CDZ RCC Podcast: Trumped Trade

[eagle1462010]

Velocity of money - Wikipedia, the free encyclopedia

The velocity of money (also called the velocity of circulation of money) refers to how fast money passes from one holder to the next. It can refer to the income velocity of money, which is the frequency at which the average unit of currency is used to purchase newly domestically-produced goods and services within a given time period.[3] In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.[3] Alternatively and less frequently, it can refer to the transactions velocity of money, which is the frequency with which the average unit of currency is used in any kind of transaction in which it changes possession—not only the purchase of newly produced goods, but also the purchase of financial assets and other items.


If the velocity of money is increasing, then transactions are occurring between individuals more frequently.[3] Although once thought to be constant,[citation needed] it is now understood that the velocity of money changes over time and is influenced by a variety of factors.[4]

Money going to another country helps their velocity of money.............even when foreign countries buy their products in a different currency......Those people get paid to build the T.V. and thus circulate the money into their country..............while we LOSE our velocity of money as the currency leaves the country..........

I prefer the money to circulated here instead of China..........didn't see that in the equation.......

You are making a connection, which isn't possible to make. US Dollars can not be used in China. There is not one store, one supplier, one employee, that works for US Dollars in China.

If you are in China, and sell a TV, and I buy it and give you US Dollars... what the heck can you do with those dollars? Nothing. You can't buy materials to build more TVs. You can't pay your workers with them. You can't even keep the lights on at your business. Those dollars are absolutely useless to you, unless you buy something from the US with them.

If money was flowing out of the US.... We'd be completely broke by now.

The US only has $1.4 Trillion dollars currently in circulation. Right now. That's how much PHYSICAL CURRENCY exists.


View attachment 52952

No look at that..... In 1996, the deficit was $100 Billion. It's been up to $750 Billion a year.

What's my point? If all that money was flowing out year over year.... we would have run completely out of cash a decade ago. If money was flowing to China, and not coming back, then we should be in economic collapse by now.

Bottom Line.... the money is coming back. All the money that goes to China, MUST come right back to the US. One way, or another, it ends up back here. The idea that it's going over there, and staying over there, and making them rich, is bonkers, and not supportable.

The Velocity Of Money In The U.S. Falls To An All-Time Record Low

When an economy is healthy, there is lots of buying and selling and money tends to move around quite rapidly. Unfortunately, the U.S. economy is the exact opposite of that right now. In fact, as I will document below, the velocity of M2 has fallen to an all-time record low. This is a very powerful indicator that we have entered a deflationary era, and the Federal Reserve has been attempting to combat this by absolutely flooding the financial system with more money. This has created some absolutely massive financial bubbles, but it has not fixed what is fundamentally wrong with our economy.

As you can see from the chart posted below, the velocity of M1 normally declines during a recession. Just look at the shaded areas in the chart. But a funny thing has happened since the end of the last recession. The velocity of M1 has just kept falling and it is now at a nearly 20 year low…

In the chart posted below, we can once again see that the velocity of M2 normally slows down during a recession. And we can also see that the velocity of M2 has continued to slow down in the “post-recession era” and has now dropped to the lowest level ever recorded…

Where is that flow of money coming back then? It's not flowing.................Lowest ever recorded..............If it's coming back........then where is it????

It certainly isn't going back into circulation here.................

You don't seem to be grasping this. If the money was flowing out.... and it didn't come back..... there would be no money left in the entire country. None. Zero. No one anywhere in this entire country would have any cash at all.

The fact you have even one single dollar..... proves that the money MUST be coming back.

Nothing you posted changes that. Even the printing of money by the Feds, doesn't account for this. The total amount of trade deficit exceeds all of money in circulation, and printed by the Fed, and several Trillion more.

Now, why is the flow of money slow? That's easy. We've driven up the cost of doing business in America with labor laws and mandates, and taxes. Nothing more complicated than that.

Of course some of it is coming back.............but it sure as hell isn't being circulated into our economy...............Our economy needs this circulation..............the graphs are from the Fed............and they are the lowest in HISTORY on one of them..............That's not good for America.........never has been.............

Losing jobs to other countries isn't good for America................Which is why we should negotiate directly with other nations..............INCLUDING QUOTA'S on certain goods that would end industry here......................

It's not good news to lose a lot of our industrial base here...............and that is what is happening..................

 

[Andylusion]

Velocity of money - Wikipedia, the free encyclopedia

The velocity of money (also called the velocity of circulation of money) refers to how fast money passes from one holder to the next. It can refer to the income velocity of money, which is the frequency at which the average unit of currency is used to purchase newly domestically-produced goods and services within a given time period.[3] In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.[3] Alternatively and less frequently, it can refer to the transactions velocity of money, which is the frequency with which the average unit of currency is used in any kind of transaction in which it changes possession—not only the purchase of newly produced goods, but also the purchase of financial assets and other items.


If the velocity of money is increasing, then transactions are occurring between individuals more frequently.[3] Although once thought to be constant,[citation needed] it is now understood that the velocity of money changes over time and is influenced by a variety of factors.[4]

Money going to another country helps their velocity of money.............even when foreign countries buy their products in a different currency......Those people get paid to build the T.V. and thus circulate the money into their country..............while we LOSE our velocity of money as the currency leaves the country..........

I prefer the money to circulated here instead of China..........didn't see that in the equation.......

You are making a connection, which isn't possible to make. US Dollars can not be used in China. There is not one store, one supplier, one employee, that works for US Dollars in China.

If you are in China, and sell a TV, and I buy it and give you US Dollars... what the heck can you do with those dollars? Nothing. You can't buy materials to build more TVs. You can't pay your workers with them. You can't even keep the lights on at your business. Those dollars are absolutely useless to you, unless you buy something from the US with them.

If money was flowing out of the US.... We'd be completely broke by now.

The US only has $1.4 Trillion dollars currently in circulation. Right now. That's how much PHYSICAL CURRENCY exists.


View attachment 52952

No look at that..... In 1996, the deficit was $100 Billion. It's been up to $750 Billion a year.

What's my point? If all that money was flowing out year over year.... we would have run completely out of cash a decade ago. If money was flowing to China, and not coming back, then we should be in economic collapse by now.

Bottom Line.... the money is coming back. All the money that goes to China, MUST come right back to the US. One way, or another, it ends up back here. The idea that it's going over there, and staying over there, and making them rich, is bonkers, and not supportable.

The Velocity Of Money In The U.S. Falls To An All-Time Record Low

When an economy is healthy, there is lots of buying and selling and money tends to move around quite rapidly. Unfortunately, the U.S. economy is the exact opposite of that right now. In fact, as I will document below, the velocity of M2 has fallen to an all-time record low. This is a very powerful indicator that we have entered a deflationary era, and the Federal Reserve has been attempting to combat this by absolutely flooding the financial system with more money. This has created some absolutely massive financial bubbles, but it has not fixed what is fundamentally wrong with our economy.

As you can see from the chart posted below, the velocity of M1 normally declines during a recession. Just look at the shaded areas in the chart. But a funny thing has happened since the end of the last recession. The velocity of M1 has just kept falling and it is now at a nearly 20 year low…

In the chart posted below, we can once again see that the velocity of M2 normally slows down during a recession. And we can also see that the velocity of M2 has continued to slow down in the “post-recession era” and has now dropped to the lowest level ever recorded…

Where is that flow of money coming back then? It's not flowing.................Lowest ever recorded..............If it's coming back........then where is it????

It certainly isn't going back into circulation here.................

You don't seem to be grasping this. If the money was flowing out.... and it didn't come back..... there would be no money left in the entire country. None. Zero. No one anywhere in this entire country would have any cash at all.

The fact you have even one single dollar..... proves that the money MUST be coming back.

Nothing you posted changes that. Even the printing of money by the Feds, doesn't account for this. The total amount of trade deficit exceeds all of money in circulation, and printed by the Fed, and several Trillion more.

Now, why is the flow of money slow? That's easy. We've driven up the cost of doing business in America with labor laws and mandates, and taxes. Nothing more complicated than that.

Of course some of it is coming back.............but it sure as hell isn't being circulated into our economy...............Our economy needs this circulation..............the graphs are from the Fed............and they are the lowest in HISTORY on one of them..............That's not good for America.........never has been.............

Losing jobs to other countries isn't good for America................Which is why we should negotiate directly with other nations..............INCLUDING QUOTA'S on certain goods that would end industry here......................

It's not good news to lose a lot of our industrial base here...............and that is what is happening..................

We're not losing our industrial base. Last year was a record year in manufacturing. Never been better. Never built more stuff in the US. I posted that graph for a reason.

Losing jobs, is because we've made it less profitable to operate in the US. It's that simple. Has nothing to do with trade.

IF we banned trade (or fair trade, or whatever trade)...... we would still be where we are now, only worse.

 

[Andylusion]

Your poll is whack.
One of protectionisms goals is to make the Nation at hand to be more competitive.
When spouting trumps protectionism, be sure to mention how he going to be changing taxes around too. That part matters

Protectionism is about taxing imports. That's what tariffs are.... a tax on imports. So I did mention that part, and it's bad.

Other aspects of his tax plan, are important, but not the focus of this specific discussion. My focus was specifically on trade.

I can see your point... but I would argue that's a false definition of "competitive".

In any other situation, you would never consider protectionism to be "competitive".

If you were playing chess, and the judge of the match said "to be more competitive, the rules is the other player only has capture your queen or rook to win". No one would say "well that's so it's more competitive".

If you were playing Tennis, and they painted your opponents side of the net 10 feet shorter than yours, no one would say "It's to be competitive".

Similarly, if you run an oil change shop, and there's another oil change shop across the street from you, and the city counsel comes in and says "We're going to levy a 20% tax on your oil changes, but not on their oil changes..... it's to be competitive you see".

No one would ever say that.

Well... the oil change shop is across town.... Still doesn't make sense. That's not being competitive. Well it's in another state. Still doesn't make sense. Well it's in another country. Still........ That's not being competitive.

That's unfairly using the government to punish one business over another business. You are not being competitive.

Being competitive, is changing the way you do business, or providing a better product, or finding a way to lower costs, to compete.

Being competitive, is not lobbying government to smash your competition, so that you don't have to compete with them.

So in my view, protectionism is the exact opposite of 'being competitive', just like if we race, and I change the rules so the finish line is 10 yards shorter for me, you would never claim I was "being competitive".

Protectionism is for undeveloped nations, or nations that have dwindled down to focus more on domestic issues so they have a chance to compete in the world market. Like Japan. America practiced protectionism for like 100 years. We had our biggest growth to date. Granted we are still a "newborn".
Its like buying a 30 year old car and you try to fix it up before you drive it. If you just "jump in" you can find yourself broke down..
I support free trade and protectionism. Both have their advantages and both have the potential to hurt a nation. Free trade isn't good for a nation if you cant compete with other nations. Importing everything and being a country of retail wont sustain us. We have to build ourselves back up.
Trumps tax plan helps make his protectionism make more sense. It all flows together.

Actually that is not true.

The Truth about Trade in History

You can read up on it, but the reality is that US protectionism, had the exact same effect as the India protectionism. Behind protection barriers infant industries remained perpetually infant, never needing to advance to the level of the other nations.

Instead of helping domestic industry advance, it led to them being continuously under developed.

There is a difference between protectionism, and general taxation. Tariffs were levied in 1789. But these were not protectionism. They were explicitly for the purpose of raising revenue, to pay for regular government expenditures, not to prevent imports, and indeed imports were not hindered by moderate taxation of imported goods.

It wasn't until 1824, that the government specifically raised tariffs for the intention of raising protectionist barriers.

