Presidential race to the bottom continues as Clinton embraces tariffs

Speaking at a rally in Michigan, Hillary Clinton apparently decided her current economic policies weren't sufficiently destructive. To remedy this, she announced that she now supports using "targeted tariffs" against other countries that "have gamed the system."

This position is mistaken and harmful to the average US worker. What politicians mean, in general, when they accuse foreign entities of gaming the system, is that they managed to sell goods at artificially low prices--prices so low that US companies and workers can't compete. The nefarious way in which they achieved this varies, depending on the politician--maybe currency manipulation (which everyone does), maybe paying workers too low of wages, maybe lax regulations, maybe government subsidies, and so on. But the general contours are the same.

To see why blocking trade is wrong, one only needs to consider the extreme case. What if countries were "gaming the system" so much they actually cut their net costs to zero and they just decided to give their product (let's say, cars) away in the US for free. Surely, no US manufacturer of cars could compete with free, and they would shortly go out of business, leaving their former employees unemployed. These people would struggle in the short-run. But meanwhile, consumers in the economy (including the displaced workers) benefit from free cars. At least in the short-run, a small fraction of people face hardship while the great mass of people benefit.

This exact same dynamic plays out with each new groundbreaking innovation as well. Lightbulbs displaced candlemakers, cars destroyed the horse-drawn carriage industry, and Microsoft Word surely displaced secretaries and typewriter manufacturers alike. Each development also dramatically improved worker productivity as well as the standard of living. International trade often seems like a totally separate economic issue, complete with its own set of jargon--trade deficit, "dumping", tariffs (instead of taxes), etc. But on a fundamental level, the same forces are at work.

The question is whether we should sacrifice the long-term interests of the many to the short-term interests of a few. Opposing international trade and supporting tariffs, means answering this question in the affirmative. And the logical extension of this principle is that our country, if the occasion arose, should refuse free goods and also actively block all technological innovation. This position is as close to self-refuting as they come--and now in the 2016 presidential race, it has bipartisan support.

Of course, given that opposition to trade was a core issue for Bernie Sanders, Clinton's new, stronger opposition to trade is not very surprising. It's also another example of how the political debate between the major party candidates continues spiraling downward. Both candidates have innumerable terrible ideas that could be credibly and persuasively exploited, by anyone that was trying. But instead, the candidates usually attack their opponents on the issues where they aren't quite bad enough. It's not framed that way, but that's the essence of what is happening.

Hillary supports a $15 minimum wage. So Trump, instead of explaining that the minimum wage harms the very people it seeks to help, breaks with Republican orthodoxy and supports an increase. Trump, when he's not calling for the US to murder terrorists' family members, occasionally says halfway noninterventionist things on war. So instead of focusing criticism on Trump's most belligerent remarks--a dovish line one assumes would resonate with her party--the Clinton campaign criticizes Trump for not expressing sufficient hostility with Russia. On nearly every issue where candidates differ, there is a race to be worse, first.

Trade policy appears to be just the latest competition. And regardless of which candidate runs faster, one thing is certain--everyone loses.

Defense Contractor Lobbies for... Peace and Trade?

A wonderful and surprising thing happened this week. The US-based Boeing Company signed a deal with Iran Air to sell up to $25 billion worth of new commercial airplanes.

Assuming you're not a shareholder of Boeing or a customer of Iran Air, it might not be immediately clear why this is big news. And in an ideal world, it wouldn't be. US companies would be able to trade freely with Iranian companies, and every new business deal would be entirely mundane. In the world we actually live in, however, this deal is nothing short of groundbreaking. It has major implications in both practical and symbolic ways.

Practical Implications
Starting first with the practical effects, Iran has been suffering under US and/or international sanctions to some extent dating back to 1979,* shortly after the Iranian Revolution overthrew the US-backed dictator there. Since that time, each successive US president, save George Bush Sr., has managed to tighten the sanctions regime. Despite failing to produce any positive political effects, the sanctions regime has had many negative effects for the Iranian economy over the years. One of the more acute, and obscure, consequences came from Iranian companies' inability to import new civilian airplanes or import spare parts to maintain their existing fleet. The result is that Iran's commercial aircraft are considerably less reliable and safe, on average, than the rest of the world's.

