Is Free Trade Dead?

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The Wealth Of Nations, Book IV Chapter II, pp. 456-7, paras. 11-12.

“By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”

The Trump era will forever be distinguished by its notable shift away from free trade economic policies. Generating a resurgence passionate resurgence in the advocacy of protectionism. This rhetoric was salient even in the nascent period of the Trump phenomenon, dating back to his iconoclastic speeches on the campaign trail in 2015. Championing a quasi-neo-mercantilism that challenged the decades-long conventional wisdom of the Republican Party. This prevalent truism being that liberalized trade is a core component of any sound economic platform. Taking into account the modest reforms we saw under the Regan Administration. The wave of neoliberal trade policy continued through the 1990s with the bipartisan support of the NAFTA bill. It seemed as if the trend towards globalized trade was seemingly unstoppable. Until right-wing populism swept the United States indicating a change in public perception of moderately unfettered international free trade.

The Trumpian position on international trade dates back to the years of the NAFTA bill of the 1990s. Vocal high-profile opponents of the bill included columnist and former Presidential aide Pat Buchanan and Ross Perot. Expressing concern over the outsourcing of production and its direct impact on the American economy. Mainly, all of the U.S. workers have been displaced by outsourcing jobs to foreign countries. From a prima facie standpoint, this argument seems sound. However, after closer examination, it becomes quite clear that economically it is profoundly flawed. There is a moral dimension embedded in this argument because people do suffer from losing their jobs. The unfortunate economic vicissitudes of the American Rust Belt can be speculated to have been greatly impacted by the outsourcing of domestic labor.

On a deeper level, most of the variable causing the shift towards foreign production of goods has been engendered by faulty economic policies. Economic behavior is guided by the unwavering laws of economic exchange. Analogous to the laws of physics they cannot be indefinitely contradicted without serious repercussions. Since each economic agent acts in their self-interest they respond accordingly to government initiatives and laws that violate these immutable laws and informal laws guiding commerce. Domestic regulations laws governing minimum wage, production, transportation, and taxation become so onerous that firms become incentivized to move to manufacture abroad. While policies such as minimum wage laws are billed as means of improving the quality of life for low-skilled workers, it tends to have the opposite effect. Such measures only serve to benefit a few while harming many through increasing the unemployment rate. Raising the price floor for labor will impact profitability that leaves employers with a difficult choice. Either cut labor expenses through automation, outsourcing and working with a skeleton crew or succumb to bankruptcy.

Driving the shift to off-shore production is the comparative advantage that many countries have over the United States when it comes to manufacturing and other services. Classical economists such as Adam Smith and David Ricardo believed that it was more advantageous for each economic unit (whether it be an individual worker, firm, or national economy) to focus on the goods and services they produced most efficiently. In a sense comparative advantage logically extends the anything else that can be obtained through various trading partners.  For example, it is well known that Adam Smith was a big fan of Claret wine, a beverage fermented in France. The soil in Scotland is not generally unsuited to winemaking, therefore it would not be sensible to produce Claret in the United Kingdom. But Scotland does have climate amendable to the production of some of the world’s finest Single Malt whiskies.

The comparative advantage that countries such as China as over the United States are lower labor costs and fewer regulations. Due to measures such as minimum wage laws operating as price controls (functioning as a  price floor), they are bound to create disruptions in the labor market. Tempting producers to take actions such as outsourcing jobs to curtail losses. A sensible reaction to policies that effectively undermine the core purpose of prices. That purpose is to serve as a quantifiable signal that communicates the market supply and demand of a commodity. Suppliers and producers need to respond to the inflated value of labor accordingly to stay solvent. That unfortunately requires workers to be laid off and to find more affordable labor alternatives. To quote Milton Friedman manipulating prices is never a “free lunch”! The disutility of mandating a higher minimum is evident not only from the qualitative reason of human nature but also in quantifiable data. While estimates suggest that raising the national minimum wage to $15/hr would lift 900,000 Americans out of poverty. Simultaneously, such a change would also be projected to put 34 million Americans out of work. Demonstrating how the costs of raising the national price floor outweigh the minor benefits.

From a superficial standpoint, it is easy to label the competition of foreign as being the taproot of our economic woes. It makes for wonderfully succinct bumper sticker slogans that are catchy and fun to chant at rallies and protests. The protectionist approach of blaming others for our economic problems ignores the inherent issues with our domestic policies. Its restrictive regulations and high corporate tax rates drive businesses to go abroad. There was a lot of social currency in placing the blame on other countries for our inefficiencies in production during the Trump years. These admonishments of free trade are predicated upon economic fallacies and illusory thinking. For a politician, it is easier to play the blame game than to encourage innovation to stay competitive. It is also much quicker to mobilize crowds through economically illiterate bluster than to tell them to take control of their destiny.