Economist Frank Taussig wrote in the 1880s, that protectionism had no real effect, and did not benefit US industry at all. Now he didn't mean that they didn't get rich charging high price for low quality goods..... but that the industry did not develop to be internationally competitive.

So no, actually US protectionism is not an example of successful protectionism. It is in fact, yet another example of how protectionism failed.

 

[Slyhunter]

View attachment 52937


Trump gets down to business on 60 Minutes

On Sept 26th, 60 Minutes aired a bit where they interviewed Donald Trump, and one of the things they talked about was Trumps plan for international trade.

The Trump plan is basically that we are going to place a tax on everything imported into the US. That way Ford won't put a manufacturing plant in Mexico, but will place that plant in the US. In essence, we need protectionism. Put heavy tariffs on trade with other countries, so we can have jobs here.

Is that a good plan? Is that what we should do?

To answer that question, we need to first understand the fundamental economics. Trade, or "voluntary exchange", is inherently mutually beneficial. Both parties by nature, are better off from trade. If trade was not beneficial to both sides, then they wouldn't do it.

A simple example: I am selling a TV set. The TV set is $100. You want to buy the TV set. You give me the $100, and I give you the TV. If the TV was not worth more to you, than the $100, you would not have traded. If the $100 was not worth more to me, than the TV, I would not have trade. We are both better off because of the trade. If we were not, then we would not have done the trade.

So both of us mutually benefit from the trade. We're both better off, or we would not have done the trade.

One popular claim is that China is engaging in Mercantilism.

So what is that? Well it's the idea of a government engaging in trade policies that enrich themselves by trade. Of course all countries believe they will enrich themselves by trade.... so that's nothing special.

But they claim that China's policy harms us, while benefiting them. To understand how, we have to back up and explain how trade is supposed to work.

So I live in China, and I am selling the TV. You give me $100, and I give you the TV set. Now I have $100 in US Dollars. Can I pay my employees with US dollars? No. Can I buy parts to make more TVs with US dollars? No. I have to exchange those dollars, for Yuan, the Chinese currency.

So the Central Bank of China, gives me Yuan, and takes the US Dollars. Now as this happens over and over, the Central Bank of China, has tons of US Dollars. This would cause the exchange rate to change, so that 1 Yuan would get more US Dollars... making it cheaper to buy US goods. Thus more people would buy, thus dollars would flow back to the US from China.

Now that's what is 'supposed' to happen.

Under Mercantilism, a country would instead, use the US dollars to exchange them for Gold. If you remember, prior to the early 1970s, you could exchange a US dollar, for gold. So I sell you a TV set from China, take your $100, and give it to the Chinese Central Bank for Yuan, then the Chinese Central Bank, takes the $100 to the US Treasury and exchanges it for Gold.

They get richer, and we get poorer... in theory.

Here's the problem... that kind of Mercantilism can't work anymore, because you can't convert dollars into Gold. The only thing China can do with a US dollar, is buy something with it. Short of that, they can't do jack.

So China is not engaging in Mercantilism.

Another myth is that a trade deficit is debt. Trade deficits cause debt, and we have to deal with the trade deficit, or we'll continue to go into debt.

So again, I am selling a TV, and you want to buy one, and the TV is $100. You give me the $100, and I give you the TV. Where is the debt? I'm in Canada. I give you the TV, and you give me the $100. Where's the debt? I'm in the UK, and I give you the TV, and you give me the $100. Where's the debt? Well there is no debt unless you borrow the $100... but you could do that no matter where you get the TV from, domestically or internationally.

This idea that trade causes debt, comes from China using the US dollars, to purchase US Treasury Bonds. The problem is, if we had zero trade with China at all, and the US government spent more money than it collected in taxes, then there would be debt. Equally, we could triple our trade with China, and if the US Government was spending less money than it collected in taxes, and did not sell any US Treasury Bonds, then there would be no debt, no matter what the trade deficit was.

So trade does not cause debt. Ever. Government spending causes debt.

But then, whats wrong with protecting our economy? What's wrong with taxing imports?

The theory has great appeal on both sides of the political spectrum, but the reality is Protectionism has never resulted in the benefits supporters claim. Protectionism usually has devastating consequences.

http://www.nber.org/digest/may09/w14604.html

Peter Blair Henry and Conrad Miller wrote an article "Tale of Two Islands", which compared Barbados, and Jamaica. The two Islands have similar cultural histories, and people, and both were colonized with imported slave labor, under the British crown.

In the 1970s, Jamaica made a decidedly protectionist turn, in order to foster economic growth, and benefit domestic business. Instead, Jamaica fell into ruin, and became overrun with drugs and crime. Interestingly, Peter Henry's father supported the protectionism, but found after protectionism came into effect, he couldn't find the raw materials for the chemist field he worked in, which resulted in him moving to the US, which is how Peter Henry ended up a US citizen, and an economist.

Take another example, such as India. India engaged in heavy protectionism after independence. But instead of growing domestic jobs, and stimulating growth, it caused stagnation.



The above picture is of the Ambassador, built by Hindustan Motors. In 1956, a small car company in the UK, called Morris Motors, build the Oxford Series III. They ceased production of this car in 1959.

But in 1957, Hindustan Motors of India, purchased the design, and started producing the Oxford, as the Hindustan Ambassador. The design and build of this automobile remained almost completely unchanged for the duration of production. The photo above is not an antique car at a county fair or something. It's not a restore project. The Hindustan Ambassador was built until 2014. The car above is NEW.

From 1957 until 2014, very little changed. In 1979, they slightly improved the design and handling. What happened that caused them to upgrade the Ambassador? Suzuki was allowed to compete in India, and introduced the Maruti 800, to compete with the Ambassador.... and suddenly Hindustan Motors had motivation to upgrade their cars. What a shock.

Then in 1990 to 1992, they upgraded their cars again. This time replacing the 55 Horse Power engine they had been using since 1957, to a newer, more powerful 75 and 88 horse power engine. But did they build it domestically? No, they imported engines from Isuzu. What happened in the 90s? Fiat, Hyundai and Toyota, all started selling cars in India.

Protectionism allowed people to be stuck with a crappy 1956 car, that was absolutely unchanged for 40 years. It wasn't until the end of protectionism, that car companies even attempted to upgrade their products. And by the way, this isn't limited to just this example. Standard Motor company of India, sold the "Standard Herald" which was a Triumph Herald designed in 1959, which they continued to make until 1988, virtually unchanged.

Standard (Indian automobile) - Wikipedia, the free encyclopedia

Hindustan Ambassador - Wikipedia, the free encyclopedia

Far from generating this great economic growth, it generated economic stagnation.

And there are numerous examples. Compare the free-trade Hong Kong, to the protectionism of China prior to 1979. Hong Kong was massively wealthy, while Chinese earned less than $2 a day.

Or compare the protectionism of North Korea, to the Free-Trade of South Korea.

Or compare the Free-Trade Venezuela, to Protectionist Venezuela. Venezuela went from the leading economy in south America, to the worst economy of South America.

Or compare Free-Trade Singapore to the more protectionist neighbors.

Only one country has 100% free trade. You see it there. Now compare Singapore economically to all it's neighbors. If protectionism worked, then Indonesia with 52% protection tariffs on imports, should be the economic power house of the group. But it's not.

But possibly the best example that protectionism does not work, is America itself.

Rustici on Smoot-Hawley and the Great Depression | EconTalk | Library of Economics and Liberty

Economist Thomas Rustici was interviewed on EconTalk, about the Smoot-Hawley tariff of 1930.

In 1928, Hoover was elected on a platform of protectionist tariffs. In 1929, the House was protectionist, but the Senate was free-trade and was blocking the Smoot-Hawley tariff.

On October 21st, 1929, Sixteen Senators rolled. They agreed to pass the tariff, if tariffs were put in place for their states. On that day, the stock market began to slide. The stock market lost almost 1/3rd of it's value, before the Crash of Oct 29th.

But it goes on.... After the Senate passed the tariff, the House and Senate got together to reconcile the two bills, but couldn't. In December, they gave up, and left on winter recess. The bill appeared dead. Even the New York Times claimed the tariff was dead. Between Mid November and April, the stock market had recovered half of the value it had lost. In fact it was within about 10 points of where it was at the start of 1929.

But in May of 1929, Congress started working on the Smoot Hawley Tariff again, and by June they had made an agreement and passed the bill onto the President.

In May 1028 Economists wrote a signed letter to Herbert Hoover, warning that Smoot-Hawley Tariff would have drastic economic and monetary consequences, and told him to veto it.

Hoover received formal complaints by 23 countries, and 36 countries lodged 59 formal protests with the State Department. Spain, Canada and many other countries raised tariffs on US goods in retaliation.

Starting at the end of May, beginning of June, when it was clear the Tariff would pass, the market began to slide. It lost 20% of it's value in the first two weeks of June, and Hoover signed the bill into law June 17th. That slide continued non-stop until about 1933, where it started to very slowly recover until FDR screwed up the economy again in 1936-37, which caused a recession inside the depression.

Now clearly there is a correlation, but how exactly does a tariff cause economic destruction?

Well one example is fairly conclusive to me. In May, before the Smoot-Hawley Tariff is passed, Canada passes a tariff on imported Steel and Iron products from the US. When the Smoot-Hawley Tariff is passed, it places a massive tariff on Iron Ore imported from Canada.

17 Months after the passage of Smoot-Hawley, 11 banks in Pittsburgh go insolvent, and shut their doors. Why?

Well.... Pittsburgh was the central hub of the steel and iron industry. Hence: Pittsburgh Steelers. But the steel companies had two things happen at the same time.... The cost of Iron Ore drastically went up, because most of the ore came from Canada, now had a huge tariff on it. At the same time the demand for Iron and Steel from the US, dropped because other countries, primarily Canada, put a huge tariff on Steel and Iron from the US. Cost of making steel up, price and demand of steel down.

The Steel industry crashed, and when companies start having problems, they start pulling all their money out of the banks. Pull out all the money, and the banks to go bust.

And interestingly, I've seen that the companies I've worked for, most wouldn't exist if we engaged in protectionism.

Many of the products I've built, couldn't be built without imported goods. CPU controller boards made out of the country. Metal parts, supplied by other countries. Imported sensors and electronics.

Moreover, many of our customers are foreign. We sell to Canada, Brazil, Turkey, China, and many others. People have said that we can't compete with these other countries that have lower wages. That is totally false.

"We have to bring back manufacturing to the US!" Completely wrong.

It's amazing how many people don't know that last year, 2014, was a record year in US manufacturing. We produced more product in manufacturing last year, than ever before in US history. More than ever.



We have been competing successfully with low-wage countries for decades. And this idea that a trade deficit (importing more than we export) is so horrible.... you realize when the trade deficit started? In the 1990s. You remember how horrible the economy was in the 90s, with massive unemployment and recession after recession.... during the 90s..... right? You don't remember that? Neither do I.

You remember when we have a balance of trade right? During the amazing 1970s, when the economy was booming, and growth was massive? During the 70s? Right? You don't remember that? You remember Stagflation? Right.

Since the 1900s, there has only been two times where the US had a significant surplus balance of trade. Just twice. The late 1940s after the end of WW2, when Europe was in ruins, there was massive demand for goods, and we were the only ones to supply them. So we had huge exports.

And the other time was...... the 1930s.... the Great Depression.



By the way, you'll notice that imports dropped pretty hard in 2000, and 2008, and slightly in 1980. What happened all those years? We had a recession.

Do you know why trade deficits fall during recessions? Do you know why they rise during economic growth periods?

