is that companies as a whole have very little power to pay less to investors, … so the corporate tax comes from lower wages or, equivalently, higher prices. Then, indirectly, reducing the corporate tax would increase capital, which would result in higher wages.”

Cochrane’s post and another on his blog were prompted by an earlier piece by Greg Mankiw showing that real wages, in an open economy, will have a strong negative response to a corporate tax increase. Here is the reasoning: the tax reduces the return earned from invested capital in the short run. Ideally, capital is deployed only up to the point at which its return no longer exceeds the opportunity cost needed to attract it. Given time to adjust, less capital must be deployed after the imposition of the tax in order to force the return on a marginal unit of capital back up to the given opportunity cost. That means less capital deployed per worker, and that, in turn, reduces labor productivity and wages.

Another issue addressed by Cochrane has to do with assertions that monopoly power in the corporate sector is a good rationale for a high tax on corporate income. You can easily convince me that the “average” firm in the corporate sector earns a positive margin over marginal cost. However, a microeconomic analysis of monopoly behavior by the entire corporate sector would be awkward, to say the least. Despite all that, Cochrane notes that monopolists have more power than firms in competitive sectors to raise prices, and monopsonists have more power to reduce wages. Therefore, the “tax the monopolists” line of argument does not suggest that labor will avoid a significant burden of a corporate tax. A safer bet is that firms in the U.S. corporate sector are price-takers in capital markets, but to some degree may be price-makers in product and labor markets.

Cochrane also emphasizes the inefficiency of the corporate tax as a redistributional mechanism, even if shareholders bear a significant share of its burden. It is still likely to harm workers via lost productivity, as discussed above. It is also true that many workers hold corporate equities in their retirement funds, so a corporate tax harms them directly in their dual role as owners of capital.

The cut in the corporate tax rate is but one element of many in the GOP bill, but a related provision is that so-called “pass-through” income, of the type earned via many privately-owned businesses, would be taxed at a maximum rate of 25%. These businesses generate more income than C-corporations. Currently, pass-through income is taxed as ordinary income, so capping the top rate at 25% represents a very large tax cut. As Alex Tabarrok points out at the last link, tax treatment should be neutral with respect to the form of business organization, but under the GOP bill, the effective gap between the top rate for pass-throughs versus corporate income would be even larger than it is now.

Critics of a reduction in corporate taxes should bear in mind that its incidence falls at least partly on labor, perhaps mainly on labor. The U.S. has the highest corporate tax rate in the industrialized world. That undermines U.S. competitiveness, as does the complexity of corporate tax rules. Tax planning and compliance burn up massive resources while drastically reducing the tax “take”, i.e., the revenue actually collected. The corporate income tax is something of a “show” tax that exists to appease populist and leftist elements in the electorate who consistently fail to recognize the unexpectedly nasty consequences of their own advocacy.

 

Good Leaders Aren’t Trade Warriors

30 Wednesday Mar 2016

Posted by in Free Trade, Protectionism

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Protectionism

The protectionist foreign trade rhetoric issued by the major-party presidential candidates is intended to appeal to ignorant economic instincts. Donald Trump and Bernie Sanders come to mind most readily, but Ted Cruz and Hillary Clinton are jumping in with similar campaign positioning. The thrust of these populist, anti-trade appeals is that America is losing jobs to “unfair” foreign competition, an argument that distorts the very objective of trade: consumers take part in exchange in order to consume; they capture value from high quality, unique merchandise and competitive terms. Ultimately, producers engage in trade to gain the wherewithal to consume. Consumption is the real end-game.

It can be misleading to talk about “nations” engaging in trade with each other, despite the emphasis placed on trade agreements like NAFTA and TPP. In the first place, it is better to stress consumers and producers, rather than “nations”, because most foreign trade is private, cooperative activity, not national decision-making. But the candidates persist in characterizing trade as a “contest”. That misleading notion is what prompts governments to muck up the trade environment by imposing restrictions on the free flow of goods and services. Trade agreements have been heralded as great achievements, but they never approximate a regime of truly liberalized trade because the latter requires no formal agreement whatsoever, merely a hands-off approach by government. And trade agreements tend to entangle trade issues with other policy objectives, holding consumers hostage in the process.

We hear from opportunistic candidates that jobs are lost to trade with foreigners. But again, consumption, not “jobs” per se, is the real objective of economic activity. If domestic jobs are lost, it is generally because consumers judge the value produced inferior to what’s offered from abroad. American consumers should not be obliged to support inferior value, domestic market power unchecked by competition, monopoly prices and limited choices. Patriotic jingoism attempts to blind us from these economic imperatives.

The standard protectionist narrative is that foreign “nations” cheat on trade with the U.S. via currency manipulation, predatory pricing or “dumping”, “unfair” wages or other unfair labor practices. Do any of these objections to free trade hold water?

The “fairness” of foreign wages and labor practices is a matter of perspective. Wages cannot be considered unfair merely because they are low relative to U.S. wages. Wages paid to workers by foreign exporters tend to be consistent with the standard of living in those societies, and they are often some of the best income opportunities available there. This is economic dynamism that lifts masses from the grips of poverty. It’s absurd to caste it as “exploitation”.

