Recently by Gary North: Free Trade: The Litmus Test of Economics
In a previous article, “Tax-Loving Conservatives,” I wrote about an invisible line down the middle of your street. Jones lives on the other side. You live on your side. Jones makes you an offer to sell something 10% cheaper than Smith sells. Smith lives on your side of the street.
Smith gets Brown and Green to impose a 25% sales tax on anything Jones offers to sell to anyone on your side of the street. Then I analyzed this arrangement in terms of who wins – Smith – and who loses: you, Jones, Green, and Brown. You can read this here.
I thought the metaphor of the invisible line was clear. There is no invisible economic line. There is only a judicial line. Judicial lines are matters of guns and badges. People on one side of the line drive in one direction. People on the other side drive in the opposite direction. It is illegal to drive in the wrong direction on either side. But, economically speaking, there is no line.
Similarly, there is an invisible judicial line across the Rio Grande River. There is also one along the coasts. There is one between Canada and the United States. These have to do with residency and voting, both of which have been made legal issues. These have to do with “our money” and “your money.”
My point: there is no economic line. The line exists as a judicial category, not an economic category. It becomes an economic category only because politicians turn these judicial lines into economic lines.
In the days before the income tax, anyone could come into the United States. There were no passports. Late in the 19th century, there was an entry point at Ellis Island. Immigration bureaucrats blocked the entry of sick people. This meant that immigration restrictions were a public health issue. The authorities blocked out microscopic invaders by blocking the people who carried them. But healthy people were allowed to enter the nation. My great-grandfather arrived from England this way. So did my Armenian father-in-law.
WAR AND PASSPORTS
We forget that the American passport was an imposition by two Presidents: Woodrow Wilson and Franklin Roosevelt. Here is the Wikipedia account.
From 1789 through late 1941, the government established under the Constitution required passports of citizens only during the American Civil War (1861-1865) and during and shortly after World War I (1914-1918). The passport requirement of the Civil War era lacked statutory authority. After the outbreak of World War I, passports were required by executive order, though there was no statutory authority for the requirement. The Travel Control Act of May 22, 1918 permitted the president, when the United States was at war, to proclaim a passport requirement, and a proclamation was issued on August 18, 1918. Though World War I ended on November 11, 1918, the passport requirement lingered until March 3, 1921.
The Wiki authors were too polite to identify what happened on March 4. That was the day that President Harding was inaugurated. I fixed the entry to reflect this. I added: “On March 4, Warren G. Harding was inaugurated.” We shall see how long this addition remains.
There was an absence of a passport requirement under United States law between 1921 and 1941. World War II (1939-1945) again led to passport requirements under the Travel Control Act of 1918. A 1978 amendment to the Immigration and Nationality Act of 1952 made it illegal to enter or depart the United States without an issued passport even in peacetime.
The contemporary period of required passports for Americans under United States law began on November 29, 1941.
The Wiki authors were too polite to identify what happened next: Pearl Harbor (December 7). Gee, it looks as though President Roosevelt knew something big was coming, military-wise. But I digress.
TARIFFS AND IMMIGRATION
The 1924 immigration act imposed quotas on immigrants. Why? Because of the income tax, which had passed in 1913, according to the Attorney General, although not the voters. (See the two-volume book, The Law That Never Was.”) Similar restrictions were placed on immigrants inside Europe.
World War I and the income taxes that paid for it led to these restrictions. When immigrants could become citizens and vote their way into other Americans’ wallets, the barriers went up.
These barriers did not come down until 1965, when Teddy Kennedy and Lyndon Johnson figured out that Mexican immigrants’ children born inside the USA would become voters and join the Democrats to help Democrats vote money out of Republicans’ wallets two decades later. That was the year that a new immigration law was passed.
That law was a huge gift to Republican employers. It broke the labor union movement. Immigrants worked cheaply in right-to-work states. Their products could be exported North – no tariffs. Democrats don’t like to remind their constituents of this fact. Republicans don’t, either. It gives too much credit to the hated Teddy and LBJ. But Teddy and LBJ gave the conservative movement its greatest domestic political victory of the second half of the twentieth century: the roll-back of trade unionism.