It's actually really simple. Trade deficits rise because.... we have money. When we don't have money, and can't buy things.... trade deficits fall.

Why do we have a trade deficit with China? The Chinese people prior to 1978, 63% of the population earned less than $2 a day. Now between us and them, who can buy more, from the other?

If you earn $100,000 a year, and I earn $20,000 a year, and we both own stores.... who can buy more from the other person? Obviously, between you and me, there is going to be a trade deficit. I can only buy $20,000 worth of goods from you, and you can buy $100,000 worth of goods from me.

A trade deficit is a sign of our wealth. That's why it exists. And curbing trade can only make us worse off. So while Trump may have public support for placing tariffs on trade, it's a bad policy, and it will harm the country, and we shouldn't do it. And that my friends, is the RCC perspective. Thanks.

You sell a $5000 tv for $100 because they are willing to work for pennies in China. We tax that make it cost $5000 again and spend it on American workers, American welfare, etc. Win win.

 

[Andylusion]

View attachment 52937


Trump gets down to business on 60 Minutes

On Sept 26th, 60 Minutes aired a bit where they interviewed Donald Trump, and one of the things they talked about was Trumps plan for international trade.

The Trump plan is basically that we are going to place a tax on everything imported into the US. That way Ford won't put a manufacturing plant in Mexico, but will place that plant in the US. In essence, we need protectionism. Put heavy tariffs on trade with other countries, so we can have jobs here.

Is that a good plan? Is that what we should do?

To answer that question, we need to first understand the fundamental economics. Trade, or "voluntary exchange", is inherently mutually beneficial. Both parties by nature, are better off from trade. If trade was not beneficial to both sides, then they wouldn't do it.

A simple example: I am selling a TV set. The TV set is $100. You want to buy the TV set. You give me the $100, and I give you the TV. If the TV was not worth more to you, than the $100, you would not have traded. If the $100 was not worth more to me, than the TV, I would not have trade. We are both better off because of the trade. If we were not, then we would not have done the trade.

So both of us mutually benefit from the trade. We're both better off, or we would not have done the trade.

One popular claim is that China is engaging in Mercantilism.

So what is that? Well it's the idea of a government engaging in trade policies that enrich themselves by trade. Of course all countries believe they will enrich themselves by trade.... so that's nothing special.

But they claim that China's policy harms us, while benefiting them. To understand how, we have to back up and explain how trade is supposed to work.

So I live in China, and I am selling the TV. You give me $100, and I give you the TV set. Now I have $100 in US Dollars. Can I pay my employees with US dollars? No. Can I buy parts to make more TVs with US dollars? No. I have to exchange those dollars, for Yuan, the Chinese currency.

So the Central Bank of China, gives me Yuan, and takes the US Dollars. Now as this happens over and over, the Central Bank of China, has tons of US Dollars. This would cause the exchange rate to change, so that 1 Yuan would get more US Dollars... making it cheaper to buy US goods. Thus more people would buy, thus dollars would flow back to the US from China.

Now that's what is 'supposed' to happen.

Under Mercantilism, a country would instead, use the US dollars to exchange them for Gold. If you remember, prior to the early 1970s, you could exchange a US dollar, for gold. So I sell you a TV set from China, take your $100, and give it to the Chinese Central Bank for Yuan, then the Chinese Central Bank, takes the $100 to the US Treasury and exchanges it for Gold.

They get richer, and we get poorer... in theory.

Here's the problem... that kind of Mercantilism can't work anymore, because you can't convert dollars into Gold. The only thing China can do with a US dollar, is buy something with it. Short of that, they can't do jack.

So China is not engaging in Mercantilism.

Another myth is that a trade deficit is debt. Trade deficits cause debt, and we have to deal with the trade deficit, or we'll continue to go into debt.

So again, I am selling a TV, and you want to buy one, and the TV is $100. You give me the $100, and I give you the TV. Where is the debt? I'm in Canada. I give you the TV, and you give me the $100. Where's the debt? I'm in the UK, and I give you the TV, and you give me the $100. Where's the debt? Well there is no debt unless you borrow the $100... but you could do that no matter where you get the TV from, domestically or internationally.

This idea that trade causes debt, comes from China using the US dollars, to purchase US Treasury Bonds. The problem is, if we had zero trade with China at all, and the US government spent more money than it collected in taxes, then there would be debt. Equally, we could triple our trade with China, and if the US Government was spending less money than it collected in taxes, and did not sell any US Treasury Bonds, then there would be no debt, no matter what the trade deficit was.

So trade does not cause debt. Ever. Government spending causes debt.

But then, whats wrong with protecting our economy? What's wrong with taxing imports?

The theory has great appeal on both sides of the political spectrum, but the reality is Protectionism has never resulted in the benefits supporters claim. Protectionism usually has devastating consequences.

http://www.nber.org/digest/may09/w14604.html

Peter Blair Henry and Conrad Miller wrote an article "Tale of Two Islands", which compared Barbados, and Jamaica. The two Islands have similar cultural histories, and people, and both were colonized with imported slave labor, under the British crown.

In the 1970s, Jamaica made a decidedly protectionist turn, in order to foster economic growth, and benefit domestic business. Instead, Jamaica fell into ruin, and became overrun with drugs and crime. Interestingly, Peter Henry's father supported the protectionism, but found after protectionism came into effect, he couldn't find the raw materials for the chemist field he worked in, which resulted in him moving to the US, which is how Peter Henry ended up a US citizen, and an economist.

Take another example, such as India. India engaged in heavy protectionism after independence. But instead of growing domestic jobs, and stimulating growth, it caused stagnation.



The above picture is of the Ambassador, built by Hindustan Motors. In 1956, a small car company in the UK, called Morris Motors, build the Oxford Series III. They ceased production of this car in 1959.

But in 1957, Hindustan Motors of India, purchased the design, and started producing the Oxford, as the Hindustan Ambassador. The design and build of this automobile remained almost completely unchanged for the duration of production. The photo above is not an antique car at a county fair or something. It's not a restore project. The Hindustan Ambassador was built until 2014. The car above is NEW.

From 1957 until 2014, very little changed. In 1979, they slightly improved the design and handling. What happened that caused them to upgrade the Ambassador? Suzuki was allowed to compete in India, and introduced the Maruti 800, to compete with the Ambassador.... and suddenly Hindustan Motors had motivation to upgrade their cars. What a shock.

Then in 1990 to 1992, they upgraded their cars again. This time replacing the 55 Horse Power engine they had been using since 1957, to a newer, more powerful 75 and 88 horse power engine. But did they build it domestically? No, they imported engines from Isuzu. What happened in the 90s? Fiat, Hyundai and Toyota, all started selling cars in India.

Protectionism allowed people to be stuck with a crappy 1956 car, that was absolutely unchanged for 40 years. It wasn't until the end of protectionism, that car companies even attempted to upgrade their products. And by the way, this isn't limited to just this example. Standard Motor company of India, sold the "Standard Herald" which was a Triumph Herald designed in 1959, which they continued to make until 1988, virtually unchanged.

Standard (Indian automobile) - Wikipedia, the free encyclopedia

Hindustan Ambassador - Wikipedia, the free encyclopedia

Far from generating this great economic growth, it generated economic stagnation.

And there are numerous examples. Compare the free-trade Hong Kong, to the protectionism of China prior to 1979. Hong Kong was massively wealthy, while Chinese earned less than $2 a day.

Or compare the protectionism of North Korea, to the Free-Trade of South Korea.

Or compare the Free-Trade Venezuela, to Protectionist Venezuela. Venezuela went from the leading economy in south America, to the worst economy of South America.

Or compare Free-Trade Singapore to the more protectionist neighbors.

Only one country has 100% free trade. You see it there. Now compare Singapore economically to all it's neighbors. If protectionism worked, then Indonesia with 52% protection tariffs on imports, should be the economic power house of the group. But it's not.

But possibly the best example that protectionism does not work, is America itself.

Rustici on Smoot-Hawley and the Great Depression | EconTalk | Library of Economics and Liberty

Economist Thomas Rustici was interviewed on EconTalk, about the Smoot-Hawley tariff of 1930.

In 1928, Hoover was elected on a platform of protectionist tariffs. In 1929, the House was protectionist, but the Senate was free-trade and was blocking the Smoot-Hawley tariff.

On October 21st, 1929, Sixteen Senators rolled. They agreed to pass the tariff, if tariffs were put in place for their states. On that day, the stock market began to slide. The stock market lost almost 1/3rd of it's value, before the Crash of Oct 29th.

But it goes on.... After the Senate passed the tariff, the House and Senate got together to reconcile the two bills, but couldn't. In December, they gave up, and left on winter recess. The bill appeared dead. Even the New York Times claimed the tariff was dead. Between Mid November and April, the stock market had recovered half of the value it had lost. In fact it was within about 10 points of where it was at the start of 1929.

But in May of 1929, Congress started working on the Smoot Hawley Tariff again, and by June they had made an agreement and passed the bill onto the President.

In May 1028 Economists wrote a signed letter to Herbert Hoover, warning that Smoot-Hawley Tariff would have drastic economic and monetary consequences, and told him to veto it.

Hoover received formal complaints by 23 countries, and 36 countries lodged 59 formal protests with the State Department. Spain, Canada and many other countries raised tariffs on US goods in retaliation.

Starting at the end of May, beginning of June, when it was clear the Tariff would pass, the market began to slide. It lost 20% of it's value in the first two weeks of June, and Hoover signed the bill into law June 17th. That slide continued non-stop until about 1933, where it started to very slowly recover until FDR screwed up the economy again in 1936-37, which caused a recession inside the depression.

Now clearly there is a correlation, but how exactly does a tariff cause economic destruction?

Well one example is fairly conclusive to me. In May, before the Smoot-Hawley Tariff is passed, Canada passes a tariff on imported Steel and Iron products from the US. When the Smoot-Hawley Tariff is passed, it places a massive tariff on Iron Ore imported from Canada.

17 Months after the passage of Smoot-Hawley, 11 banks in Pittsburgh go insolvent, and shut their doors. Why?

Well.... Pittsburgh was the central hub of the steel and iron industry. Hence: Pittsburgh Steelers. But the steel companies had two things happen at the same time.... The cost of Iron Ore drastically went up, because most of the ore came from Canada, now had a huge tariff on it. At the same time the demand for Iron and Steel from the US, dropped because other countries, primarily Canada, put a huge tariff on Steel and Iron from the US. Cost of making steel up, price and demand of steel down.

The Steel industry crashed, and when companies start having problems, they start pulling all their money out of the banks. Pull out all the money, and the banks to go bust.

And interestingly, I've seen that the companies I've worked for, most wouldn't exist if we engaged in protectionism.

Many of the products I've built, couldn't be built without imported goods. CPU controller boards made out of the country. Metal parts, supplied by other countries. Imported sensors and electronics.

Moreover, many of our customers are foreign. We sell to Canada, Brazil, Turkey, China, and many others. People have said that we can't compete with these other countries that have lower wages. That is totally false.

"We have to bring back manufacturing to the US!" Completely wrong.

It's amazing how many people don't know that last year, 2014, was a record year in US manufacturing. We produced more product in manufacturing last year, than ever before in US history. More than ever.



We have been competing successfully with low-wage countries for decades. And this idea that a trade deficit (importing more than we export) is so horrible.... you realize when the trade deficit started? In the 1990s. You remember how horrible the economy was in the 90s, with massive unemployment and recession after recession.... during the 90s..... right? You don't remember that? Neither do I.

You remember when we have a balance of trade right? During the amazing 1970s, when the economy was booming, and growth was massive? During the 70s? Right? You don't remember that? You remember Stagflation? Right.