Is it “unfair” to competitors in the U.S.? Not if they know how to compete and are allowed to do so. Unfortunately, government regulatory policies in the U.S. often present obstacles to the competitiveness of domestic producers. This is well-illustrated by Daniel J. Ikenson of The CATO Institute in “Crucifying Trade For The Sins Of Domestic Policy“. He emphasizes that trade promotes economic growth, but when it causes job losses for some workers, U.S. economic policies make it difficult for those workers to find new jobs.

“Incentivize businesses to hire people to train them in exchange for their commitment to work for the company for a period of time. Reform a corporate tax system that currently discourages repatriation of an estimated $2 trillion of profits parked in U.S. corporate coffers abroad, deterring domestic investment, which is needed for job creation. Curb excessive and superfluous regulations that raise the costs of establishing and operating businesses without any marginal improvements in social, safety, environmental, or health outcomes. Permanently eliminate imports duties on intermediate goods to reduce production costs and make U.S.-based businesses more globally competitive. Advocate the retirement of protectionist occupational licensing practices.“

So-called “dumping” by foreign producers, or selling below cost, is an unsustainable practice, by definition. Pricing below cost is difficult to prove, especially if local wages are low and raw inputs are plentiful. If dumping can be proven, retaliation might feel good but would punish American consumers. A foreign producer might be subsidized by its government as a matter of industrial policy and economic planning, an unhealthy policy to begin with, and possibly to facilitate a long-run market advantage in foreign trade. The U.S. itself is thick with subsidized industry, however, so arguing for retaliation on those grounds is more than a little hypocritical.

I rarely quote Paul Krugman, but when I do, it’s from work he’s done as an actual economist, not as an agenda-driven pundit. So we have the following Krugman quote courtesy of Don Boudreaux:

“I believe that if the rhetoric that portrays international trade as a struggle continues to dominate the discourse, then policy debate will in the end be dominated by men like [James] Goldsmith, who are willing to take that rhetoric to its logical conclusion. That is, trade will be treated as war, and the current system of relatively open world markets will disintegrate because nobody but a few professors believes in the ideology of free trade.

And that will be a shame, because for all their faults the professors are right. The conflict among nations that so many policy intellectuals imagines prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade.“

David Harsanyi asks how American consumers will like more restrictive trade policy when forced to pay more for smart phones, laptops, HDTVs, cars, food, and any number of other goods. The usual anti-trade narrative is that foreign producers have harmed the manufacturing sector disproportionately, but in another article, Ikenson lays bare the fallacy that U.S. manufacturing has been victimized by trade.

The consequences of trade restrictions are higher prices, reduced production and reduced consumption, an undesirable combination of outcomes. This means higher prices of imported goods as well as domestic goods, whose producers will face less competition by virtue of the trade barriers. With reduced availability of imported goods, economic theory predicts that domestic producers will not fully meet the frustrated demands. This is a classic response of producers with monopoly power: restraint of trade. The negative consequences are compounded when foreign governments impose retaliatory measures against the U.S., harming American exporters.

A further misgiving expressed by politicians regarding free trade is that America’s trade deficit implies greater indebtedness to the rest of the world. This argument has been made by a few leftist economists who misunderstand the nature of direct investment, and who tend to think erroneously of economic outcomes as zero-sum. It’s true that foreign producers who receive dollars in exchange for goods often invest those proceeds in U.S. assets. A fairly small share of that investment is in debt issued by U.S. governments and private companies. But a much larger share is invested in U.S. equities and real assets, which are not U.S. debts. As Don Boudreaux points out, the domestic sellers of those assets generally reinvest in other U.S. assets, so private U.S. ownership of global capital is not diminished by increased foreign investment in the U.S.

An interesting aspect of the trade debate is that the dollar’s role as a global reserve currency implies that the U.S. must run a chronic trade deficit. The rest of the world uses dollars to trade goods and assets, but to acquire dollars, foreigners must sell things to holders of dollars in the U.S. This keeps the foreign exchange value of the dollar elevated, which makes imports cheaper to Americans and U.S. exports more costly to foreigners. Those dollars are a form of U.S. debt, but it is debt for which we should feel flattered, as long as confidence in the dollar remains. A diminished role for the dollar in world trade would lead to a surplus of dollars, undermining its value and promoting inflation in the U.S. Let’s hope for a gradual transition to that world.

Finally, the presidential candidates allege that foreign currency manipulation is another reason for American job losses. One prominent example occurred last year when China allowed the renminbi to decline to more realistic levels on foreign exchange markets. Donald Trump called this an unfair trade tactic, but apparently the People’s Bank felt that it couldn’t support the renminbi without undermining economic growth. The earlier dollar peg also helped to keep Chinese inflation in check. Contrary to Trump’s assertions, if China stopped manipulating its currency altogether, the renminbi would go even lower!

Beyond the opportunistic political arguments, the point is that central banks (including the U.S. Federal Reserve) manage their currencies to achieve a variety of objectives, not merely to promote exports. That is not an endorsement of such policies. It is an objective fact. Anyone can argue that a foreign currency is “too low” if their objective is to demonize a country and it’s exports to the U.S., but the assertion may not be grounded in facts as markets assess them.

The arguments against open trade policies are generally specious, hypocritical or grounded in a mentality of victimhood. Vibrant producers who are free of government restrictions should welcome the expanded markets available to them abroad and should not seek redress against competition via government protection. Liberalized trade has engendered tremendous economic benefits over the years, while protectionist policies have only brought severe contractions. Let’s be free and trade freely!