A Lesson for George Mason Economics Chair, Boudreaux As He Attempts to School Dilbert Creator, Scott Adams

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).

  1. 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.
  2. 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.
  3. 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.
  4. 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.

13 thoughts on “A Lesson for George Mason Economics Chair, Boudreaux As He Attempts to School Dilbert Creator, Scott Adams

  1. 1. & 2. I don’t think Boudreaux is saying that American production limits competition. Presumably Carrier wanted to move this production for cost savings purposes. If all its competitors stayed in the US, it could keep prices the same, and pocket the savings. But presumably many of its competitors have also or will move some production to lower cost areas. They then all don’t get rich; the incentives are too great for one to undercut prices to get market share, after which point prices drop and cost savings are passed along to consumers.

    Do consumers take their savings, turn them into dollar bills, and flush them down the toilet? No, they spend the money on other stuff, which increases employment in other industries. Layoffs of Carrier workers are “that which is seen” as Bastiat called it. Increased hiring throughout the economy, as consumers spend their savings on other things, are “that which is unseen”, but which good economists know are there. It just isn’t easy to point to a particular newly hired employee somewhere and say that they, specifically, were hired because a certain factory closed.

    As for the money multiplier, do you want to go the route of savings and investment are bad, and only consumption makes the economy strong?

    3. Again, you are forgetting all those hired when consumers spend the savings they have because they can buy stuff cheaper because it is made abroad. And don’t forget that the foreigners we bought stuff from don’t flush those dollars down the toilet. They either buy American stuff, which results in more hiring here, or they invest the dollars in the US, which also results in more hiring here.

    4. Sorry, couldn’t follow your argument about foreign intervention creating higher ROI at lower risk. Not sure what that means in this context.

    I’m a big fan of your stuff, but I think in this case Boudreaux is right.

    1. Let me explain the argument you are making using a slightly different set of words and you tell me if it holds water. Please feel free to correct me if I am wrong.

      Keeping production in the U.S. will increase costs to the consumer which will result in them buying fewer things and therefore hurt the economy. Buying things at lower prices creates job growth because people will buy more stuff.

      What strikes me is that both of these conclusions depend on two assumptions that I will explain like this:

      1. Increasing the NUMBER of items sold in America leads to economic growth and health.
      2. Purchasing an item manufactured in outside of the U.S. creates the same economic benefit as purchasing an item manufactured inside the U.S.

      Again, feel free to correct me if I am wrong.

      What you have failed to consider is two things here that blow your entire argument out of the water.

      1. Increasing the number of items sold is irrelevant because you are spreading the same number of dollars around to different places. To grow the economy you need to increase the number of dollars changing hands, not where the existing dollars get distributed.

      2. Products manufactured outside of the U.S. do not have the same economic benefit as products manufactured inside of the U.S. When the manufacturing of products is outsourced the jobs that go along with manufacturing leave and the dollars generated in income for those employees flow outside of the country and are then spent outside of the country. If a product is manufactured in the U.S. then the dollars generated at the manufacturing step stay in the U.S. and are spent in the U.S. The same principal applies to outsourcing of every kind including customer service and engineering jobs.

      Please tell me where I am wrong here.

      1. Thomas: Good questions. Before I answer them, I’ll point out that Carrier is probably not an ideal example to use because it makes expensive industrial equipment, whereas it becomes clearer if you think of clothing, which used to be produced here but now mostly comes from Asia at much lower cost.

        “1. Increasing the number of items sold is irrelevant because you are spreading the same number of dollars around to different places.”

        The main thing we want out of the economy is a rising standard of living for as many people as possible. That can be defined as people getting more for their money. When incomes go up or prices go down, either way, our standard of living is rising.

        Having more stuff available for the same price is a good thing for consumers. They can choose to spend the same amount and get more, or purchase the same quantity and have money left over to buy other goods and services. That they can do so means their standard of living has gone up.

        When they use their savings to buy other things, that increases employment somewhere else in the economy. If they choose to not spend their savings right away, they put it in the bank, which can lend it out to business who can hire more workers, or lend it to consumers who will buy more stuff. The money gets spread around just as before, only the standard of living has gone up, and employment is not harmed, it is only changed from one type of job to some other type.

        Yes, there are people who lose their factory jobs who are too old or have some reason why they won’t qualify for the new jobs that will pop up from outfits supplying whatever it is on which consumers are spending their savings from lower prices. That is a separate problem, and a temporary one.

        A hundred years ago clothing was all made in the US, but was very expensive, and a huge part of the average person’s budget. Now, partially because it is made cheaply overseas, people have much more money left over to either buy even more clothing, or spend on other things, which increases employment.

