Today Donald J. Boudreaux, who is Professor of Economics and Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center at George Mason University, wrote an open letter to Dilbert creator Scott Adams. The letter was a rebuttal to Scott disagreeing with Michigan Rep Justin Amash about Trump’s trade policy.
Justin Amash had tweeted out that tariffs will hurt the consumer in higher prices. Scott retorted that the tariffs will not be applied because the threat of applying a tariff on firms who chase cheap foreign labor but then sell that production back to the US consumer they just laid off will disincentivize the firms from leaving in the first place. It was then that Mr. Boudreaux jumped in, stating unequivocally that Scott is wrong and Justin is right.
Boudreaux argues that while he agrees the tariff would actually not be applied it would stifle competition and thus consumers would pay a higher price. Boudreaux seems to imply that low consumer prices are a top priority of trade policy. Below is the main argument within Boudreaux’s open letter to Scott Adams.
Rep. Amash is right and you are wrong. Although no formal tax collection is triggered if Mr. Trump’s threats prevent all offshoring, Trump’s tariff – by restricting competition – would artificially reduce outputs and raise prices. American consumers would pay unnecessarily higher prices, an outcome inseparable from the very purpose of the tariff. That consumers pay these extra, unnecessary amounts to domestic producers rather than to domestic customs agents is irrelevant: the tariff forces all consumers of these products to pay extra, unnecessary amounts to some small group of fellow Americans who, rather than earn these higher payments, extract them using threats of state coercion.
Let me explain the logical fallacies that Mr. Boudreaux fails to recognize in his chivalrous attempt to defend Rep Amash and our existing international trade agreements (note there is nothing free trade about these agreements).
- Boudreaux’s entire argument is based on an unsubstantiated notion that offsetting the labor cost savings from cheap foreign labor with a tariff somehow limits competition. This is equivalent to saying American production limits competition. There are currently 28.5 million private firms producing in the US, more than ever before. I’ve never seen any data to substantiate that American production limits competition. In fact, I find it quite an absurd proposition. Unless Boudreaux can substantiate that claim, it simply cannot be accepted. And if the basis of his argument is unsound then the rest of it is invalid.
- Secondly is the implication that US firms chase cheap foreign labor so that they can pass those cost savings onto the consumer. Price models are a function of what the market will bear, not cost. The point of the cost savings is to drive profits, profits which over the past 5 years are paid directly to shareholders. Dividends have almost no money multiplier effect. And so reallocating labor income, which has the highest money multiplier effect, to profit is a net economic value destroyer not creator.
- Even if consumers paid a higher price as a result of the tariff, which we know isn’t true based on points 1 & 2 above, the offset of that is they would be paying a higher price with labor income earned as opposed to credit or welfare. Meaning if I can keep my job, I’m ok paying a slightly higher price because while I might be able to buy less things I can still support my family without private or public debt. And so to suggest the top objective of trade or any economic policy should be getting the lowest possible price is another absurd proposition.
- Boudreaux suggests the tariff is state coercion yet fails to recognize the tariff is a reaction to a state intervention of free markets i.e. international trade agreements that allow labor cost arbitrage to exist without the naturally higher risks of the undeveloped nations that offer the cheaper labor (the cheap labor and higher risk being a function of the same underdeveloped societal infrastructure). Higher return means higher risk. Lower labor cost means higher ROI. Higher ROI means higher risk. But through state coercion, the higher risk is negated leaving just the higher ROI. This is not free market. This is state intervention. The tariff is being used to level the playing field so to speak.
Mr. Boudreaux, while I appreciate your zeal for trade agreements, I am slightly surprised as to the naivety of your argument. You haven’t given the readers enough credit. Something you PhD economists are going to be facing much more of in the coming years. There is a movement to educate and draw in the American public to such economic discussions. We will be better prepared to understand your theoretical, applicable and logical fallacies. You should take note, and be better prepared next time.