The Fallacy of Raising the Minimum Wage

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The renewed interest in raising the federal minimum wage is gaining steam as a hotly contested debate. Especially considering President Biden is inserting a $15 an hour minimum wage requirement in his latest Coronavirus relief bill. There are many proponents on both sides of the issue. Many advocates of a higher minimum wage claim the moral high ground on the issue, considering the rate has not kept up with inflation. Suggesting that raising it to $15 per hour would aid those working in low paid professions with being able to afford the bare necessities. Some even boldly advocating for a pricing floor of $24 per hour as being an adequate minimum wage.

However, is it economically sound to raise the minimum wage to even $15 per hour? Over the past couple of years, several papers have suggested so, but their interpretation of the data did suffer from some misconceptions. If we underwent an extremely rudimentary cost/benefit analysis of raising the pricing floor for labor we would see that it is a detrimental policy. A recent study found that raising it to $15 an hour would lift approximately 900,000 people out of poverty. As many advocates enthusiastically indicate as being evidence that this would be a good policy. Per the 2020 U.S. Census, it is estimated that 34 million people were living in poverty in 2019. Making 900,000 only a drop in the bucket in terms of battling the social issue of poverty. What the pro-raise the minimum wage camp neglects to inform us of that the same study they cite also estimates that 1.4 million people would also stand to lose their jobs! Making it reasonable to question whether raising the minimum wage would truly benefit the poor members of society.

The resurgence of the minimum wage debate mirrors the arguments for imposing pricing ceilings on in-demand goods during the beginning of the COVD-19 pandemic. Why? Because minimum wage laws and price gouging laws both operate as forms of price controls. Generally, these policies are implemented to insulate the consumer or work from “exploitation”. Either being paid inadequate wages or having to pay exorbitant prices for commodities during a time of crisis. However, prices are the key market signal that bridges the information asymmetries between consumer and supplier. Prices are contingent upon the supply of a product or service and the level of demand. Hinging on one of the most basic and universally known economic laws. Despite the good intentions of the activists pushing for an elevated minimum wage they are doing more harm than good. By mandating by law that the minimum wage needs to be at a certain dollar amount it immediately creates distortions in the labor market.

In an abstract sense, the worker is selling their time, services, and human capital when they agree to accept a job offer. In the job market, the corporations and small businesses looking for workers are the consumers. The job seekers are the ones supplying the labor. High wages alert prospective job seekers were the most lucrative job opportunities are which generally require less common skills. Directing the job seekers to make the appropriate investments in human capital. Implicitly detailing which degrees, certificate programs, and other forms of job training are required to stand out in the job market. Workers with little in the way of skills command a lower starting wage. Compensation is based on a worker’s productive output capacity. If a worker has few skills their productivity would be relatively lower from an economic standpoint. When the minimum wage is raised there is an imminent risk of displacing low-skill workers. If a fast-food worker is only producing $9 an hour worth of productive output and the minimum wage is raised to $15 an hour the business owner stands to take the loss. Then he may decide to cut corners and operate with fewer people, compromised product quality, or automatic the process. The threat of automation is real. Several studies have found that driving the price floor for labor up results  in increased automation of operations. It is clear that the distortion of prices in the labor market could lead to displacing more low skill workers. The result being more low skill workers harmed than helped. Some income better than no income at all?

Yakus V. United States: Price Controls and Wartime Socialism

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Introduction:

Conventional wisdom holds that many of our economic freedoms come second to the interests of the nation in times of national crisis. During World War II, there was unprecedented growth of government intervention in the national economy. Inflationary monetary policy to fund the war effort without revealing the true costs through direct taxation. Price controls to camouflage the nominal rise in prices spurred by inflation. Rationing and quota systems utilized to divert goods from the consumer markets to U.S. Military. The federal government even seized factories primarily used for the production of consumer goods for wartime production. The American people saw similar measures during World War I. However, not to the same scale nor with the same level of Universal acceptance by American citizens. 

From the standpoint of the popular interpretation of history, all these socialistic policies were justified. After all, World War II was an all-out-war. The moral imperative of defeating the Third-Reich required dispensing with individual freedoms and free-market policies. It is debatable whether these policy prescriptions aided the United States in their victory in World War II. One thing that is for certain that these policies led to the further erosion of individual liberty and property rights. Due to most academics and laypeople believing that these were minor sacrifices when compared to the result of defeating a bloodthirsty fascist dictator. The true irony is how much the United States mimicked the economic policies of the fascist or socialistic regime. Per a cursory definition of socialism, it is an economic system in which the state controls the means of production. Displayed in the actions of pricing-fixing, consumption limits, and even re-directing production towards military equipment under threat of legal sanctions. This may have stifled the maniacal aspirations of a madman, this was all done at the expense of free-market enterprise and has to lead the way to the continuous growth in the size of government.

