Monthly Archives: March 2017

The argument for free trade is half sound

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In 1900, the average tariff on imported goods was 27.4% and there was no income tax. Import tariffs provided all the money to run the US government and there was no minimum wage law. The high tariffs kept wage rates from falling to match those in the 3rd world. Currently, the average tariff is near-zero: 1.3%. There is a sizable income tax and a government income deficit; minimum wage laws are used to prop up salaries. Most economists claim we are doing things right now, and that the protective tariffs of the past were a mistake. Donald Trump claimed otherwise in his 2016 campaign. Academic economists are appalled, and generally claim he’s a fool, or worse. The argument they use to support low tariffs was made originally by Adam Smith (1776): “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry.” As a family benefits from low cost products, a country must too. Why pay more?  How stupid would you have to be to think otherwise?

A cartoon from Puck 1911. Do you cut tariffs, and if so how much. High tariffs provide high wages and expensive prices for the consumer. Low tariffs lead to cheap products and low wages. Uncle Sam is confused.

A cartoon from Puck, 1911. Should tariffs be cut, and if so, how much. High tariffs provide high prices and high wages. Low tariffs lead to low prices for the consumer, but low wages. Uncle Sam is confused.

Of course, a country is not a family, and it is clear that some people will benefit more from cheap products, others less, and some folks will even suffer. Consumers and importers benefit, while employees generally do not. They are displaced from work, or find they must compete with employees in very low wage countries, and often with child labor or slave labor. The cartoon at right shows the conundrum. Uncle Sam holds a knife labeled “Tariff Revision” trying to decide where to cut. Any cut that helps consumers hurts producers just as much. Despite the cartoon, it seems to me there is likely a non-zero tariff rate that does not slow trade too much, but still provides revenue and protects American jobs.

A job-protecting tariff was part of the Republican platform from Lincoln’s time, well into the 20th century, and part of the Whig platform before that. Democrats, especially in the south, preferred low tariffs, certainly no more than needed to provide money for government operation. That led to a diminution of US tariffs, beginning in the mid- 1800s, first for US trade with developed countries, and eventually with third world as well. By the 1930s, we got almost no government income from tariffs, and almost all from an ever-larger income tax. After WWII low tariff reductions became a way to promote world stability too: our way of helping the poor abroad get on their feet again. In the 2016 campaign, candidate Donald Trump challenged this motivation and the whole low-tariff approach as anti- American (amor anti America-first). He threatened to put a 35% tariff on cars imported from Mexico as a way to keep jobs here, and likely to pay for the wall he claimed he would build as president. Blue-collar workers loved this threat, whether they believed it or not, and they voted Republican to an extent not seen in decades. Educated, white collar folks were uniformly appalled at Trump’s America-first insensitivity, and perhaps (likely) by the thought that they might have to pay more for imported goods. As president, Trump re-adjusted his threat to 20%, an interesting choice, and (I suspect) a good one.

The effect of a 20% tariff can be seen better, I think, by considering a barter-economy between two countries, one developed, one not: Mexico and the US, say with an without a 20% tax. Assume these two countries trade only in suits and food. In the poor country, the average worker can make either 4 suits per month or 200 lbs of food. In the developed country, workers produce either 10 suits or 1000 lbs of food. Because it’s a barter economy with a difference in production, we expect that, in the poor country, a suit costs 50 lbs of food; in the rich country, 100 lbs of food. There is room here to profit by trade.

The current state of tariffs world-wide. Quite a few countries have tariffs much higher than ours. Among those, Mexico.

Tariffs world-wide. While we put no tax on most imported products, while much of the world taxes our products rather heavily.

With no tariff, totally free trade, an importer will find he can make a profit bringing 100 lbs of US food to Mexico to trade for 2 suits. He can return two suits to the US having gotten his two suits at the price of one, less the cost of transport, lawyers, and middlemen (relatively low). Some US suit-makers will suffer, but the importer benefits immediately, and eventually US consumers and Mexican suit workers will benefit too. Eventually, US suit prices will go down, and Mexican wages up, We will have cheaper suits and will shift production to produce what we make best —  food.

In time, we can expect that an American suit maker will move his entire production to Mexico bringing better equipment and better management. Under his hand, lets assume his Mexican workers make 6 suits per month. The boss can now pay them better, perhaps 100 lbs of food and two suits per month. He still makes a nice profit, more than before: he ships two suits to the US to buy the 200 lbs of food, and retains now two suits as profit. Hillary Clinton believed this process was irreversible. “Those jobs are gone and they’re not coming back,” her campaign told CNN. She claimed she’d retrain the jobless “for the jobs of the future” and redistribute the wealth of the rich, a standard plank of the democratic platform since 1896. But for several reasons industrial voters didn’t trust her. Redistribution of wealth rarely works because, for example, the manufacturer can keep his profits off-shore, as many do.

