Let’s shed some (sun)light on the issue
Wednesday, July 30th, 2008 By James Nesbitt
Robert Scott, the author of the EPI report which I criticized earlier today, defended his study in a response to my post. In that defense, he draws heavily upon statistics and models from which his conclusions and assumptions are drawn. It’s easy to get caught up in numbers and leave the principles that give them meaning far behind. But detailed observations don’t always reflect the truth, and it’s easy to fall into a trap when one forgets which is the master and which is the servant. For thousands of years, humans observed the sun moving from the east in the morning to the west at night. From this observation, they developed the theory that the sun revolved around the earth. They were so convinced of their beliefs that they were willing to kill others to preserve their theory. As we now know, however, they were wrong. Data and observations by themselves serve only as the various colors on a painter’s palette. One must have the principles to use as a brush if he wishes to paint a picture.
First, a word on foreign trade. Although often spoken of as a dangerous thing, foreign trade has few economic differences from trade between states, cities, or even neighbors. Just as it would be foolish to attempt to restrain trade between households of neighbors, it is foolish to restrain foreign trade. From an unpublished letter to the editor I submitted to the Cincinnati Enquirer in May:
It is a commonly held view by numerous politicians, many members of the public, and D-average economists that the unbalanced trade of goods with China drains money and economic strength from the United States. This incorrect belief survives due to a lack of understanding of the foreign exchange market. Two important concepts are involved in foreign exchange: flow of trade and flow of capital. While it is true that we are running a trade deficit (sending our money abroad in exchange for foreign goods) with China ($256 billion in 2007 alone), this is no cause for alarm. You are likely running an individual trade deficit with your local Kroger store, but this certainly does not cause you much concern. Kroger reinvests the money you spend at its store to produce more goods and services, fueling economic growth and indirectly contributing to your next paycheck. Foreign exchange works the same way, on a much larger scale. Our trade deficit with China is offset by a flow of capital back to the United States, the corresponding and critical concept of the foreign exchange market often overlooked due to lack of economic knowledge or political expediency. The Chinese have invested the money we use to purchase their goods back into our businesses and government, fueling our economy. As of June 2007, the Chinese government was the second-largest foreign holder of U.S. securities, with holdings estimated by the U.S. Treasury at $922 billion (behind Japan, another country with which we have a large trade deficit). This reflects Chinese investment in U.S. government and businesses, investment which both finances government activity and fuels economic growth, indirectly boosting your income.
Just as trading with your neighbor allows you to focus on what you do best, producing more overall as a result, trade between countries produces a greater level of production at greater efficiency, thus increasing wealth.
Next, Ohio’s manufacturing situation: it is certainly true that Ohio has suffered a serious reduction in manufacturing employment, and this is a very troubling situation for those who have recently found themselves unemployed. This fact is not in dispute. But what should be done as a result? Should we preserve these jobs by engaging in protectionist policies? Will this reduce unemployment and “save” our economy, as some say? This opinion is what I dispute.
History has shown that this type of reaction is not only unnecessary but does not serve the longer term needs of an economy as a whole. When the automobile was invented, should we have banned its production for the simple reason that it would have “decimated” the industries associated with horses and carriages and thus hurt our economy? When the refrigerator was invented, should we have protected the legions of men who delivered ice to each American home from the unemployment line? Many people discussed doing exactly that at the time, but it is apparent now that those actions would have been foolish and even more damaging than the immediate effects.
Just after the Civil War, over half of our population was employed in agriculture. Due to technological advances (the invention of the tractor, for instance) and improved methods for growing food (for example, cheaper and more effective fertilizers, made available to farmers by innovative entrepreneurs), this number fell to less than 4% by 1980. If the logic driving this perceived need for protectionism holds true, where were/are all the unemployed farmers? And no, the Great Depression wasn’t a result of changes in farming employment. Why don’t we suffer from massive unemployment today? The simple answer is that the makeup of our economy changed; when labor was freed up for other pursuits, new industries developed to take the load. In that same time period, the service industry increased its share of employment from around 20% to about 70%. Our economy adapted to meet its new comparative advantage. Economists refer to this process as creative destruction. The term is rather self-explanatory; while you are destroying certain parts of the economy (manufacturing, for instance), you are creating others. The net result of this process is growth.
Likewise, Ohio is facing a structural shift. Ohioans can blame this shift mostly on themselves; they have allowed labor unions to force uncompetitive wage requirements on employers through the force of law and have allowed politicians to raise tax and regulatory burden to uncompetitive levels. As a result, other countries (and even states) have notified employers that they are willing to offer regulatory structures more conducive to profit. It should surprise few that employers have accepted these offers. The manufacturing era of Ohio’s economy is ending. Its finale was hastened by these realities, but it is an inevitable result of growth and progress. No one today would suggest that a plan to begin a massive wooden ship building industry in Cleveland is a wise plan for success. However, in an earlier time, maybe it would have. New England certainly crafted a successful economy from the idea. The difference between these two examples (geography aside) is the progression of time, and therefore the growth and progress of our economy. We don’t need wooden ships anymore, because we have improved our technology and with it our standard of living. That our standard of living has progressed is undeniable; recently, California banned the sale of certain food products due to their unhealthiness. There are very few societies in the past and even few today that can take the luxury of banning food. In many societies, citizens are lucky to have something to eat at all.
Attempts to protect dying industries such as Ohio’s manufacturing through government regulation are not only futile, but foolish. Frederic Bastiat exposed the fallacy of protectionism in his famous (or for some, notorious) Candlestick makers’ Petition. Indeed, just think of the benefits of banning the sun! Imagine how many more would be employed in the lighting business and in the coal mines! But I do Bastiat an injustice; if you take the time to read this, you should likewise take the time to read his original.
Where does this leave Ohio? To be an economic powerhouse again, it must embrace its structural change by accepting the next great economic growth rather than clinging to the last. The preparations for this change are simple: Lower the tax burden by enacting Ohio House Bill 534 to eliminate the income tax, leveling the playing field between Ohio and its rival nations and states. Eliminate stifling regulations that inhibit economic growth by scaling back the size of government and removing bureaucratic hoops. Renew the state’s commitment to private property rights, a commitment which has been eroded through measures such as the smoking ban. Private investors throughout the world will do the rest, by bringing their resources and wealth to Ohio with the expectation that their success is theirs to keep, should they find it. The whole of Ohio will benefit and flourish as a result, and Ohio’s new industries will develop all by themselves.
Tags: Competition, Economy, Labor, Prosperity, Trade