This was the immigration side of the victory. The other side was President Kennedy’s move to lower tariffs: the famous GATT tariff reductions. The Democrats were the ramrods of reduced trade barriers. The flood of imported goods broke the back of trade unionism, which had relied on government intervention after 1935: the Wagner Act. America’s labor markets were reclaimed from the Democrats of 1935. The Democrats did this. The Republicans did not have the votes. In any case, the Republican legacy had always been high tariffs, all the way back to Abraham Lincoln.
WHO WINS? WHO LOSES?
I did my best to show that trade between people on “This Side” and “That Side” should be a matter of free choice between individual traders.
One of my subscribers asked these questions.
1) If the person in “This Side” does not drop his price to compete with the person on “that side” and people on “this side” bought regularly from “that side” would there not, all other things being equal and over time, be a transfer of wealth to “that side” from “this side”? And, if that transfer of wealth were large enough would that not eventually hurt “this side”, possibly making them subservient to “that side” now that “that side” has more wealth and the abilities that come with it? (presupposition is that depraved man will use wealth to harm his neighbors and the corollary that wealth is a form of defense). Maybe the assertion is invalid as long as venders on “this side” will come down in price and compete with venders on “that side”. But, the tariff would, at least, keep the wealth on the same side of the street where, supposedly, you have more in common (i.e. defense interest) than with those across the street.2) What if the people on “that side” have a death wish for the people of “this side” and they have a policy to use revenues generated by sales to create ways to destroy “this side”?… would not “this side” be wise to discourage trade with “that side”? This would be anti-free trade, no doubt, but it seems rather insane to fund your enemy… in this scenario it seems that the invisible lines might make a difference?
I will do my best to answer these questions. They all stem from an incorrect understanding of voluntary exchange. These errors are the default setting in most people’s thinking. Mercantilism and Hamiltonianism rest on them. People think nationally in terms of “them vs. us.” They think individually in terms of “Let’s make a deal.”
If the person in “This Side” does not drop his price to compete with the person on “that side” and people on “this side” bought regularly from “that side” would there not, all other things being equal and over time, be a transfer of wealth to “that side” from “this side”?
With what do people on This Side buy the goods? Money. Where did they get the money? From producing something.
So, people buy a cheaper item from sellers on That Side. This leaves them with more money in their pockets on This Side. They can now spend it or invest it. They are not poorer than before the trade. They are richer. They have the item they bought, plus the extra money.
There is a transfer of wealth to the other side: money. There is also a transfer of wealth from the other side: stuff.
The mercantilist defines money as wealth, and stuff as . . . what? He never really says. He just says it’s not as valuable as money.
David Hume (1752) and Adam Smith (1776) argued against this. They said that stuff is wealth, too. But the Hamiltonian mind set cannot fathom this. The Hamiltonians want Americans to spend most of their money on stuff manufactured by subsidized, inefficient producers on This Side. So, they pass sales taxes on imported goods.
The fact is this: if the stuff imported from abroad were not regarded as worth more than the money exported to pay for it, no one on This Side would buy from anyone on That Side. No one is in the charity business. No one gives away something for nothing in business.
What of the sales not made by the manufacturer on This Side, because there was no bargain available on That Side? There was no money left over. This question, the Hamiltonians prefer to ignore. That seller is not a member of the cronies in the protected, inefficient firms.
Hamiltonians subsidize domestic firms that cannot compete with foreign firms, while starving out firms that can compete, but cannot survive when the crony firms get the sales domestically. There is no extra money left over after the trade.
NATIONAL DEFENSE
This argument is common. I have heard it for half a century.