While a very high tariff would stop all trade, but lets see what would happen with Trump’s 20% tariff. With a 20% tariff, when the first two suits come to the US, we extract 0.4 suits in tax revenue, but nothing on export. The importer still makes a profit, but it’s now 0.6 suits, the equivalent of 60 lbs of food. He can sell his suits for less than the American, but not quite as much less. If the manufacturer moves to Mexico he makes more money than by trade alone, but not quite as much. Tax is still collected on every suit brought to America — now 20% of the 3 suits per Mexican worker that the Boss must export. The American worker’s wages are depressed but he/she isn’t forced to compete with the Mexican dollar-for-dollar (suit for suit). In barter terms, he isn’t required to make 6 suits for every 100 lbs of food.lincoln-national-bank-internal-improvements-tariffs

Repeating the above for different tax rates, we find that, in the above fictional economy a 50% tariff in the maximum to allow any trade (or the minimum rate to stop trade completely): the first two suits might enter; but they’d be taxed at one suit, just enough to pay for the 100 lbs of food. There would be no profit for the importer, and he/she would stop importing. At 50% tariff, we would get no new goods, and we’d collect no new revenue – a bad situation. Lincoln’s “protective tariffs” of 1861 may have contributed to Southern succession and the start of the civil war. While there is a benefit to trade, it seems to me that some modest tariff (10%, 20%) is better for us — a conclusion that Trump seems to have intuited, and that many other countries seem to have come to, too (see map-chart above). As for the academic economists, I note that they also predicted that stock market crash should Trump be elected; it’s gone nearly straight up since November 8, 2016. For experts on money, I find that most economists are not rich.

Robert E. Buxbaum, March 27, 2017. I learned such economics as I have from my one course in economics, plus comic books like the classic “Once upon a dime” produced by the New York Federal Reserve. Among the lessons learned: that money is a distraction, just a more convenient way to carry around a suit, 100 lbs of food, or a month of work. If you want to understand economics, I think it helps to work things out in terms of barter. As

Global warming and the president’s Resolute desk

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In the summer of 2016, the Crystal Serenity, a cruse ship passed through the Northwest passage, going from the Pacific to the Atlantic above the Canadian arctic circle. It was a first for a cruise ship, but the first time any modern ship made the passage, it was 162 years ago, and the ship was wooden and unmanned. It was the British Resolute; wood from that ship was used to make the President’s main desk — one used by the last four presidents. And thereby hangs a tale of good global warming, IMHO.

President Trump meets with college presidents at the Resolute desk. Originally the front had portraits of Queen Victoria and President Hayes. Those are gone; the eagle on the front is an addition, as is the bottom stand.

President Trump meets with college presidents at the Resolute desk. Originally the front had portraits of Queen Victoria and President Hayes. Those are gone; the eagle on the front is an addition, as is the bottom stand. The desk is now 2″ taller than originally. 

The world today is warmer than it was in 1900. But, what is not generally appreciated is that, in 1900 the world was warmer than In 1800; that in 1800 it was warmer than in 1700; and that, in 1640, it was so cold there were regular fairs on the frozen river Themes. By the 1840s there were enough reports of global warming that folks in England thought the northwest passage might have opened at last. In 1845 the British sent two ships, the Erebus and the Terror into the Canadian Arctic looking for the passage. They didn’t make it. They and their crews were lost and not seen again until 2014. In hopes of finding them though, the US and Britain sent other ships, including the Resolute under the command of captain Edward Belcher.

The Resolute was specially made to withstand the pressure of ice. Like the previous ships, and the modern cruise ship, it entered the passage from the Pacific during the peak summer thaw. Like the ships before, the Resolute and a partner ship got stuck in the ice — ice that was not quite stationary, but nearly so, The ships continued to move with the ice, but at an unbearably slow pace. After a year and a half captain Belcher had moved a few hundred miles, but had had enough. He abandoned his ships and walked out of Canada to face courts martial in England (English captains were supposed to “go down with the ship”). Belcher was acquitted; the ice continued to move, and the ships moved with it. One ship sank, but the Resolute, apparently unscathed, passed through to the Atlantic. Without captain or crew, she was the first ship in recorded history to make the passage, something that would not happen again till the Nautilus nuclear submarine did it under the ice, 100 years later.

 

The ghost ship Resolute was found in September 1855, five years after she set sail, by captain Buddington of the American whaler, George Henry. She was floating, unmanned, 1200 miles from where captain Belcher had left her. And according to the law of the sea, she belonged to Buddington and his crew to use as they saw fit. But the US was inching to war with Britain, an outgrowth of the Crimean war and seized Russo-American property. Franklin Pierce thought it would help to return the ship as a sign of friendship — to break the ice, as it were. A proposal for funds was presented to congress and passed; the ship was bought, towed to the Brooklyn Navy yard for refitting, and returned to Britain as a gift. The gift may have worked: war with Britain was averted, and the seized property was returned. Then again, Britain went on to supply the confederacy early in the Civil War. None-the-less, it was a notable ship, and a notable gift, and when it was broken up, Parliament decided to have two “friendship desks” made of its timbers. One desk was presented to President Hayes, the other to Queen Victoria. One of these desks sits the British Naval museum at Portsmouth; its American cousin serves Donald Trump in the Oval office as it has served many president before him. It has been used by Coolidge, Kennedy, Carter, Reagan, Clinton, Bush II, and Obama before him — a reminder that global warming can be good, in both senses. If you are interested in the other presidents’ desks, I wrote a review of them here.