Since the 1900s, there has only been two times where the US had a significant surplus balance of trade. Just twice. The late 1940s after the end of WW2, when Europe was in ruins, there was massive demand for goods, and we were the only ones to supply them. So we had huge exports.

And the other time was...... the 1930s.... the Great Depression.



By the way, you'll notice that imports dropped pretty hard in 2000, and 2008, and slightly in 1980. What happened all those years? We had a recession.

Do you know why trade deficits fall during recessions? Do you know why they rise during economic growth periods?

It's actually really simple. Trade deficits rise because.... we have money. When we don't have money, and can't buy things.... trade deficits fall.

Why do we have a trade deficit with China? The Chinese people prior to 1978, 63% of the population earned less than $2 a day. Now between us and them, who can buy more, from the other?

If you earn $100,000 a year, and I earn $20,000 a year, and we both own stores.... who can buy more from the other person? Obviously, between you and me, there is going to be a trade deficit. I can only buy $20,000 worth of goods from you, and you can buy $100,000 worth of goods from me.

A trade deficit is a sign of our wealth. That's why it exists. And curbing trade can only make us worse off. So while Trump may have public support for placing tariffs on trade, it's a bad policy, and it will harm the country, and we shouldn't do it. And that my friends, is the RCC perspective. Thanks.

You sell a $5000 tv for $100 because they are willing to work for pennies in China. We tax that make it cost $5000 again and spend it on American workers, American welfare, etc. Win win.

The TV isn't worth $5000. If it was, they would sell it for $5,000. Are you really telling me, that all those TVs on sale for $100, are actually worth $5,000 but the companies are just selling them for $100 because labor is cheap? Not true.

If the TV was worth $5,000, meaning they could get someone to pay them $5,000 for that TV, they would sell it for that much.

If I could get you to buy my TV set for two million, I'd charge that much. But no one is going to pay that much.

The value of a product is not determined by the cost of labor. It's determined by supply and demand.

Thus your plan will fail for that reason. If you tax imports, driving up the cost of imported goods, you might be able to raise the price a little, very little, but the result is people will simply not buy those TVs. Thus no jobs are really created, because the TV market will shrink.

Further, it is possible that some TVs will be built in the US, to avoid the import taxes, however, it still will not result in jobs. Workers will not be hired to put together TV manually like in China. Instead, the TVs will be mass produced by automated assembly lines.

So you will drive up the cost of goods in the US, but you still won't create any jobs.

If your theory was true, then why didn't the protectionism of the 1930s, create massive growth and jobs? Because for every job supposedly created by high taxes in imports, more than a few jobs are lost.

 

[Slyhunter]

View attachment 52937


Trump gets down to business on 60 Minutes

On Sept 26th, 60 Minutes aired a bit where they interviewed Donald Trump, and one of the things they talked about was Trumps plan for international trade.

The Trump plan is basically that we are going to place a tax on everything imported into the US. That way Ford won't put a manufacturing plant in Mexico, but will place that plant in the US. In essence, we need protectionism. Put heavy tariffs on trade with other countries, so we can have jobs here.

Is that a good plan? Is that what we should do?

To answer that question, we need to first understand the fundamental economics. Trade, or "voluntary exchange", is inherently mutually beneficial. Both parties by nature, are better off from trade. If trade was not beneficial to both sides, then they wouldn't do it.

A simple example: I am selling a TV set. The TV set is $100. You want to buy the TV set. You give me the $100, and I give you the TV. If the TV was not worth more to you, than the $100, you would not have traded. If the $100 was not worth more to me, than the TV, I would not have trade. We are both better off because of the trade. If we were not, then we would not have done the trade.

So both of us mutually benefit from the trade. We're both better off, or we would not have done the trade.

One popular claim is that China is engaging in Mercantilism.

So what is that? Well it's the idea of a government engaging in trade policies that enrich themselves by trade. Of course all countries believe they will enrich themselves by trade.... so that's nothing special.

But they claim that China's policy harms us, while benefiting them. To understand how, we have to back up and explain how trade is supposed to work.

So I live in China, and I am selling the TV. You give me $100, and I give you the TV set. Now I have $100 in US Dollars. Can I pay my employees with US dollars? No. Can I buy parts to make more TVs with US dollars? No. I have to exchange those dollars, for Yuan, the Chinese currency.

So the Central Bank of China, gives me Yuan, and takes the US Dollars. Now as this happens over and over, the Central Bank of China, has tons of US Dollars. This would cause the exchange rate to change, so that 1 Yuan would get more US Dollars... making it cheaper to buy US goods. Thus more people would buy, thus dollars would flow back to the US from China.

Now that's what is 'supposed' to happen.

Under Mercantilism, a country would instead, use the US dollars to exchange them for Gold. If you remember, prior to the early 1970s, you could exchange a US dollar, for gold. So I sell you a TV set from China, take your $100, and give it to the Chinese Central Bank for Yuan, then the Chinese Central Bank, takes the $100 to the US Treasury and exchanges it for Gold.

They get richer, and we get poorer... in theory.

Here's the problem... that kind of Mercantilism can't work anymore, because you can't convert dollars into Gold. The only thing China can do with a US dollar, is buy something with it. Short of that, they can't do jack.

So China is not engaging in Mercantilism.

Another myth is that a trade deficit is debt. Trade deficits cause debt, and we have to deal with the trade deficit, or we'll continue to go into debt.

So again, I am selling a TV, and you want to buy one, and the TV is $100. You give me the $100, and I give you the TV. Where is the debt? I'm in Canada. I give you the TV, and you give me the $100. Where's the debt? I'm in the UK, and I give you the TV, and you give me the $100. Where's the debt? Well there is no debt unless you borrow the $100... but you could do that no matter where you get the TV from, domestically or internationally.

This idea that trade causes debt, comes from China using the US dollars, to purchase US Treasury Bonds. The problem is, if we had zero trade with China at all, and the US government spent more money than it collected in taxes, then there would be debt. Equally, we could triple our trade with China, and if the US Government was spending less money than it collected in taxes, and did not sell any US Treasury Bonds, then there would be no debt, no matter what the trade deficit was.

So trade does not cause debt. Ever. Government spending causes debt.

But then, whats wrong with protecting our economy? What's wrong with taxing imports?

The theory has great appeal on both sides of the political spectrum, but the reality is Protectionism has never resulted in the benefits supporters claim. Protectionism usually has devastating consequences.

http://www.nber.org/digest/may09/w14604.html

Peter Blair Henry and Conrad Miller wrote an article "Tale of Two Islands", which compared Barbados, and Jamaica. The two Islands have similar cultural histories, and people, and both were colonized with imported slave labor, under the British crown.

In the 1970s, Jamaica made a decidedly protectionist turn, in order to foster economic growth, and benefit domestic business. Instead, Jamaica fell into ruin, and became overrun with drugs and crime. Interestingly, Peter Henry's father supported the protectionism, but found after protectionism came into effect, he couldn't find the raw materials for the chemist field he worked in, which resulted in him moving to the US, which is how Peter Henry ended up a US citizen, and an economist.

Take another example, such as India. India engaged in heavy protectionism after independence. But instead of growing domestic jobs, and stimulating growth, it caused stagnation.



The above picture is of the Ambassador, built by Hindustan Motors. In 1956, a small car company in the UK, called Morris Motors, build the Oxford Series III. They ceased production of this car in 1959.

But in 1957, Hindustan Motors of India, purchased the design, and started producing the Oxford, as the Hindustan Ambassador. The design and build of this automobile remained almost completely unchanged for the duration of production. The photo above is not an antique car at a county fair or something. It's not a restore project. The Hindustan Ambassador was built until 2014. The car above is NEW.

From 1957 until 2014, very little changed. In 1979, they slightly improved the design and handling. What happened that caused them to upgrade the Ambassador? Suzuki was allowed to compete in India, and introduced the Maruti 800, to compete with the Ambassador.... and suddenly Hindustan Motors had motivation to upgrade their cars. What a shock.

Then in 1990 to 1992, they upgraded their cars again. This time replacing the 55 Horse Power engine they had been using since 1957, to a newer, more powerful 75 and 88 horse power engine. But did they build it domestically? No, they imported engines from Isuzu. What happened in the 90s? Fiat, Hyundai and Toyota, all started selling cars in India.

Protectionism allowed people to be stuck with a crappy 1956 car, that was absolutely unchanged for 40 years. It wasn't until the end of protectionism, that car companies even attempted to upgrade their products. And by the way, this isn't limited to just this example. Standard Motor company of India, sold the "Standard Herald" which was a Triumph Herald designed in 1959, which they continued to make until 1988, virtually unchanged.

Standard (Indian automobile) - Wikipedia, the free encyclopedia

Hindustan Ambassador - Wikipedia, the free encyclopedia

Far from generating this great economic growth, it generated economic stagnation.

And there are numerous examples. Compare the free-trade Hong Kong, to the protectionism of China prior to 1979. Hong Kong was massively wealthy, while Chinese earned less than $2 a day.

Or compare the protectionism of North Korea, to the Free-Trade of South Korea.

Or compare the Free-Trade Venezuela, to Protectionist Venezuela. Venezuela went from the leading economy in south America, to the worst economy of South America.

Or compare Free-Trade Singapore to the more protectionist neighbors.

Only one country has 100% free trade. You see it there. Now compare Singapore economically to all it's neighbors. If protectionism worked, then Indonesia with 52% protection tariffs on imports, should be the economic power house of the group. But it's not.

But possibly the best example that protectionism does not work, is America itself.

Rustici on Smoot-Hawley and the Great Depression | EconTalk | Library of Economics and Liberty

Economist Thomas Rustici was interviewed on EconTalk, about the Smoot-Hawley tariff of 1930.

In 1928, Hoover was elected on a platform of protectionist tariffs. In 1929, the House was protectionist, but the Senate was free-trade and was blocking the Smoot-Hawley tariff.

On October 21st, 1929, Sixteen Senators rolled. They agreed to pass the tariff, if tariffs were put in place for their states. On that day, the stock market began to slide. The stock market lost almost 1/3rd of it's value, before the Crash of Oct 29th.

But it goes on.... After the Senate passed the tariff, the House and Senate got together to reconcile the two bills, but couldn't. In December, they gave up, and left on winter recess. The bill appeared dead. Even the New York Times claimed the tariff was dead. Between Mid November and April, the stock market had recovered half of the value it had lost. In fact it was within about 10 points of where it was at the start of 1929.

But in May of 1929, Congress started working on the Smoot Hawley Tariff again, and by June they had made an agreement and passed the bill onto the President.

In May 1028 Economists wrote a signed letter to Herbert Hoover, warning that Smoot-Hawley Tariff would have drastic economic and monetary consequences, and told him to veto it.

Hoover received formal complaints by 23 countries, and 36 countries lodged 59 formal protests with the State Department. Spain, Canada and many other countries raised tariffs on US goods in retaliation.

Starting at the end of May, beginning of June, when it was clear the Tariff would pass, the market began to slide. It lost 20% of it's value in the first two weeks of June, and Hoover signed the bill into law June 17th. That slide continued non-stop until about 1933, where it started to very slowly recover until FDR screwed up the economy again in 1936-37, which caused a recession inside the depression.

Now clearly there is a correlation, but how exactly does a tariff cause economic destruction?

Well one example is fairly conclusive to me. In May, before the Smoot-Hawley Tariff is passed, Canada passes a tariff on imported Steel and Iron products from the US. When the Smoot-Hawley Tariff is passed, it places a massive tariff on Iron Ore imported from Canada.