While very specific, this problem makes perfect sense from an economic perspective. Airplanes represent a very complex and specialized product, as well as a considerable amount of capital. There's no reason that an Iranian entrepreneur couldn't start an airplane or spare parts manufacturing business. But their ability to be successful in a such a specialized industry is limited by the size of the market.

An Economics Tangent
To see a more tangible example of this principle at work, think of the rise of specialty online retailers. And in particular, we'll use the not-entirely-random case of vegan shoes. Before the Internet and e-commerce had taken off, there were probably about as many vegans as there are today. And if you're vegan, especially if you're a guy, the prospect of finding a good vegan (non-leather) pair of dress shoes is a daunting one. It basically comes down to a tradeoff between principle and pain. You could buy high-end dress shoes that were fashionable and comfortable, but you'd have to compromise on principle because they would invariably be made of leather. Or you could find cheap dress shoes that were vegan by accident to make them cheap, but these would typically look terrible and feel even worse. I surely was not the only one confronted with this dilemma, and yet, my moderately-sized hometown of Boise, Idaho did not have a single vegan shoe store. It was outrageous, I assure you.

Fortunately, the Internet (and before that, the mail-order catalog to a degree) provided the solution. Because while there were not enough male vegans in Boise in need of professional shoes to support a dedicated store (indeed, I doubt the number was significantly higher than 1), there are more than enough in the world to do so. And thus, we have the rise of successful online vegan shoe stores such as the literally named Vegetarian-Shoes.co.uk.

Back to Iran
So why did I tell you a long-winded story about the trials of the vegan shoe consumer? Because it actually explains the Iranian airline predicament quite well. When dealing with a very specialized product with limited demand, the size of the market is everything. By preventing other countries from trading with Iran, this is akin to removing the ability of the vegan shoe store to sell online. They might be able to survive, but they won't be able to specialize and refine their product as much as an organization that has the world market as their possible customer base. Combine that with Iran's inability to import products, and the result is that the products that are available probably aren't going to be as good. In this way, reducing the size of the market limits specialization and tends to reduce product quality as well.

Given this backdrop, the entry of Boeing, the largest aircraft manufacturer in the world, into the Iranian market is likely to provide real and meaningful benefits to Iranian travelers. This alone would be great news.

Symbolic Implications
The benefits do not end there however. There's also a major symbolic component. As noted above, Iran and the US have been at odds more or less continuously since 1979. The two countries have been on the brink of war (with the US as the instigator) on multiple occasions, and it is almost a miracle that a direct full-scale conflict never erupted.

This is important context because Boeing isn't just a major aircraft manufacturer. They are also one of the US's largest defense contractors. This means that one of the principal members of the US military-industrial-complex is now engaging in a peaceful mutually beneficial trade with a nation that was a principal member on the US hit list until very recently. The US Government may have refused to fully normalize relations or fully lift sanctions on Iran. But Boeing is not waiting for the dust to settle. This deal represents a kind of private detente, one that may prove to be nearly as significant as the Iran Deal was in moving the ball towards normalcy.

Incentives Aligned with Peace and Trade
It should go without saying that Boeing did not pursue this deal out of the goodness of their heart. Instead, this is about the bottom line, and that's perfectly okay.

It should also be noted that, historically, Boeing is not shy about influencing the political process when it benefits the bottom line. This was seen most recently when it lobbied successfully for preserving that great archetype of corporate welfare, the Export-Import Bank. But influencing the government comes hand-in-hand with being a defense contractor. No individual or group in US society has much use for combat helicopters or other high-tech weapons. So if they are going to find a buyer, it will necessarily be through well-coordinated lobbying of the purchasers. This may explain why in the 2014 election cycle, Boeing was the 11th most prolific lobbying organization (based on dollars spent) in the US, according to OpenSecrets.org.

And as a defense contractor, it often makes business sense for Boeing to support war and hostilities around the globe. Rising tensions increase the perceived need for more weapons and military equipment, and war itself necessitates the replenishment of ammunition and equipment. From a financial perspective, these are great things for Boeing.

In this case, however, the tables have turned. Boeing has made the calculation that the potential profits from gaining Iranian airlines as new civilian aircraft customers are larger than the profits associated with an outright conflict or just continuing tensions in the region. The fact that Boeing pursued and announced this deal publicly, even before some of the details are final, proves that they have committed to this decision.