War Time Socialism:

In his classical book, Crisis and Leviathan, Robert Higgs equates the historical wartime policies of to Higgs refers to such a state of total war as being either “wartime socialism” or “wartime fascism” (about price and wage controls during World War II). Depending on one’s “linguistic tastes” (p.211). To a certain extent, Dr. Higgs has a point. Fascism is nothing more than right-wing socialism. The brand of socialism practiced by the Soviet Union was nothing more than left-wing socialism.  In Ludwig von Mises’s magnum opus Human Action, the thin line between fascism and Marxism is divided by the variety of polylogism an individual subscribes to. Polylogism is the phenomenon where it is assumed “…logical structure of mind is different with…” groups of people. How these delineations are made depends on whether a person operates on class-based or racial/national polylogism (p.75-76). Marxism asserts that the intentions of all tycoons, entrepreneurs, and investors are inherently exploitative making it a superb example of a class-based polylogism. Fascists such as Nazis believe in the supremacy of their own race and nation-state. Assume that all other ethnicities and nationalities are inferior. Utilizing the state principles to guide the governance and economic activity of the state.

The unfortunate truth is that many of these invasive and destructive policies were nearly unanimously supported by the supreme court during the Second World War. The supreme court ill-fatedly acted as a mechanism of institutional validation for economic overreach of the government.  As detailed in Crisis and Leviathan:

“ The justices,  almost without exception, had formed themselves as cheering section for expansive legislative and executive actions of the bellicose times. None of the government’s exceptional exercises of power, not even one, was disapproved by the Supreme Court.” (Higgs, 1987,p.220)

One of the most prominent checks on executive authority did little to curb the aspirations of FDR’s administration.  In the context of the dire stakes of matching to victory in the European and Asian theaters of combat, social pressure made it difficult to articulate dissent. The ideological sway of “defeating fascism” with economic policies that mirrored some of the decrees of nationalistic dictatorships (Higgs, 1987, P.241). The Supreme Court haplessly codified this collectivist ideology by disregarding the principles of free enterprise and individual liberty. The United States won the war and even saw a few decades of prosperity after the 1940s. One can only be in awe of what was dispensed with to make it happen. These command-and-control measured were passed and validated with greater ease than those the legislation passed to remedy World War I and the Great Depression. This longstanding legacy of extension of war powers has permanently weakened the restraints against executive overreach.

Yakus V. United States – Background

One area that did receive a significant review from the Supreme Court during this era was price control laws. Most of these cases focused on whether the implementation and enforcement were procedurally constitutional (Higgs, 1987, p.221). The defining case was Yakus V. United States. The case was decided on March 27, 1944.  The Emergency Price Control Act of 1942 was implemented to prevent nominal prices from being impacted by wartime inflation. Two defendants were convicted by the district court for violating this law by selling beef at wholesale prices. The district court also invalidated any concerns of whether the Fifth Amendment rights (Due process) had been transgressed by the act. The defendants then decided to bring their case up to the U.S. Supreme Court.

Concerns of Constitutionality:

Per Oyez, there were two main points of concern regarding the Constitutionality of the Emergency Price Control Act. The first concern was regarding how congress transferred legislative authority. Making it reasonable to question the legality of conferring vast decision-making powers to the administrator of the act.  The second concern was whether the defendants had their Fifth Amendment rights under the Due Process clause breached by enforcement of this legislation.

The Decision:

The majority opinion held that the terms of the law were legally sound from a Constitutional standard. The court found that the way congress bestowed the administrator of the act decision-making authority was done so sparingly. Done so to achieve important objectives. That the Constitution enables Congress to perform its legislative function with some degree of flexibility. Regarding the concerns of whether the legislation respects Due process, again the court did not find the law to be transgressive. Citing that the standards are precise enough to guarantee that it is fulfilling its Constitutional intend, therefore it is constitutional ( operating as a narrow tautology, circuitously stating it is Constitutional because it is Constitutional).  

That doesn’t mean there wasn’t any dissent from the Justices on this case. For instance, Justice Roberts cited that providing such digressional authority to a bureaucratic administrator makes it impossible for Congress to have proper oversight. Also, pointed out that the act relied too heavily on the assumption that the administrator would be impartial. Justice Rutledge also chimed in with his criticisms of this case. Reasoning that the court should not enforce laws without allowing the court to consider their Constitutional validity. Per Higgs, Rutledge referred to enforcement of the law as “asymmetrical” from a criminal prosecution and defense standpoint. This is since a defendant could be tried in federal and state courts, but could not challenge in these same courts. The defendant was required to petition the Emergency Court of Appeals within 60 days of the prospective concern (Higgs, 1987, p. 222).

Conclusion:

Few people are willing to challenge legal and economic decisions made during World War II. Most people would assume that these “temporary” violations of our liberties were for the greater good. Most of these invasive policies have served as the scaffolding to greater contraventions of our civil liberties and economic freedom.  We certainly want to avoid falling prey to the slippery slope fallacy. However, the historical evidence is overwhelming that it has been a steady progression of various policies that have worked slowly eroded our freedoms. Credulously acquiescing these laws and prescriptions as being for the greater good, is nothing more than a fallacy. It is well documented that price controls are awful economic policies. They distort one of the few mechanisms that both consumers and vendors have for bridging the gap between the information asymmetries of commerce. The way this atrocious policy was enforced through the Emergency Price Control Act endowed a bureaucratic apparatus with far too much authority.  The true tragedy being then the Supreme Court then proceeded to validated this horrendous policy. A tragedy indeed!