        “2. Products manufactured outside of the U.S. do not have the same economic benefit as products manufactured inside of the U.S. ”

        That’s more complicated, but ultimately they do. As I said, dollars sent overseas when we buy things made there, come back here, with a little lag time. The holders of those dollars, or those with whom they exchange them to get their local currency (which they need to pay workers and suppliers), have to get the dollars back into the US to get some value from them. They might want to buy US products or services, or they might want to invest the money here. Either way, more people get employed producing those goods and services, or working in the companies in which the foreigners invested their money. Even when they just buy US gov’t bonds, that money helps lower the interest the government has to pay for debt, freeing up part of the budget for other things.

        Again, all these things change the types of jobs available. The percentage of people who work low skilled jobs in factories has gone way down., but other occupations have gone way up as a result.

        Here is my favorite example–you know all those yoga and tai-chi teachers, gym personal trainers, etc. type jobs? Would those jobs exist if we had kept out cheap Chinese clothing, and everyone were now paying three times the current price to get underwear made in Georgia? No, they wouldn’t, because people wouldn’t have enough money left over after buying clothing to join a gym or take a yoga class.

        That is what Bastiat meant; the textile plant closing and laying off workers is SEEN, while all the yoga teachers getting jobs is that which is UNSEEN, but absolutely connected to the existence of cheap imports that were the cause of the factory closing. And how many yoga teachers would trade their current jobs in for one in a factory? My guess, close to none.

        1. Talking about the type of product is irrelevant to my argument. Manufacturing creates added value and therefore increased wealth, regardless of the product being manufactured. Taking a piece of that wealth creation and moving it is to take a chunk of the wealth and move it to a different country. This is always a loss for the U.S. and a gain for whoever gets the jobs. Always, regardless of the product.
          Your next argument is about standard of living, and it is also irrelevant and is a substitute for the actual argument which is what is best for the economy of the U.S. in the long term. Wealth increases standard of living, not cheap stuff which you can’t buy if you have a low paying job. If we want to increase the standard of living for all Americans we need to create wealth for all Americans.
          You are also ignoring the fact that the average U.S. household lives paycheck to paycheck which means that they spend everything they earn. If stuff is cheaper, they buy more, but spend the same amount of money. They only spend more if they make more in wages. They don’t have savings, and even if they do they are not going to spend them simply because goods are cheaper.
          Regardless of the price of clothing the average American worker is going to spend the same number of dollars. Let’s say making a shirt in China saves 10% versus making it in the U.S. and a shirt here costs $100. If he buys a shirt made in china for $90 and has $10 left over in his budget to buy some socks with he is still only spending $100. We didn’t add anything to the total amount spent. This is the reality of how most American households spend their income.
          It is true that cheaper goods can affect the standard of living in the short term, but only creation of wealth can do that in the long run. The industrial revolution, the fossil fuel revolution, and the informational revolution have brought us the standard of living we enjoy in this country, not cheap shit from China.
          As for point 2 you have also provided a substitute argument which is irrelevant and quite frankly wrong. Chinese textile workers are not buying U.S. bonds at a rate that put the same amount of money back into the economy as is leaving. Not even close. They are also not buying U.S. made goods at rates anywhere close to sending as much money back as is leaving.
          Also, note that services jobs like yoga teachers do not create wealth either nor do jobs in the financial sector. Only when you add labor to material to produce a more valuable good do you create wealth. If our goal is to create wealth as a nation we need to apply labor to material and make something here in the U.S. and the more of that process is retained within our borders the more wealth we create.

          1. Sorry Thomas. You misunderstand too many things about economics for me to correct today. I recommend reading Brad’s posts, plus his previous ones, and also, although they disagree on this particular subject, Don Boudreaux’s daily posts on cafehayek.com

            Best wishes.

          2. And Rick is exiting the conversation after providing several substitute arguments and never even attempting to refute mine. A classic example of why the globalists are going to fail when trying to stop Trump change the way that the U.S. interacts with the rest of the world.

  2. I enjoy, but more importantly, have learned much from both you and Don Boudreaux, so I look forward to a reply and exchange of views on the topic. I don’t believe DB tweets but he does publish on Cafe Hayek. Thanks for the education.

  3. This is a big hole in the way many economists think of the world because they’ve never been intimately involved in developing and manufacturing a product. I’ve pointed this out to a view including Mr. Boudreaux on occasions. It doesn’t seem to sink in. They also seem to think that manufacturing is leaving when they hear of a Carrier or some other company leaving. That’s generally final assembly. The manufacturing, the making of the parts, if it was to leave, left years prior. The parts are sourced at global prices. Final assembly is a such a small portion of the shelf price that even if it the savings were passed on at 100% it wouldn’t change a person’s finances unless he’s buying it weekly or daily rather than a couple times over his life.

  4. Scott Adams’ Point #2 shows the Professor’s stupendous ignorance of the real world. In looking up his biography I saw that he has no real world business experience. That came as no surprise. What a babe-in-the-woods does one have to be to assume corporations will dutifully pass along savings from cheaper labor costs? Hello? Stock buybacks, shy-high executive salaries, declining capex, etc. etc. It is obvious that Mr. Boudreaux lives in an academic fantasyland and should be ignored by all that live in the real world.

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