This is critical, because there will definitely be efforts to try to shut it down. Already, members of Congress have weighed in suggesting that this deal somehow represents a threat to US national security if Iran replaces old civilian airplanes with new, American-made ones. There are also still residual obstacles to the deal emerging from Obama's failure to honestly implement sanctions relief. Currently, Iran is still effectively denied access to the international payments system, so it's unclear how they would pay for the $25 billion deal. This has made some skeptical that the deal will actually stick.

My view, however, is that the sale will stand. This deal represents an opportunity for Boeing to earn more revenue from one customer than the whole company did in the first quarter of this year. Boeing has a very strong vested interest in seeing this transaction through. And their extensive lobbying power means they will almost certainly be able to eliminate any existing political obstacles in their path. If Boeing's lobbying organization can save the Export-Import Bank, which has no legitimate arguments supporting it, then surely it can also ram through a business deal that has no legitimate arguments opposing it. Hopefully, in the process, they'll eliminate the obstacles for other countries and companies to trade with Iran as well. In short, Boeing's profit-driven self-interest may be able to provide relief that President Obama promised but refused to provide himself.

Time will tell how all the details shake out on this story. But for now, we can sit back and enjoy the beautiful spectacle. A defense contractor is lobbying for peace and trade with Iran--and they are going to win.

*Disclaimer: This link portrays US actions in a much more positive light than is warranted, but it still summarizes some of the key events.

The Unfortunate Intersection of Oreos, Nationalism, and Protectionism

Donald Trump and others are taking a brave stand against the consumption of Oreos recently, and somehow it became a big news story. The Oreos are not being targeted for any ill-conceived change in recipe or a newfound desire to lose weight. No, the Oreos' offense is that their parent company plans to shift its manufacturing operations from Chicago to Mexico. So it's yet another case of American jobs being shipped overseas-rivers, and the Presidential candidates are predictably up in arms. For Trump, it's another example of how America loses; for Sanders, it's further confirmation of the evil and greedy nature of corporations; and for Hillary, it's an opportunity for her to show she hates economics as much as her competition. For the rest of us, though, it should be a teachable moment.

It is easy and simple to decry an action we dislike, but it is far more useful to understand why it happened in the first place. The latter is what we should be doing here. And while there are probably many reasons that contributed to the company's decision to move its facility--including the relatively high wages of Americans generally, relative to Mexicans; the likely increased costs associated with the Affordable Care Act; and the City of Chicago's steadfast march towards a likely bankruptcy scenario--much of the blame can likely be laid on America's favorable treatment of the domestic sugar industry, which drives up costs considerably for a cookie that counts sugar as it's second most significant ingredient (after flour).

Before we get to the details on sugar, however, it is useful to point out another issue here. It obviously makes sense why American politicians are denouncing a company's decisions to move jobs from America to Mexico; by definition, all of their voters are Americans. It also makes sense why workers at the Chicago facility, their families, and the immediate community would be upset by this decision. It affects them directly, and, given that many of these jobs likely required relatively limited skills, the future employment prospects for the former workers may be bleak in the current economic environment. That's a real problem, and it should not be forgotten. But we also need to acknowledge the other side of the coin. The jobs aren't being lost; they're being transferred. The positions that are currently filled by American residents will eventually be filled by Mexican people. Thus, for the rest of us that are neither politicians nor directly affected, the appropriate reaction is less obvious. Should we prefer, in general, that American people are employed over Mexican people? And if so, why?

Given the level of discussion we might be used to on these issues, it might almost seem like a rhetorical question. It is not. Yes, the simple nationalistic answer of Trump, Sanders, etc., is an option--namely, I'm American, so I prefer the Americans have jobs over the Mexicans--but it is not a defensible position. To see why, just replace "Americans" with your particular racial (or religious) and replace "Mexicans" with a minority group. For example, "I'm white, so I prefer white people have jobs over black people," probably sounds much worse, but in substance, it's the same thing. Given that the vast majority of Americans and Mexicans did not choose to be Americans or Mexicans and were simply born into it, there's no logical reason to prefer one to the other on the basis of a shared identity that, incidentally, you probably did not choose either.