And, if that transfer of wealth were large enough would that not eventually hurt “this side”, possibly making them subservient to “that side” now that “that side” has more wealth and the abilities that come with it? (presupposition is that depraved man will use wealth to harm his neighbors and the corollary that wealth is a form of defense). Maybe the assertion is invalid as long as venders on “this side” will come down in price and compete with venders on “that side”. But, the tariff would, at least, keep the wealth on the same side of the street where, supposedly, you have more in common (i.e. defense interest) than with those across the street.
This is the old “national defense” argument. Here is the key fact. Military defense is not a matter of voluntary exchange. It is a matter of guns and uniforms and coercion. Once again, the argument invokes guns.
Question: Why should the government allow any trade with a foreign enemy, if the issue is war? What has a 20% sales tax got to do with defending the nation? I can see it now. In the middle of World War II, Roosevelt proposes a 20% import tax on German and Japanese goods. Would that have played in Peoria?
If this argument holds up, then Congress should impose a 100% ban on trade. Tariffs? You mean we should charge Americans an extra 20% or 30% because the government on the other side of the line is going to nuke us? Does this make sense?
This argument sounds nutty. That’s why no one in Congress ever mentions it when arguing for tariff increases. No one has ever invoked this argument in public. But Hamiltonians use it, since they have no valid economic arguments. They take whatever is available.
Now on to #2.
What if the people on “that side” have a death wish for the people of “this side” and they have a policy to use revenues generated by sales to create ways to destroy “this side”?… would not “this side” be wise to discourage trade with “that side”? This would be anti-free trade, no doubt, but it seems rather insane to fund your enemy… in this scenario it seems that the invisible lines might make a difference?
This is the same argument. It is re-stated in new words.
Answer: what has a 20% tariff got to do with defending the nation against defeat and destruction?
In any case, the U.S. government has done the opposite over the last 60 years.
SUBSIDIES FOR EXPORTS
In 1961, it authorized the Bryant Chucking & Grinder company to sell to the USSR the machines that alone made the unique ball bearings that alone made possible MIRVed nuclear warheads.
What’s that? They never told you this in high school? Gee, I wonder why not. Here is Antony Sutton’s account.
The Bryant Chucking Grinder Company accepted a Soviet order for thirty-five Centalign-B machines for processing miniature ball bearings. All such precision ball bearings in the United States, used by the Department of Defense for missile guidance systems, were processed on seventy-two Bryant Centalign Model-B machines.In 1961 the Department of Commerce approved export of thirty-five such machines to the USSR, which would have given the Soviets capability about equal to 50 percent of the U.S. capability.The Soviets had no equipment for such mass production processing, and neither the USSR nor any European manufacturer could manufacture such equipment. A Department of Commerce statement that there were other manufacturers was shown to be inaccurate. Commerce proposed to give the Soviet Union an ability to use its higher-thrust rockets with much greater accuracy and so pull ahead of the United States. Subsequently, a congressional investigation yielded accurate information not otherwise available to independent nongovernment researchers and the general public.
Why was that in the national interest? Because it made possible the multi-trillion-dollar build-up of the military-industrial complex, 1961-91. When I say “national interest,” I am referring to the national interest, according to the military-industrial-congressional complex. Then, in 1972, Congress approved export subsidies to the USSR to provide wheat. The Soviets’ socialized agriculture had produced another of its recurring mini-crops again. This subsidy for the USSR raised food prices in the USA. But, because it was the policy of the U.S. Department of Agriculture to subsidize agriculture and therefore keep food prices high, this was seen as consistent with American self-interest, as defined by Congress.
CONCLUSION
The separation of “This Side” from “That Side” exists because of politics. It becomes an economic issue only because politics is allowed to intrude in economic issues.
The popular Hamiltonian argument for tariffs because of national defense makes no sense. A 30% tariff on a country that intends to destroy you will not play in Peoria. This is why it has never been invoked in Congress. It’s just one more example of grasping at conceptual straws.
If anything, free trade reduces the urge to go to war. It creates a domestic constituency against going to war. “Make profits, not war!” “Sell trinkets. Don’t die.”
June 14, 2012
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2012 Gary North
