Part 3 (1/2)

A higher tariff wall, which, however, is not prohibitive, will produce the saree

The effect of a tariff, therefore, is to change the structure structure of Aes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another It makes the industries in which we are coer, and the industries in which we are comparatively efficient smaller Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries hich ould otherwise have traded es the number of occupations, the kind of occupations, and the relative size of one industry as compared with another It makes the industries in which we are coer, and the industries in which we are comparatively efficient smaller Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries hich ould otherwise have tradedthe ument pro and con, a tariff is irrelevant to the question of ees in the tariff, either upward or doard, can create tees in the structure of production Such sudden changes can even cause a depression) But a tariff is not irrelevant to the question of wages In the long run it always reduces real wages, because it reduces efficiency, production and wealth in the tariff, either upward or doard, can create tees in the structure of production Such sudden changes can even cause a depression) But a tariff is not irrelevant to the question of wages In the long run it always reduces real wages, because it reduces efficiency, production and wealth

Thus all the chief tariff fallacies stem from the central fallacy hich this book is concerned They are the result of looking only at the iroup of producers, and forgetting the long-run effects both on consumers as a whole and on all other producers

(I hear so tariff protection to all all producers?” But the fallacy here is that producers?” But the fallacy here is that this cannot help producers uniformly, and cannot help at all don producers: these efficient producerspower brought about by the tariff) this cannot help producers uniformly, and cannot help at all don producers: these efficient producerspower brought about by the tariff)

6

On the subject of the tariff we must keep in mind one final precaution It is the sa the effects of machinery It is useless to deny that a tariff does benefit-or at least can can benefit- benefit-special interests True, it benefits them at the expense of everyone else at the expense of everyone else But it does benefit theet protection, while its owners and workers enjoyed the benefits of free trade in everything else they bought, that industry would benefit, even on net balance As an attes, however, even people in the protected industries, both as producers and consuin to suffer from other people's protection, and may finally be worse off even on net balance than if neither they nor anybody else had protection the tariff blessings, however, even people in the protected industries, both as producers and consuin to suffer from other people's protection, and may finally be worse off even on net balance than if neither they nor anybody else had protection

But we should not deny, as enthusiastic free traders have so often done, the possibility of these tariff benefits to special groups We should not pretend, for example, that a reduction of the tariff would help everybody and hurt nobody It is true that its reduction would help the country on net balance But soh protection would be hurt That in fact is one reason why it is not good to bring such protected interests into existence in the first place But clarity and candor of thinking coht when they say that a removal of the tariff on their product would throw them out of business and throw their workers (at least temporarily) out of jobs And if their workers have developed specialized skills, theylast learnt equal skills In tracing the effects of tariffs, as in tracing the effects of machinery, we should endeavor to see would be hurt Groups previously enjoying high protection would be hurt That in fact is one reason why it is not good to bring such protected interests into existence in the first place But clarity and candor of thinking coht when they say that a removal of the tariff on their product would throw them out of business and throw their workers (at least temporarily) out of jobs And if their workers have developed specialized skills, theylast learnt equal skills In tracing the effects of tariffs, as in tracing the effects of machinery, we should endeavor to see all all the chief effects, in both the short run and the long run, on the chief effects, in both the short run and the long run, on all all groups groups

As a postscript to this chapter I should add that its argu duties collected mainly for revenue, or to keep alive industries needed for war; nor is it directed against all arguainst the fallacy that a tariff on net balance ”provides ees,” or ”protects the As; and so far as wages and the standard of living are concerned, it does the precise opposite But an examination of duties imposed for other purposes would carry us beyond our present subject tariffs, including duties collected mainly for revenue, or to keep alive industries needed for war; nor is it directed against all arguainst the fallacy that a tariff on net balance ”provides ees,” or ”protects the As; and so far as wages and the standard of living are concerned, it does the precise opposite But an examination of duties imposed for other purposes would carry us beyond our present subject

Nor need we here exae controls, bilateralis international trade Such devices have, in general, the sah or prohibitive tariffs, and often worse effects They present more coh the sa that we have just applied to tariff barriers

Chapter XII

THE DRIVE FOR EXPORTS

EXCEEDED ONLY BY the pathological dread of i for exports Logically, it is true, nothing could berun i both in the broadest sense, which includes such ”invisible” itees and all other items in the ”balance of payments”) It is exports that pay for ireater iet paid The smaller imports we have, the smaller exports we can have Without iners will have no funds hich to buy our goods When we decide to cut down our i also to cut down our exports When we decide to increase our exports, we are in effect deciding also to increase our iical dread of i for exports Logically, it is true, nothing could berun i both in the broadest sense, which includes such ”invisible” itees and all other items in the ”balance of payments”) It is exports that pay for ireater iet paid The smaller imports we have, the smaller exports we can have Without iners will have no funds hich to buy our goods When we decide to cut down our i also to cut down our exports When we decide to increase our exports, we are in effect deciding also to increase our imports