So tribalism isn't adequate to answer this question. Additionally, no one's rights are being violated here; neither the American workers nor the Mexican ones can have a right to a job making Oreos because that would imply someone else has a duty to employ them. That means a rights-based approach to the question isn't helpful either. Instead, the most rational approach to evaluate this narrow question is likely a utilitarian one (i.e. greatest good for the greatest number), using the economic concept of diminishing marginal utility.

Like most academic expressions, diminishing marginal utility is just a fancy label for something we all already know to be true from personal experience. It is probably easiest to understand in terms of food. Let's say you're having a strong craving for a particular kind of chocolate cookie with a creme filling of dubious composition. If you indulge in that craving, the first cookie you have will be the most satisfying (i.e. gives you the most utility, in econ-speak). Then the next cookie will still be pretty good, but it won't give you quite as much joy as the first. This process continues on down the line. And by the time you get to cookie number ten, it's not nearly as impactful as the first one. That's diminishing marginal utility. And don't pretend like you've never had ten Oreos in one sitting. We've all been there. (Haven't we?)

In any case, the same concept applies with money and jobs. The difference between being unemployed and broke versus getting your first decent-paying job (say at $50k a year) is dramatic. If you subsequently got a promotion that increased your salary by the same amount (from $50k up to $100k), this would still be significant, but it's not as significant as going from $0 to $50k. What follows from this general principle is that, given certain assumptions,* one could theoretically increase overall utility (well-being) by taking a job from a person in a healthier economic position and giving it to a person in a more desperate economic position.** That description, incidentally, fits well with the story of Oreos. Jobs are being transferred from Americans who, on average, are likely to be relatively wealthy, to Mexican people who, on average, are likely to be relatively poor. Indeed, that's part of the reason the move is being made: Mexican labor is willing to work for less.

So, based on the utilitarian approach to the issue, it would seem that, if we take any position at all on this event, we should actually favor the Mexican workers over the American ones. And that's before we take into account the fact that the economic evidence on the gains to trade in general tend to be significant and tend to benefit the poorest people the most by reducing the cost of products they purchase. When such effects get added in, we should be even more strongly in favor of trade, even when that means the ever unpopular idea of outsourcing.

Of course, this general theoretical understanding of net gains or utility maximization is probably of little consolation to people that are directly affected by the job cuts. For them, it is more helpful to understand why this happened. And for Americans that could certainly be affected by similar decisions in the future, it's important to understand what policies help produce these outcomes. For that piece, we'll turn to an excellent new article by James Bovard featured at The Foundation for Economic Education. He outlines the unfortunate protectionist policies of the US sugar industry that have created a very difficult environment for large-scale confectionery producers. And he suggests the kinds of policies advocated by Donald Trump, if implemented, would lead to similarly negative outcomes for other industries. Instead of superficially condemning a company for following incentives, outrage is best channeled towards the US politicians foolishly created those incentives in the first place and are promising to create more of those distortions in the future. To that end, here's the link:

Oreo Is Leaving for Mexico and Trumpism Is to Blame

*There are many key assumptions here, and the idea of utility maximization can lead to decidedly unfortunate conclusions if not properly constrained (as we'll see in the next note). One important assumption here, is that we're assuming both that we can quantify a person's satisfaction (utility) in a remotely meaningful way and then compare it / aggregate it with other people's satisfaction. There are obviously reasons this can lead one astray, and Austrian economists would tend to avoid such aggregation / general assumptions about what "the people" want. That said, given that we're just making the assumption that more money tends to be preferable to less, it does not seem unreasonable to assume that is generally true across people.

**This general idea is part of the reason some economists (and others) would tend to favor wealth redistribution schemes. Taking from the rich is a small inconvenience to them and could be a huge boon to whoever it's given too, or so the argument goes. At the extreme of this view, you could have an argument for absolute economic equality / communism. The problem, from a libertarian perspective, however, is twofold. First, the rich person owns the money and, at least in some cases, likely earned it through legitimate, non-coercive means. Provided this is the case, there needs to be a justification to violate this right. (And need alone, would not suffice). This is why we were sure to note that in the above case, there were no rights at stake and thus a utilitarian approach could be more appropriate.

The second problem with such schemes is the disincentives they will create. If those disincentives are strong enough, they could make everyone worse off, even on utility maximizing grounds. Obviously, if the tax and transfer system really did ensure absolute income equality, the incentive system would totally break down and everyone would be poorer.