17 Months after the passage of Smoot-Hawley, 11 banks in Pittsburgh go insolvent, and shut their doors. Why?

Well.... Pittsburgh was the central hub of the steel and iron industry. Hence: Pittsburgh Steelers. But the steel companies had two things happen at the same time.... The cost of Iron Ore drastically went up, because most of the ore came from Canada, now had a huge tariff on it. At the same time the demand for Iron and Steel from the US, dropped because other countries, primarily Canada, put a huge tariff on Steel and Iron from the US. Cost of making steel up, price and demand of steel down.

The Steel industry crashed, and when companies start having problems, they start pulling all their money out of the banks. Pull out all the money, and the banks to go bust.

And interestingly, I've seen that the companies I've worked for, most wouldn't exist if we engaged in protectionism.

Many of the products I've built, couldn't be built without imported goods. CPU controller boards made out of the country. Metal parts, supplied by other countries. Imported sensors and electronics.

Moreover, many of our customers are foreign. We sell to Canada, Brazil, Turkey, China, and many others. People have said that we can't compete with these other countries that have lower wages. That is totally false.

"We have to bring back manufacturing to the US!" Completely wrong.

It's amazing how many people don't know that last year, 2014, was a record year in US manufacturing. We produced more product in manufacturing last year, than ever before in US history. More than ever.



We have been competing successfully with low-wage countries for decades. And this idea that a trade deficit (importing more than we export) is so horrible.... you realize when the trade deficit started? In the 1990s. You remember how horrible the economy was in the 90s, with massive unemployment and recession after recession.... during the 90s..... right? You don't remember that? Neither do I.

You remember when we have a balance of trade right? During the amazing 1970s, when the economy was booming, and growth was massive? During the 70s? Right? You don't remember that? You remember Stagflation? Right.

Since the 1900s, there has only been two times where the US had a significant surplus balance of trade. Just twice. The late 1940s after the end of WW2, when Europe was in ruins, there was massive demand for goods, and we were the only ones to supply them. So we had huge exports.

And the other time was...... the 1930s.... the Great Depression.



By the way, you'll notice that imports dropped pretty hard in 2000, and 2008, and slightly in 1980. What happened all those years? We had a recession.

Do you know why trade deficits fall during recessions? Do you know why they rise during economic growth periods?

It's actually really simple. Trade deficits rise because.... we have money. When we don't have money, and can't buy things.... trade deficits fall.

Why do we have a trade deficit with China? The Chinese people prior to 1978, 63% of the population earned less than $2 a day. Now between us and them, who can buy more, from the other?

If you earn $100,000 a year, and I earn $20,000 a year, and we both own stores.... who can buy more from the other person? Obviously, between you and me, there is going to be a trade deficit. I can only buy $20,000 worth of goods from you, and you can buy $100,000 worth of goods from me.

A trade deficit is a sign of our wealth. That's why it exists. And curbing trade can only make us worse off. So while Trump may have public support for placing tariffs on trade, it's a bad policy, and it will harm the country, and we shouldn't do it. And that my friends, is the RCC perspective. Thanks.

You sell a $5000 tv for $100 because they are willing to work for pennies in China. We tax that make it cost $5000 again and spend it on American workers, American welfare, etc. Win win.

The TV isn't worth $5000. If it was, they would sell it for $5,000. Are you really telling me, that all those TVs on sale for $100, are actually worth $5,000 but the companies are just selling them for $100 because labor is cheap? Not true.

If the TV was worth $5,000, meaning they could get someone to pay them $5,000 for that TV, they would sell it for that much.

If I could get you to buy my TV set for two million, I'd charge that much. But no one is going to pay that much.

The value of a product is not determined by the cost of labor. It's determined by supply and demand.

Thus your plan will fail for that reason. If you tax imports, driving up the cost of imported goods, you might be able to raise the price a little, very little, but the result is people will simply not buy those TVs. Thus no jobs are really created, because the TV market will shrink.

Further, it is possible that some TVs will be built in the US, to avoid the import taxes, however, it still will not result in jobs. Workers will not be hired to put together TV manually like in China. Instead, the TVs will be mass produced by automated assembly lines.

So you will drive up the cost of goods in the US, but you still won't create any jobs.

If your theory was true, then why didn't the protectionism of the 1930s, create massive growth and jobs? Because for every job supposedly created by high taxes in imports, more than a few jobs are lost.

big screen tv's used to cost $5,000 or more. Now because they are cheaper to build they cost downwards to $100. So you are the one that is wrong.

 

[Andylusion]

View attachment 52937


Trump gets down to business on 60 Minutes

On Sept 26th, 60 Minutes aired a bit where they interviewed Donald Trump, and one of the things they talked about was Trumps plan for international trade.

The Trump plan is basically that we are going to place a tax on everything imported into the US. That way Ford won't put a manufacturing plant in Mexico, but will place that plant in the US. In essence, we need protectionism. Put heavy tariffs on trade with other countries, so we can have jobs here.

Is that a good plan? Is that what we should do?

To answer that question, we need to first understand the fundamental economics. Trade, or "voluntary exchange", is inherently mutually beneficial. Both parties by nature, are better off from trade. If trade was not beneficial to both sides, then they wouldn't do it.

A simple example: I am selling a TV set. The TV set is $100. You want to buy the TV set. You give me the $100, and I give you the TV. If the TV was not worth more to you, than the $100, you would not have traded. If the $100 was not worth more to me, than the TV, I would not have trade. We are both better off because of the trade. If we were not, then we would not have done the trade.

So both of us mutually benefit from the trade. We're both better off, or we would not have done the trade.

One popular claim is that China is engaging in Mercantilism.

So what is that? Well it's the idea of a government engaging in trade policies that enrich themselves by trade. Of course all countries believe they will enrich themselves by trade.... so that's nothing special.

But they claim that China's policy harms us, while benefiting them. To understand how, we have to back up and explain how trade is supposed to work.

So I live in China, and I am selling the TV. You give me $100, and I give you the TV set. Now I have $100 in US Dollars. Can I pay my employees with US dollars? No. Can I buy parts to make more TVs with US dollars? No. I have to exchange those dollars, for Yuan, the Chinese currency.

So the Central Bank of China, gives me Yuan, and takes the US Dollars. Now as this happens over and over, the Central Bank of China, has tons of US Dollars. This would cause the exchange rate to change, so that 1 Yuan would get more US Dollars... making it cheaper to buy US goods. Thus more people would buy, thus dollars would flow back to the US from China.

Now that's what is 'supposed' to happen.

Under Mercantilism, a country would instead, use the US dollars to exchange them for Gold. If you remember, prior to the early 1970s, you could exchange a US dollar, for gold. So I sell you a TV set from China, take your $100, and give it to the Chinese Central Bank for Yuan, then the Chinese Central Bank, takes the $100 to the US Treasury and exchanges it for Gold.

They get richer, and we get poorer... in theory.

Here's the problem... that kind of Mercantilism can't work anymore, because you can't convert dollars into Gold. The only thing China can do with a US dollar, is buy something with it. Short of that, they can't do jack.

So China is not engaging in Mercantilism.

Another myth is that a trade deficit is debt. Trade deficits cause debt, and we have to deal with the trade deficit, or we'll continue to go into debt.

So again, I am selling a TV, and you want to buy one, and the TV is $100. You give me the $100, and I give you the TV. Where is the debt? I'm in Canada. I give you the TV, and you give me the $100. Where's the debt? I'm in the UK, and I give you the TV, and you give me the $100. Where's the debt? Well there is no debt unless you borrow the $100... but you could do that no matter where you get the TV from, domestically or internationally.

This idea that trade causes debt, comes from China using the US dollars, to purchase US Treasury Bonds. The problem is, if we had zero trade with China at all, and the US government spent more money than it collected in taxes, then there would be debt. Equally, we could triple our trade with China, and if the US Government was spending less money than it collected in taxes, and did not sell any US Treasury Bonds, then there would be no debt, no matter what the trade deficit was.

So trade does not cause debt. Ever. Government spending causes debt.

But then, whats wrong with protecting our economy? What's wrong with taxing imports?

The theory has great appeal on both sides of the political spectrum, but the reality is Protectionism has never resulted in the benefits supporters claim. Protectionism usually has devastating consequences.

http://www.nber.org/digest/may09/w14604.html

Peter Blair Henry and Conrad Miller wrote an article "Tale of Two Islands", which compared Barbados, and Jamaica. The two Islands have similar cultural histories, and people, and both were colonized with imported slave labor, under the British crown.

In the 1970s, Jamaica made a decidedly protectionist turn, in order to foster economic growth, and benefit domestic business. Instead, Jamaica fell into ruin, and became overrun with drugs and crime. Interestingly, Peter Henry's father supported the protectionism, but found after protectionism came into effect, he couldn't find the raw materials for the chemist field he worked in, which resulted in him moving to the US, which is how Peter Henry ended up a US citizen, and an economist.

Take another example, such as India. India engaged in heavy protectionism after independence. But instead of growing domestic jobs, and stimulating growth, it caused stagnation.



The above picture is of the Ambassador, built by Hindustan Motors. In 1956, a small car company in the UK, called Morris Motors, build the Oxford Series III. They ceased production of this car in 1959.

But in 1957, Hindustan Motors of India, purchased the design, and started producing the Oxford, as the Hindustan Ambassador. The design and build of this automobile remained almost completely unchanged for the duration of production. The photo above is not an antique car at a county fair or something. It's not a restore project. The Hindustan Ambassador was built until 2014. The car above is NEW.

From 1957 until 2014, very little changed. In 1979, they slightly improved the design and handling. What happened that caused them to upgrade the Ambassador? Suzuki was allowed to compete in India, and introduced the Maruti 800, to compete with the Ambassador.... and suddenly Hindustan Motors had motivation to upgrade their cars. What a shock.

Then in 1990 to 1992, they upgraded their cars again. This time replacing the 55 Horse Power engine they had been using since 1957, to a newer, more powerful 75 and 88 horse power engine. But did they build it domestically? No, they imported engines from Isuzu. What happened in the 90s? Fiat, Hyundai and Toyota, all started selling cars in India.

Protectionism allowed people to be stuck with a crappy 1956 car, that was absolutely unchanged for 40 years. It wasn't until the end of protectionism, that car companies even attempted to upgrade their products. And by the way, this isn't limited to just this example. Standard Motor company of India, sold the "Standard Herald" which was a Triumph Herald designed in 1959, which they continued to make until 1988, virtually unchanged.

Standard (Indian automobile) - Wikipedia, the free encyclopedia

Hindustan Ambassador - Wikipedia, the free encyclopedia

Far from generating this great economic growth, it generated economic stagnation.

And there are numerous examples. Compare the free-trade Hong Kong, to the protectionism of China prior to 1979. Hong Kong was massively wealthy, while Chinese earned less than $2 a day.

Or compare the protectionism of North Korea, to the Free-Trade of South Korea.

Or compare the Free-Trade Venezuela, to Protectionist Venezuela. Venezuela went from the leading economy in south America, to the worst economy of South America.

Or compare Free-Trade Singapore to the more protectionist neighbors.

Only one country has 100% free trade. You see it there. Now compare Singapore economically to all it's neighbors. If protectionism worked, then Indonesia with 52% protection tariffs on imports, should be the economic power house of the group. But it's not.

But possibly the best example that protectionism does not work, is America itself.

Rustici on Smoot-Hawley and the Great Depression | EconTalk | Library of Economics and Liberty

Economist Thomas Rustici was interviewed on EconTalk, about the Smoot-Hawley tariff of 1930.