The reason for this is eleoods to a British i But he cannot use British pounds to pay the wages of his workers, to buy his wife's clothes or to buy theater tickets For all these purposes he needs American dollars Therefore his British pounds are of no use to hioods or sells theent) to sooods Whichever he does, the transaction cannot be completed until the American exports have been paid for by an equal aoods Whichever he does, the transaction cannot be completed until the American exports have been paid for by an equal amount of imports

The same situation would exist if the transaction had been conducted in terms of American dollars instead of British pounds The British importer could not pay the American exporter in dollars unless some previous British exporter had built up a credit in dollars here as a result of soe, in short, is a clearing transaction in which, in Aainst their dollar credits In England, the pound sterling debts of foreigners are canceled against their sterling credits

There is no reason to go into the technical details of all this, which can be found in any good textbook on foreign exchange But it should be pointed out that there is nothing inherently mysterious about it (in spite of the mystery in which it is so often wrapped), and that it does not differ essentially from what happens in do, even if for oods, in order to get the purchasing power to buy Do off checks and other clai houses

It is true that under the international gold standard discrepancies in balances of imports and exports were soold But they could just as well have been settled by shi+pments of cotton, steel, whisky, perfume, or any other coold standard exists the deold is alht of and accepted as a residual international ”money” rather than as just another commodity), and that nations do not put artificial obstacles in the way of receiving gold as they do in the way of receiving al else (On the other hand, of late years they have taken to putting old than in the way of exporting anything else; but that is another story) gold than in the way of exporting anything else; but that is another story) Now the same people who can be clearheaded and sensible when the subject is one of domestic trade can be incredibly en trade In the latter field they can seriously advocate or acquiesce in principles which they would think it insane to apply in doovernn countries for the sake of increasing our exports, regardless of whether or not these loans are likely to be repaid when the subject is one of domestic trade can be incredibly en trade In the latter field they can seriously advocate or acquiesce in principles which they would think it insane to apply in doovernn countries for the sake of increasing our exports, regardless of whether or not these loans are likely to be repaid

American citizens, of course, should be allowed to lend their own funds abroad at their own risk The government should put no arbitrary barriers in the way of private lending to countries hich we are at peace As individuals we should be willing to give generously, for hureat distress or in danger of starving But we ought always to know clearly e are doing It is not wise to bestow charity on foreign people under the i a hardheaded business transaction purely for one's own selfish purposes That could only lead tothe argu one fallacy is always sure to occupy a prominent place It runs like this Even if half (or all) the loans we n countries turn sour and are not repaid, this nation will still be better off for having ive an enormous impetus to our exports

It should be in countries to enable theoods away A nation cannot grow rich by giving goods away It can only make itself poorer

No one doubts this proposition when it is applied privately If an automobile company lends a man 5,000 to buy a car priced at that amount, and the loan is not repaid, the automobile company is not better off because it has ”sold” the car It has simply lost the amount that it cost to make the car If the car cost 4,000 to make, and only half the loan is repaid, then the company has lost 4,000 minus 2,500, or a net amount of 1,500 It has not made up in trade what it lost in bad loans

If this proposition is so simple when applied to a private coet confused about it when applied to a nation? The reason is that the transaction roup ains-while the rest of us take the losses

It is true, for exaed exclusively or chiefly in export business ain on net balance as a result of bad loans made abroad The national loss on the transaction would be certain, but it ht be distributed in ways difficult to follow The private lenders would take their losses directly The losses fro would ultimately be paid out of increased taxes imposed on everybody But there would also be ht about by the effect on the econo run business and en loans that were not repaid For every extra dollar that foreign buyers had hich to buy Aoods, domestic buyers would ultimately have one dollar less Businesses that depend on do run as much as export businesses would be helped Even many concerns that did an export business would be hurt on net balance American automobile companies, for exan market in 1975 It would not profit them to sell 20 percent of their output abroad as a result of bad foreign loans if they thereby lost, say, 10 percent of their American sales as the result of added taxes taken fron loans

None of this means, I repeat, that it is unwise for private investors to et rich bybad ones

For the saive a false stiifts to foreign countries, it is stupid to give a false stih export subsidies An export subsidy is a clear case of giving the foreigner sooods for less than it costs us tothings away selling hioods for less than it costs us tothings away

In the face of all this, the United States governn econoreater part of which has consisted in outright governifts of many billions of dollars Here we are interested in just one aspect of that program-the naive belief of many of its sponsors that this is a clever or even a necessaryprosperity and employment It is still another fors away What conceals the truth froiven away is not the exports themselves but the money hich to buy them It is possible, therefore, for individual exporters to profit on net balance from the national loss-if their individual profit froreater than their share of taxes to pay for the program

