This is rich! In this above-linked op-ed piece (which isn’t identified as such but, rather, is presented as a factual report), the author takes Trump to task for “faulty math” regarding trade policy. But it’s the author of this article whose math is “faulty” at best, or deliberately misleading at worst. First, let’s consider some of the statements leading up to his “math.”
In the case of Mexico, the American companies that exported a quarter of a trillion dollars of goods and services to that country last year would be out a customer, and likely cut jobs.
Those American companies that tried to replace the $323 billion in Mexican imports would likely do so at a higher cost — assuming they are in the United States to begin with.
They would be in the United States if similar policies are applied to other countries, which would only make sense. Then, yes, the domestic manufacturers would likely replace those Mexican imports at a higher cost. But the author conveniently ignores the fact that the increased demand for labor in the U.S. would drive wages up even faster.
“Americans seem to really like guacamole,” Noland said, “but the idea that we are going to have giant greenhouses and lots of avocados and limes – the fact that we are purchasing them from the Mexicans rather than producing them at home tells you producing them at home is more expensive. We can stop trading with the Mexicans, and have $60 billion less in consumption.”
Seriously? This is the argument for not bringing a million manufacturing jobs back from Mexico? Avocados and guacamole? If they cost 20% more, people won’t buy them? They’ll just consume less? They won’t serve onion dip at their parties instead? Come on! How much of your disposable income do you spend on avocados and guacamole? How much more income would you have to spend on them if your wages went up?
By the statistics most widely accepted among economists, the U.S. position with the rest of the world has been steadily improving as investment flows into the country from abroad and supports millions of jobs.
This is an outright lie. The flow of capital investment has been negative for decades. While some investment dollars do come into the U.S., far more have left, making net investment a big drag on jobs.
OK, now for the “faulty math:”
Even if Trump achieved his wildest success, and eliminated the United States’ $500 billion trade deficit solely through increased exports that boosted gross domestic product on a dollar-for-dollar basis, it would do little to dent the estimated $7 trillion in government deficits his tax plan is projected to generate over the next decade.
Alan Cole, an economist at the Tax Foundation, said that every dollar of gross domestic product generates about 17.6 cents in federal government revenue, meaning the $500 billion trade shortfall would translate into just $88 billion in new taxes.
That part is true but, as free trade advocates tend to do, he’s presented only one half of the equation. That annual trade deficit of $500 billion (actually $800 billion if talking about manufactured products) is a drain on the economy. If every dollar of that deficit isn’t re-injected into the economy in some way, the result is a permanent recession. Since we’ve already noted that capital investment is also a net outflow, the only way left to re-inject that money into the economy is through federal deficit spending, in all its forms. Grants for education, for police and fire, for infrastructure. safety net programs like welfare and medicaid, health care premium support under the Affordable Care Act, student loans … the list goes on and on. All of this federal spending is made necessary by the trade deficit drain of money from the economy.
So, not only would restoring a balance of trade produce an additional $88 billion in new federal revenue (nothing to sneeze at and it would likely be more than that), but it would also cut federal spending by $500 billion. That’s a net impact of nearly $600 billion per year – enough for the federal government to balance its budget. And it would likely pave the way for cuts to personal income tax rates, saving all of us a bundle.
The case for free trade made by its advocates often reminds me of the commercials we all see on TV for the local casinos. Everyone gathered around the blackjack table or the crap table pumps their fists and high-fives their friends as they celebrate another win and rake in their money. Everyone’s winning and having a great time! “Casinos are a big boost for the local economy,” we’re always told when some development group wants to build a new one in your community. The casino owners and a few surrounding hotels and restaurants are winners. You’re not. If you’re someone who frequents one of these places, you’re a loser. You may not want to admit it, but you are – you’re a loser. Don’t feel bad. Everyone who goes there is a loser. Everyone who owns a business where you’d spend your money if you hadn’t lost it at the casino is also a loser. Casinos are a net drag on the broader community, siphoning away money that people need for other things.
It’s exactly the same with a trade deficit. Global corporations are winners. The rest of us are losers. But they want you to think that free trade benefits you in ways that are just too difficult to understand or quantify. Remember Enron, the huge “energy trading company” that was such a darling of Wall Street back in the ’90s? No one could figure out exactly how they made money. Enron executives condescendingly sneered that their business was just too sophisticated and complicated for most investors to understand. And lots of otherwise-intelligent people were sucked in. Eventually, the whole thing collapsed spectacularly and was exposed as a giant scam. Investors had been played for fools. That’s exactly the same scam free traders are running when they tell you that it’s not just a matter of money in versus money out.
If trade deficits don’t matter, why is it that countries like Mexico, China, Germany, Japan, South Korea and others are so adamantly opposed to taking their turn at it? It’s because they know the real math.