In 1928, Hoover was elected on a platform of protectionist tariffs. In 1929, the House was protectionist, but the Senate was free-trade and was blocking the Smoot-Hawley tariff.

On October 21st, 1929, Sixteen Senators rolled. They agreed to pass the tariff, if tariffs were put in place for their states. On that day, the stock market began to slide. The stock market lost almost 1/3rd of it's value, before the Crash of Oct 29th.

But it goes on.... After the Senate passed the tariff, the House and Senate got together to reconcile the two bills, but couldn't. In December, they gave up, and left on winter recess. The bill appeared dead. Even the New York Times claimed the tariff was dead. Between Mid November and April, the stock market had recovered half of the value it had lost. In fact it was within about 10 points of where it was at the start of 1929.

But in May of 1929, Congress started working on the Smoot Hawley Tariff again, and by June they had made an agreement and passed the bill onto the President.

In May 1028 Economists wrote a signed letter to Herbert Hoover, warning that Smoot-Hawley Tariff would have drastic economic and monetary consequences, and told him to veto it.

Hoover received formal complaints by 23 countries, and 36 countries lodged 59 formal protests with the State Department. Spain, Canada and many other countries raised tariffs on US goods in retaliation.

Starting at the end of May, beginning of June, when it was clear the Tariff would pass, the market began to slide. It lost 20% of it's value in the first two weeks of June, and Hoover signed the bill into law June 17th. That slide continued non-stop until about 1933, where it started to very slowly recover until FDR screwed up the economy again in 1936-37, which caused a recession inside the depression.

Now clearly there is a correlation, but how exactly does a tariff cause economic destruction?

Well one example is fairly conclusive to me. In May, before the Smoot-Hawley Tariff is passed, Canada passes a tariff on imported Steel and Iron products from the US. When the Smoot-Hawley Tariff is passed, it places a massive tariff on Iron Ore imported from Canada.

17 Months after the passage of Smoot-Hawley, 11 banks in Pittsburgh go insolvent, and shut their doors. Why?

Well.... Pittsburgh was the central hub of the steel and iron industry. Hence: Pittsburgh Steelers. But the steel companies had two things happen at the same time.... The cost of Iron Ore drastically went up, because most of the ore came from Canada, now had a huge tariff on it. At the same time the demand for Iron and Steel from the US, dropped because other countries, primarily Canada, put a huge tariff on Steel and Iron from the US. Cost of making steel up, price and demand of steel down.

The Steel industry crashed, and when companies start having problems, they start pulling all their money out of the banks. Pull out all the money, and the banks to go bust.

And interestingly, I've seen that the companies I've worked for, most wouldn't exist if we engaged in protectionism.

Many of the products I've built, couldn't be built without imported goods. CPU controller boards made out of the country. Metal parts, supplied by other countries. Imported sensors and electronics.

Moreover, many of our customers are foreign. We sell to Canada, Brazil, Turkey, China, and many others. People have said that we can't compete with these other countries that have lower wages. That is totally false.

"We have to bring back manufacturing to the US!" Completely wrong.

It's amazing how many people don't know that last year, 2014, was a record year in US manufacturing. We produced more product in manufacturing last year, than ever before in US history. More than ever.



We have been competing successfully with low-wage countries for decades. And this idea that a trade deficit (importing more than we export) is so horrible.... you realize when the trade deficit started? In the 1990s. You remember how horrible the economy was in the 90s, with massive unemployment and recession after recession.... during the 90s..... right? You don't remember that? Neither do I.

You remember when we have a balance of trade right? During the amazing 1970s, when the economy was booming, and growth was massive? During the 70s? Right? You don't remember that? You remember Stagflation? Right.

Since the 1900s, there has only been two times where the US had a significant surplus balance of trade. Just twice. The late 1940s after the end of WW2, when Europe was in ruins, there was massive demand for goods, and we were the only ones to supply them. So we had huge exports.

And the other time was...... the 1930s.... the Great Depression.



By the way, you'll notice that imports dropped pretty hard in 2000, and 2008, and slightly in 1980. What happened all those years? We had a recession.

Do you know why trade deficits fall during recessions? Do you know why they rise during economic growth periods?

It's actually really simple. Trade deficits rise because.... we have money. When we don't have money, and can't buy things.... trade deficits fall.

Why do we have a trade deficit with China? The Chinese people prior to 1978, 63% of the population earned less than $2 a day. Now between us and them, who can buy more, from the other?

If you earn $100,000 a year, and I earn $20,000 a year, and we both own stores.... who can buy more from the other person? Obviously, between you and me, there is going to be a trade deficit. I can only buy $20,000 worth of goods from you, and you can buy $100,000 worth of goods from me.

A trade deficit is a sign of our wealth. That's why it exists. And curbing trade can only make us worse off. So while Trump may have public support for placing tariffs on trade, it's a bad policy, and it will harm the country, and we shouldn't do it. And that my friends, is the RCC perspective. Thanks.

You sell a $5000 tv for $100 because they are willing to work for pennies in China. We tax that make it cost $5000 again and spend it on American workers, American welfare, etc. Win win.

The TV isn't worth $5000. If it was, they would sell it for $5,000. Are you really telling me, that all those TVs on sale for $100, are actually worth $5,000 but the companies are just selling them for $100 because labor is cheap? Not true.

If the TV was worth $5,000, meaning they could get someone to pay them $5,000 for that TV, they would sell it for that much.

If I could get you to buy my TV set for two million, I'd charge that much. But no one is going to pay that much.

The value of a product is not determined by the cost of labor. It's determined by supply and demand.

Thus your plan will fail for that reason. If you tax imports, driving up the cost of imported goods, you might be able to raise the price a little, very little, but the result is people will simply not buy those TVs. Thus no jobs are really created, because the TV market will shrink.

Further, it is possible that some TVs will be built in the US, to avoid the import taxes, however, it still will not result in jobs. Workers will not be hired to put together TV manually like in China. Instead, the TVs will be mass produced by automated assembly lines.

So you will drive up the cost of goods in the US, but you still won't create any jobs.

If your theory was true, then why didn't the protectionism of the 1930s, create massive growth and jobs? Because for every job supposedly created by high taxes in imports, more than a few jobs are lost.

big screen tv's used to cost $5,000 or more. Now because they are cheaper to build they cost downwards to $100. So you are the one that is wrong.

No not true. Supply and Demand. The supply was short, demand high. As those reversed, supply is high from mass manufacturing, and demand is lower because more people have TVs, the price drops.

In 1948, the price of a B&W 16 inch TV was $7,900. (adjusted for inflation). By 1952, a 20 inch B&W TV was going for $3,700.

Both were built in the US, with US labor. Are you telling me that between 48 and 52, that wages for labor fell by 50%? Really?

No, you are wrong. Sorry.

 

[FA_Q2]

View attachment 52937


Trump gets down to business on 60 Minutes

On Sept 26th, 60 Minutes aired a bit where they interviewed Donald Trump, and one of the things they talked about was Trumps plan for international trade.

The Trump plan is basically that we are going to place a tax on everything imported into the US. That way Ford won't put a manufacturing plant in Mexico, but will place that plant in the US. In essence, we need protectionism. Put heavy tariffs on trade with other countries, so we can have jobs here.

Is that a good plan? Is that what we should do?

To answer that question, we need to first understand the fundamental economics. Trade, or "voluntary exchange", is inherently mutually beneficial. Both parties by nature, are better off from trade. If trade was not beneficial to both sides, then they wouldn't do it.

A simple example: I am selling a TV set. The TV set is $100. You want to buy the TV set. You give me the $100, and I give you the TV. If the TV was not worth more to you, than the $100, you would not have traded. If the $100 was not worth more to me, than the TV, I would not have trade. We are both better off because of the trade. If we were not, then we would not have done the trade.

So both of us mutually benefit from the trade. We're both better off, or we would not have done the trade.

One popular claim is that China is engaging in Mercantilism.

So what is that? Well it's the idea of a government engaging in trade policies that enrich themselves by trade. Of course all countries believe they will enrich themselves by trade.... so that's nothing special.

But they claim that China's policy harms us, while benefiting them. To understand how, we have to back up and explain how trade is supposed to work.

So I live in China, and I am selling the TV. You give me $100, and I give you the TV set. Now I have $100 in US Dollars. Can I pay my employees with US dollars? No. Can I buy parts to make more TVs with US dollars? No. I have to exchange those dollars, for Yuan, the Chinese currency.

So the Central Bank of China, gives me Yuan, and takes the US Dollars. Now as this happens over and over, the Central Bank of China, has tons of US Dollars. This would cause the exchange rate to change, so that 1 Yuan would get more US Dollars... making it cheaper to buy US goods. Thus more people would buy, thus dollars would flow back to the US from China.

Now that's what is 'supposed' to happen.

Under Mercantilism, a country would instead, use the US dollars to exchange them for Gold. If you remember, prior to the early 1970s, you could exchange a US dollar, for gold. So I sell you a TV set from China, take your $100, and give it to the Chinese Central Bank for Yuan, then the Chinese Central Bank, takes the $100 to the US Treasury and exchanges it for Gold.

They get richer, and we get poorer... in theory.

Here's the problem... that kind of Mercantilism can't work anymore, because you can't convert dollars into Gold. The only thing China can do with a US dollar, is buy something with it. Short of that, they can't do jack.

So China is not engaging in Mercantilism.

Another myth is that a trade deficit is debt. Trade deficits cause debt, and we have to deal with the trade deficit, or we'll continue to go into debt.

So again, I am selling a TV, and you want to buy one, and the TV is $100. You give me the $100, and I give you the TV. Where is the debt? I'm in Canada. I give you the TV, and you give me the $100. Where's the debt? I'm in the UK, and I give you the TV, and you give me the $100. Where's the debt? Well there is no debt unless you borrow the $100... but you could do that no matter where you get the TV from, domestically or internationally.

This idea that trade causes debt, comes from China using the US dollars, to purchase US Treasury Bonds. The problem is, if we had zero trade with China at all, and the US government spent more money than it collected in taxes, then there would be debt. Equally, we could triple our trade with China, and if the US Government was spending less money than it collected in taxes, and did not sell any US Treasury Bonds, then there would be no debt, no matter what the trade deficit was.

So trade does not cause debt. Ever. Government spending causes debt.

But then, whats wrong with protecting our economy? What's wrong with taxing imports?

The theory has great appeal on both sides of the political spectrum, but the reality is Protectionism has never resulted in the benefits supporters claim. Protectionism usually has devastating consequences.

http://www.nber.org/digest/may09/w14604.html

Peter Blair Henry and Conrad Miller wrote an article "Tale of Two Islands", which compared Barbados, and Jamaica. The two Islands have similar cultural histories, and people, and both were colonized with imported slave labor, under the British crown.

In the 1970s, Jamaica made a decidedly protectionist turn, in order to foster economic growth, and benefit domestic business. Instead, Jamaica fell into ruin, and became overrun with drugs and crime. Interestingly, Peter Henry's father supported the protectionism, but found after protectionism came into effect, he couldn't find the raw materials for the chemist field he worked in, which resulted in him moving to the US, which is how Peter Henry ended up a US citizen, and an economist.

Take another example, such as India. India engaged in heavy protectionism after independence. But instead of growing domestic jobs, and stimulating growth, it caused stagnation.



The above picture is of the Ambassador, built by Hindustan Motors. In 1956, a small car company in the UK, called Morris Motors, build the Oxford Series III. They ceased production of this car in 1959.