Here we have si only at the iroup, and of not having the patience or intelligence to trace the long-run effects of the policy on everyone

If we do trace these long-run effects on everyone, we come to an additional conclusion-the exact opposite of the doctrine that has doovernment officials for centuries This is, as John Stuart Mill so clearly pointed out, that the real gain of foreign trade to any country lies not in its exports but in its iet from abroad commodities at a lower price than they could obtain theet fro examples in the United States are coffee and tea Collectively considered, the real reason a country needs exports is to pay for its imports

Chapter XIII

”PARITY” PRICES SPECIAL INTERESTS, as the history of tariffs reenious reasons why they should be the objects of special solicitude Their spokesmen present a plan in their favor; and it seems at first so absurd that disinterested writers do not trouble to expose it But the special interests keep on insisting on the scheme Its enactment would make so much difference to their own immediate welfare that they can afford to hire trained econoate it in their behalf The public hears the argument so often repeated, and acco statistics, charts, curves and pie-slices, that it is soon taken in When at last disinterested writers recognize that the danger of the scheme's enactment is real, they are usually too late They cannot in a feeeks acquaint thehly as the hired brains who have been devoting their full ti uninformed, and they have the air of eneral history will do as a history of the idea of ”parity” prices for agricultural products I forget the first day when it islative bill; but with the advent of the New Deal in 1933 it had become a definitely established principle, enacted into law; and as year succeeded year, and its absurd corollaries made themselves manifest, they were enacted too absurd corollaries uriculture is the most basic and important of all industries It must be preserved at all costs Moreover, the prosperity of everybody else depends upon the prosperity of the far power to buy the products of industry, industry languishes This was the cause of the 1929 collapse, or at least of our failure to recover from it For the prices of farm products dropped violently, while the prices of industrial products dropped very little The result was that the farmer could not buy industrial products; the city workers were laid off and could not buy far vicious circles There was only one cure, and it was si back the prices of the fars the farmer buys This parity existed in the period from 1909 to 1914, when farmers were prosperous That price relationshi+p must be restored and preserved perpetually

It would take too long, and carry us too far from our main point, to examine every absurdity concealed in this plausible state the particular price relationshi+ps that prevailed in a particular year or period and regarding them as sacrosanct, or even as necessarily more ”normal” than those of any other period Even if they were ”normal” at the time, what reason is there to suppose that these same relationshi+ps should be preserved es in the conditions of production and demand that have taken place in the meantime? The period of 1909 to 1914, as the basis of parity, was not selected at random In terms of relative prices it was one of the riculture in our entire history

If there had been any sincerity or logic in the idea, it would have been universally extended If the price relationshi+ps between agricultural and industrial products that prevailed froht to be preserved perpetually, why not preserve perpetually the price relationshi+p of every commodity at that time to every other? why not preserve perpetually the price relationshi+p of every commodity at that time to every other?

When the first edition of this book appeared in 1946, I used the following illustrations of the absurdities to which this would have led: A Chevrolet six-cylinder touring car cost 2,150 in 1912; an incomparably improved six-cylinder Chevrolet sedan cost 907 in 1942; adjusted for ”parity” on the same basis as farm products, however, it would have cost 3,270 in 1942 A pound of alued 225 cents; its price early in 1946 was 14 cents; but at ”parity” it would then have cost, instead, 41 cents

It would be both difficult and debatable to try to bring these two particular co not only for the serious inflation (consumer prices have more than tripled) between 1946 and 1978, but also for the qualitative differences in automobiles in the two periods But this difficulty merely emphasizes the i, in the 1946 edition, the comparison quoted above, I went on to point out that the same type of increase in productivity had in part led also to the lower prices of farh 1959 an average of 428 pounds of cotton was raised per acre in the United States as coe of 260 pounds in the five-year period 1939 to 1943 and an average of only 188 pounds in the five year 'base' period 1909 to 1913” When these coht down to date, they show that the increase in farh at a reduced rate In the five-year period 1968 to 1972, an average of 467 pounds of cotton was raised per acre Sie of 84 bushels of corn per acre was raised coe of only 261 bushels in 1935 to 1939, and an average of 313 bushels of wheat was raised per acre coe of only 132 in the earlier period

Costs of production have been substantially lowered for farm products by better application of chequotation: ”On soe farms which have been co mass production lines, it requires only one-third to one-fifth the amount of labor to produce the sanored by the apostles of ”parity” prices Yet all this is ignored by the apostles of ”parity” prices

The refusal to universalize the principle is not the only evidence that it is not a public-spirited econo a special interest Another evidence is that when agricultural prices go above above parity, or are forced there by government policies, there is no deress that such prices be brought parity, or are forced there by government policies, there is no deress that such prices be brought don to parity, or that the subsidy be to that extent repaid It is a rule that works only one way to parity, or that the subsidy be to that extent repaid It is a rule that works only one way