As for the reason for the global warming of the mid 1800s, It seems that climate is chaotic. ON a related note, I have proposed that we make a more-permanent northwest passage by cutting thorough one of the islands in northern Canada. If you want to travel the Northwest passage in 2017, there is another cruise scheduled, but passage is sold out.

Robert Buxbaum, March 16, 2017.

Arrested for decriminalized possession

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The arrest rate for marijuana is hardly down despite widespread decriminalization, but use is up. decriminalization, but use is up. A rate that exceeds that for all violent crime.

Despite years of marijuana decriminalization, arrest rates for marijuana are up from 20-25 years ago, and hardly down from last year. Why?

There are a couple of troubling patterns in US drug arrests. For one, though marijuana has been decriminalized in much of the USA, marijuana arrest rates are hardly down from five years ago, and higher than 20-30 years ago — see graph at right. Besides that, it’s still mostly black-people and Latinos arrested. And the crime is, 4/5 the of the time, drug possession, not sale.

At the same time that violent crime rates are falling, marijuana possession arrests are rising (see graph below). Currently, according to FBI statistics,  more people are arrested for marijuana possession than for all violent crime combined. You’d expect it would not be this way, and a question I’d like to explore is why. But first, let’s look at more data. I note that part of an explanation is that marijuana use is up (18% in 2015 vs 12% in 1990). This still doesn’t explain the racial imbalance but it could explain the general rise. Marijuana isn’t quite legal, and if use is up, you’d expect arrests to be up. But even here, something is fishy: use rates are the same as in 1980, 35+ years ago in the midst of the “war on drugs,” but arrest rates have more than doubled since. Why? Take New York City as an example, 17,762 people were arrested for low-level marijuana possession in 2016 (smoking in public or possession of 25 gm to 2 oz). The low-level arrest rate is twice the national average in this Democratic-bastion city, where the drug was decriminalized years ago. Arrest rates in NYC went up an additional 10% in 2016, with black people arrested at 11 times the rate of white people. How could this be?

The race discrepancy of arrests persists across the US. Though black citizens use drugs only 15% or so more often than whites, and make up only 13% of the US population, they are arrested for drugs about three times as often and incarcerated about 4 times as often. It’s mostly for marijuana possession too, and the discrepancy varies very strongly by location In Louisiana, Illinois, and New York City arrests are particularly weighted to people of color. When New York City police precinct captains were asked about this, they explained that their instructions come from above. It’s a curious answer, I’d say, reflecting perhaps their dislike of the mayor.

Drug arrests are mostly for possession, not sale, and the spread is rising.

Drug arrests are mostly for possession, not sale and the spread is rising. More than half the time, it’s marijuana.

One of the race-affecting instructions is that the police are instructed to patrol black neighborhoods, but not the student unions of majority-white colleges like NYU. They’re mandated to stop and search junky cars but not nice ones, and to search people who have outstanding parking tickets, but not generally. They even get raises that depend on the number of tickets given, a practice that does not lead to a pattern of looking the other way — one many New Yorkers would prefer. Another issue: in many states, including New York, the police can keep money or cars, if they can claim that the asset was purchased with drug money or used in the drug trade. This leads to a practice where the city budget benefits when the police arrest persons they don’t expect will be convicted. It’s a practice called civil asset forfeiture, one lampooned, on Last Week Tonight, but jealously guarded. Since it is near impossible to prove that the money or car was not used in any way illegally, once they arrest someone, the police can expect to keep his or her money or cars indefinitely. The annoyance of lawyers perhaps encourages the arrest of people who do not seem to have them — people of color. New York mayor deBlassio justifies his arrests as a way to protect the neighborhoods, as his version of former mayor, Guilliani’s broken window approach. Maybe. But I think the profit motive is at least as relevant.

drug arrests hit black folks a lot more than white

Drug arrests hit black folks a lot more than white.

I note that strict justice tends to land hardest on the poor and defenseless. I also note that many important people have used marijuana without it damaging their lives in any obvious way. Both Jeb! Bush and Bill Clinton claimed to have smoked it; as did Barak Obama, Al Gore, and the Beatles. My bottom line: while marijuana decriminalization is worthwhile, it must go along with the repeal of civil asset forfeiture laws, and other means that make arrests into profit centers – or so it appears to me. Otherwise we’ll keep on flushing lives down the drain for no good reason.

Robert Buxbaum, March 6, 2017. I’ve previously blogged about the structure of criminal sentencing, coming to conclude that the least strict sentence that does the job is to be preferred. I also ran for water commissioner in 2016.