But in 1957, Hindustan Motors of India, purchased the design, and started producing the Oxford, as the Hindustan Ambassador. The design and build of this automobile remained almost completely unchanged for the duration of production. The photo above is not an antique car at a county fair or something. It's not a restore project. The Hindustan Ambassador was built until 2014. The car above is NEW.

From 1957 until 2014, very little changed. In 1979, they slightly improved the design and handling. What happened that caused them to upgrade the Ambassador? Suzuki was allowed to compete in India, and introduced the Maruti 800, to compete with the Ambassador.... and suddenly Hindustan Motors had motivation to upgrade their cars. What a shock.

Then in 1990 to 1992, they upgraded their cars again. This time replacing the 55 Horse Power engine they had been using since 1957, to a newer, more powerful 75 and 88 horse power engine. But did they build it domestically? No, they imported engines from Isuzu. What happened in the 90s? Fiat, Hyundai and Toyota, all started selling cars in India.

Protectionism allowed people to be stuck with a crappy 1956 car, that was absolutely unchanged for 40 years. It wasn't until the end of protectionism, that car companies even attempted to upgrade their products. And by the way, this isn't limited to just this example. Standard Motor company of India, sold the "Standard Herald" which was a Triumph Herald designed in 1959, which they continued to make until 1988, virtually unchanged.

Standard (Indian automobile) - Wikipedia, the free encyclopedia

Hindustan Ambassador - Wikipedia, the free encyclopedia

Far from generating this great economic growth, it generated economic stagnation.

And there are numerous examples. Compare the free-trade Hong Kong, to the protectionism of China prior to 1979. Hong Kong was massively wealthy, while Chinese earned less than $2 a day.

Or compare the protectionism of North Korea, to the Free-Trade of South Korea.

Or compare the Free-Trade Venezuela, to Protectionist Venezuela. Venezuela went from the leading economy in south America, to the worst economy of South America.

Or compare Free-Trade Singapore to the more protectionist neighbors.

Only one country has 100% free trade. You see it there. Now compare Singapore economically to all it's neighbors. If protectionism worked, then Indonesia with 52% protection tariffs on imports, should be the economic power house of the group. But it's not.

But possibly the best example that protectionism does not work, is America itself.

Rustici on Smoot-Hawley and the Great Depression | EconTalk | Library of Economics and Liberty

Economist Thomas Rustici was interviewed on EconTalk, about the Smoot-Hawley tariff of 1930.

In 1928, Hoover was elected on a platform of protectionist tariffs. In 1929, the House was protectionist, but the Senate was free-trade and was blocking the Smoot-Hawley tariff.

On October 21st, 1929, Sixteen Senators rolled. They agreed to pass the tariff, if tariffs were put in place for their states. On that day, the stock market began to slide. The stock market lost almost 1/3rd of it's value, before the Crash of Oct 29th.

But it goes on.... After the Senate passed the tariff, the House and Senate got together to reconcile the two bills, but couldn't. In December, they gave up, and left on winter recess. The bill appeared dead. Even the New York Times claimed the tariff was dead. Between Mid November and April, the stock market had recovered half of the value it had lost. In fact it was within about 10 points of where it was at the start of 1929.

But in May of 1929, Congress started working on the Smoot Hawley Tariff again, and by June they had made an agreement and passed the bill onto the President.

In May 1028 Economists wrote a signed letter to Herbert Hoover, warning that Smoot-Hawley Tariff would have drastic economic and monetary consequences, and told him to veto it.

Hoover received formal complaints by 23 countries, and 36 countries lodged 59 formal protests with the State Department. Spain, Canada and many other countries raised tariffs on US goods in retaliation.

Starting at the end of May, beginning of June, when it was clear the Tariff would pass, the market began to slide. It lost 20% of it's value in the first two weeks of June, and Hoover signed the bill into law June 17th. That slide continued non-stop until about 1933, where it started to very slowly recover until FDR screwed up the economy again in 1936-37, which caused a recession inside the depression.

Now clearly there is a correlation, but how exactly does a tariff cause economic destruction?

Well one example is fairly conclusive to me. In May, before the Smoot-Hawley Tariff is passed, Canada passes a tariff on imported Steel and Iron products from the US. When the Smoot-Hawley Tariff is passed, it places a massive tariff on Iron Ore imported from Canada.

17 Months after the passage of Smoot-Hawley, 11 banks in Pittsburgh go insolvent, and shut their doors. Why?

Well.... Pittsburgh was the central hub of the steel and iron industry. Hence: Pittsburgh Steelers. But the steel companies had two things happen at the same time.... The cost of Iron Ore drastically went up, because most of the ore came from Canada, now had a huge tariff on it. At the same time the demand for Iron and Steel from the US, dropped because other countries, primarily Canada, put a huge tariff on Steel and Iron from the US. Cost of making steel up, price and demand of steel down.

The Steel industry crashed, and when companies start having problems, they start pulling all their money out of the banks. Pull out all the money, and the banks to go bust.

And interestingly, I've seen that the companies I've worked for, most wouldn't exist if we engaged in protectionism.

Many of the products I've built, couldn't be built without imported goods. CPU controller boards made out of the country. Metal parts, supplied by other countries. Imported sensors and electronics.

Moreover, many of our customers are foreign. We sell to Canada, Brazil, Turkey, China, and many others. People have said that we can't compete with these other countries that have lower wages. That is totally false.

"We have to bring back manufacturing to the US!" Completely wrong.

It's amazing how many people don't know that last year, 2014, was a record year in US manufacturing. We produced more product in manufacturing last year, than ever before in US history. More than ever.



We have been competing successfully with low-wage countries for decades. And this idea that a trade deficit (importing more than we export) is so horrible.... you realize when the trade deficit started? In the 1990s. You remember how horrible the economy was in the 90s, with massive unemployment and recession after recession.... during the 90s..... right? You don't remember that? Neither do I.

You remember when we have a balance of trade right? During the amazing 1970s, when the economy was booming, and growth was massive? During the 70s? Right? You don't remember that? You remember Stagflation? Right.

Since the 1900s, there has only been two times where the US had a significant surplus balance of trade. Just twice. The late 1940s after the end of WW2, when Europe was in ruins, there was massive demand for goods, and we were the only ones to supply them. So we had huge exports.

And the other time was...... the 1930s.... the Great Depression.



By the way, you'll notice that imports dropped pretty hard in 2000, and 2008, and slightly in 1980. What happened all those years? We had a recession.

Do you know why trade deficits fall during recessions? Do you know why they rise during economic growth periods?

It's actually really simple. Trade deficits rise because.... we have money. When we don't have money, and can't buy things.... trade deficits fall.

Why do we have a trade deficit with China? The Chinese people prior to 1978, 63% of the population earned less than $2 a day. Now between us and them, who can buy more, from the other?

If you earn $100,000 a year, and I earn $20,000 a year, and we both own stores.... who can buy more from the other person? Obviously, between you and me, there is going to be a trade deficit. I can only buy $20,000 worth of goods from you, and you can buy $100,000 worth of goods from me.

A trade deficit is a sign of our wealth. That's why it exists. And curbing trade can only make us worse off. So while Trump may have public support for placing tariffs on trade, it's a bad policy, and it will harm the country, and we shouldn't do it. And that my friends, is the RCC perspective. Thanks.

You sell a $5000 tv for $100 because they are willing to work for pennies in China. We tax that make it cost $5000 again and spend it on American workers, American welfare, etc. Win win.

The TV isn't worth $5000. If it was, they would sell it for $5,000. Are you really telling me, that all those TVs on sale for $100, are actually worth $5,000 but the companies are just selling them for $100 because labor is cheap? Not true.

If the TV was worth $5,000, meaning they could get someone to pay them $5,000 for that TV, they would sell it for that much.

If I could get you to buy my TV set for two million, I'd charge that much. But no one is going to pay that much.

The value of a product is not determined by the cost of labor. It's determined by supply and demand.

Thus your plan will fail for that reason. If you tax imports, driving up the cost of imported goods, you might be able to raise the price a little, very little, but the result is people will simply not buy those TVs. Thus no jobs are really created, because the TV market will shrink.

Further, it is possible that some TVs will be built in the US, to avoid the import taxes, however, it still will not result in jobs. Workers will not be hired to put together TV manually like in China. Instead, the TVs will be mass produced by automated assembly lines.

So you will drive up the cost of goods in the US, but you still won't create any jobs.

If your theory was true, then why didn't the protectionism of the 1930s, create massive growth and jobs? Because for every job supposedly created by high taxes in imports, more than a few jobs are lost.

big screen tv's used to cost $5,000 or more. Now because they are cheaper to build they cost downwards to $100. So you are the one that is wrong.

No not true. Supply and Demand. The supply was short, demand high. As those reversed, supply is high from mass manufacturing, and demand is lower because more people have TVs, the price drops.

In 1948, the price of a B&W 16 inch TV was $7,900. (adjusted for inflation). By 1952, a 20 inch B&W TV was going for $3,700.

Both were built in the US, with US labor. Are you telling me that between 48 and 52, that wages for labor fell by 50%? Really?

No, you are wrong. Sorry.

Labor did not drop - productivity went up. Also, as time goes on costs for other expenses related to the manufacturing process drop dramatically as well. Those represent very similar outcomes.

The cost of manufacturing a product is very much a part of the price (and that includes labor). Your pricing structure that you explained in post 25 completely ignores competition which is going to drive prices as close to production costs as possible and still turn reasonable profits. When I can produce a TV for 500 dollars I can grantee that you are not going to see them on the market for 100 dollars. It is not feasible. HOWEVER, when my competition in China can use slave labor to drop that production cost to 400 they are going to price their TV's at 450 and put me out of business. Other companies will utilize that same slave labor and the price of the products will reflect that.

 

[Andylusion]

View attachment 52937


Trump gets down to business on 60 Minutes

On Sept 26th, 60 Minutes aired a bit where they interviewed Donald Trump, and one of the things they talked about was Trumps plan for international trade.

The Trump plan is basically that we are going to place a tax on everything imported into the US. That way Ford won't put a manufacturing plant in Mexico, but will place that plant in the US. In essence, we need protectionism. Put heavy tariffs on trade with other countries, so we can have jobs here.

Is that a good plan? Is that what we should do?

To answer that question, we need to first understand the fundamental economics. Trade, or "voluntary exchange", is inherently mutually beneficial. Both parties by nature, are better off from trade. If trade was not beneficial to both sides, then they wouldn't do it.

A simple example: I am selling a TV set. The TV set is $100. You want to buy the TV set. You give me the $100, and I give you the TV. If the TV was not worth more to you, than the $100, you would not have traded. If the $100 was not worth more to me, than the TV, I would not have trade. We are both better off because of the trade. If we were not, then we would not have done the trade.

So both of us mutually benefit from the trade. We're both better off, or we would not have done the trade.

One popular claim is that China is engaging in Mercantilism.

So what is that? Well it's the idea of a government engaging in trade policies that enrich themselves by trade. Of course all countries believe they will enrich themselves by trade.... so that's nothing special.

But they claim that China's policy harms us, while benefiting them. To understand how, we have to back up and explain how trade is supposed to work.

So I live in China, and I am selling the TV. You give me $100, and I give you the TV set. Now I have $100 in US Dollars. Can I pay my employees with US dollars? No. Can I buy parts to make more TVs with US dollars? No. I have to exchange those dollars, for Yuan, the Chinese currency.

So the Central Bank of China, gives me Yuan, and takes the US Dollars. Now as this happens over and over, the Central Bank of China, has tons of US Dollars. This would cause the exchange rate to change, so that 1 Yuan would get more US Dollars... making it cheaper to buy US goods. Thus more people would buy, thus dollars would flow back to the US from China.

Now that's what is 'supposed' to happen.

Under Mercantilism, a country would instead, use the US dollars to exchange them for Gold. If you remember, prior to the early 1970s, you could exchange a US dollar, for gold. So I sell you a TV set from China, take your $100, and give it to the Chinese Central Bank for Yuan, then the Chinese Central Bank, takes the $100 to the US Treasury and exchanges it for Gold.

They get richer, and we get poorer... in theory.

Here's the problem... that kind of Mercantilism can't work anymore, because you can't convert dollars into Gold. The only thing China can do with a US dollar, is buy something with it. Short of that, they can't do jack.

So China is not engaging in Mercantilism.

Another myth is that a trade deficit is debt. Trade deficits cause debt, and we have to deal with the trade deficit, or we'll continue to go into debt.

So again, I am selling a TV, and you want to buy one, and the TV is $100. You give me the $100, and I give you the TV. Where is the debt? I'm in Canada. I give you the TV, and you give me the $100. Where's the debt? I'm in the UK, and I give you the TV, and you give me the $100. Where's the debt? Well there is no debt unless you borrow the $100... but you could do that no matter where you get the TV from, domestically or internationally.

This idea that trade causes debt, comes from China using the US dollars, to purchase US Treasury Bonds. The problem is, if we had zero trade with China at all, and the US government spent more money than it collected in taxes, then there would be debt. Equally, we could triple our trade with China, and if the US Government was spending less money than it collected in taxes, and did not sell any US Treasury Bonds, then there would be no debt, no matter what the trade deficit was.

So trade does not cause debt. Ever. Government spending causes debt.

But then, whats wrong with protecting our economy? What's wrong with taxing imports?

The theory has great appeal on both sides of the political spectrum, but the reality is Protectionism has never resulted in the benefits supporters claim. Protectionism usually has devastating consequences.

http://www.nber.org/digest/may09/w14604.html

Peter Blair Henry and Conrad Miller wrote an article "Tale of Two Islands", which compared Barbados, and Jamaica. The two Islands have similar cultural histories, and people, and both were colonized with imported slave labor, under the British crown.

In the 1970s, Jamaica made a decidedly protectionist turn, in order to foster economic growth, and benefit domestic business. Instead, Jamaica fell into ruin, and became overrun with drugs and crime. Interestingly, Peter Henry's father supported the protectionism, but found after protectionism came into effect, he couldn't find the raw materials for the chemist field he worked in, which resulted in him moving to the US, which is how Peter Henry ended up a US citizen, and an economist.

Take another example, such as India. India engaged in heavy protectionism after independence. But instead of growing domestic jobs, and stimulating growth, it caused stagnation.



The above picture is of the Ambassador, built by Hindustan Motors. In 1956, a small car company in the UK, called Morris Motors, build the Oxford Series III. They ceased production of this car in 1959.

But in 1957, Hindustan Motors of India, purchased the design, and started producing the Oxford, as the Hindustan Ambassador. The design and build of this automobile remained almost completely unchanged for the duration of production. The photo above is not an antique car at a county fair or something. It's not a restore project. The Hindustan Ambassador was built until 2014. The car above is NEW.

From 1957 until 2014, very little changed. In 1979, they slightly improved the design and handling. What happened that caused them to upgrade the Ambassador? Suzuki was allowed to compete in India, and introduced the Maruti 800, to compete with the Ambassador.... and suddenly Hindustan Motors had motivation to upgrade their cars. What a shock.

Then in 1990 to 1992, they upgraded their cars again. This time replacing the 55 Horse Power engine they had been using since 1957, to a newer, more powerful 75 and 88 horse power engine. But did they build it domestically? No, they imported engines from Isuzu. What happened in the 90s? Fiat, Hyundai and Toyota, all started selling cars in India.

Protectionism allowed people to be stuck with a crappy 1956 car, that was absolutely unchanged for 40 years. It wasn't until the end of protectionism, that car companies even attempted to upgrade their products. And by the way, this isn't limited to just this example. Standard Motor company of India, sold the "Standard Herald" which was a Triumph Herald designed in 1959, which they continued to make until 1988, virtually unchanged.

Standard (Indian automobile) - Wikipedia, the free encyclopedia

Hindustan Ambassador - Wikipedia, the free encyclopedia

Far from generating this great economic growth, it generated economic stagnation.

And there are numerous examples. Compare the free-trade Hong Kong, to the protectionism of China prior to 1979. Hong Kong was massively wealthy, while Chinese earned less than $2 a day.

Or compare the protectionism of North Korea, to the Free-Trade of South Korea.

Or compare the Free-Trade Venezuela, to Protectionist Venezuela. Venezuela went from the leading economy in south America, to the worst economy of South America.

Or compare Free-Trade Singapore to the more protectionist neighbors.

Only one country has 100% free trade. You see it there. Now compare Singapore economically to all it's neighbors. If protectionism worked, then Indonesia with 52% protection tariffs on imports, should be the economic power house of the group. But it's not.

But possibly the best example that protectionism does not work, is America itself.

Rustici on Smoot-Hawley and the Great Depression | EconTalk | Library of Economics and Liberty

Economist Thomas Rustici was interviewed on EconTalk, about the Smoot-Hawley tariff of 1930.

In 1928, Hoover was elected on a platform of protectionist tariffs. In 1929, the House was protectionist, but the Senate was free-trade and was blocking the Smoot-Hawley tariff.

On October 21st, 1929, Sixteen Senators rolled. They agreed to pass the tariff, if tariffs were put in place for their states. On that day, the stock market began to slide. The stock market lost almost 1/3rd of it's value, before the Crash of Oct 29th.

But it goes on.... After the Senate passed the tariff, the House and Senate got together to reconcile the two bills, but couldn't. In December, they gave up, and left on winter recess. The bill appeared dead. Even the New York Times claimed the tariff was dead. Between Mid November and April, the stock market had recovered half of the value it had lost. In fact it was within about 10 points of where it was at the start of 1929.

But in May of 1929, Congress started working on the Smoot Hawley Tariff again, and by June they had made an agreement and passed the bill onto the President.

In May 1028 Economists wrote a signed letter to Herbert Hoover, warning that Smoot-Hawley Tariff would have drastic economic and monetary consequences, and told him to veto it.

Hoover received formal complaints by 23 countries, and 36 countries lodged 59 formal protests with the State Department. Spain, Canada and many other countries raised tariffs on US goods in retaliation.

Starting at the end of May, beginning of June, when it was clear the Tariff would pass, the market began to slide. It lost 20% of it's value in the first two weeks of June, and Hoover signed the bill into law June 17th. That slide continued non-stop until about 1933, where it started to very slowly recover until FDR screwed up the economy again in 1936-37, which caused a recession inside the depression.

Now clearly there is a correlation, but how exactly does a tariff cause economic destruction?

Well one example is fairly conclusive to me. In May, before the Smoot-Hawley Tariff is passed, Canada passes a tariff on imported Steel and Iron products from the US. When the Smoot-Hawley Tariff is passed, it places a massive tariff on Iron Ore imported from Canada.

17 Months after the passage of Smoot-Hawley, 11 banks in Pittsburgh go insolvent, and shut their doors. Why?

Well.... Pittsburgh was the central hub of the steel and iron industry. Hence: Pittsburgh Steelers. But the steel companies had two things happen at the same time.... The cost of Iron Ore drastically went up, because most of the ore came from Canada, now had a huge tariff on it. At the same time the demand for Iron and Steel from the US, dropped because other countries, primarily Canada, put a huge tariff on Steel and Iron from the US. Cost of making steel up, price and demand of steel down.

The Steel industry crashed, and when companies start having problems, they start pulling all their money out of the banks. Pull out all the money, and the banks to go bust.

And interestingly, I've seen that the companies I've worked for, most wouldn't exist if we engaged in protectionism.

Many of the products I've built, couldn't be built without imported goods. CPU controller boards made out of the country. Metal parts, supplied by other countries. Imported sensors and electronics.

Moreover, many of our customers are foreign. We sell to Canada, Brazil, Turkey, China, and many others. People have said that we can't compete with these other countries that have lower wages. That is totally false.

"We have to bring back manufacturing to the US!" Completely wrong.

It's amazing how many people don't know that last year, 2014, was a record year in US manufacturing. We produced more product in manufacturing last year, than ever before in US history. More than ever.



We have been competing successfully with low-wage countries for decades. And this idea that a trade deficit (importing more than we export) is so horrible.... you realize when the trade deficit started? In the 1990s. You remember how horrible the economy was in the 90s, with massive unemployment and recession after recession.... during the 90s..... right? You don't remember that? Neither do I.

You remember when we have a balance of trade right? During the amazing 1970s, when the economy was booming, and growth was massive? During the 70s? Right? You don't remember that? You remember Stagflation? Right.

Since the 1900s, there has only been two times where the US had a significant surplus balance of trade. Just twice. The late 1940s after the end of WW2, when Europe was in ruins, there was massive demand for goods, and we were the only ones to supply them. So we had huge exports.

And the other time was...... the 1930s.... the Great Depression.



By the way, you'll notice that imports dropped pretty hard in 2000, and 2008, and slightly in 1980. What happened all those years? We had a recession.

Do you know why trade deficits fall during recessions? Do you know why they rise during economic growth periods?

It's actually really simple. Trade deficits rise because.... we have money. When we don't have money, and can't buy things.... trade deficits fall.

Why do we have a trade deficit with China? The Chinese people prior to 1978, 63% of the population earned less than $2 a day. Now between us and them, who can buy more, from the other?

If you earn $100,000 a year, and I earn $20,000 a year, and we both own stores.... who can buy more from the other person? Obviously, between you and me, there is going to be a trade deficit. I can only buy $20,000 worth of goods from you, and you can buy $100,000 worth of goods from me.

A trade deficit is a sign of our wealth. That's why it exists. And curbing trade can only make us worse off. So while Trump may have public support for placing tariffs on trade, it's a bad policy, and it will harm the country, and we shouldn't do it. And that my friends, is the RCC perspective. Thanks.

You sell a $5000 tv for $100 because they are willing to work for pennies in China. We tax that make it cost $5000 again and spend it on American workers, American welfare, etc. Win win.

The TV isn't worth $5000. If it was, they would sell it for $5,000. Are you really telling me, that all those TVs on sale for $100, are actually worth $5,000 but the companies are just selling them for $100 because labor is cheap? Not true.

If the TV was worth $5,000, meaning they could get someone to pay them $5,000 for that TV, they would sell it for that much.

If I could get you to buy my TV set for two million, I'd charge that much. But no one is going to pay that much.

The value of a product is not determined by the cost of labor. It's determined by supply and demand.

Thus your plan will fail for that reason. If you tax imports, driving up the cost of imported goods, you might be able to raise the price a little, very little, but the result is people will simply not buy those TVs. Thus no jobs are really created, because the TV market will shrink.

Further, it is possible that some TVs will be built in the US, to avoid the import taxes, however, it still will not result in jobs. Workers will not be hired to put together TV manually like in China. Instead, the TVs will be mass produced by automated assembly lines.

So you will drive up the cost of goods in the US, but you still won't create any jobs.

If your theory was true, then why didn't the protectionism of the 1930s, create massive growth and jobs? Because for every job supposedly created by high taxes in imports, more than a few jobs are lost.

big screen tv's used to cost $5,000 or more. Now because they are cheaper to build they cost downwards to $100. So you are the one that is wrong.

No not true. Supply and Demand. The supply was short, demand high. As those reversed, supply is high from mass manufacturing, and demand is lower because more people have TVs, the price drops.

In 1948, the price of a B&W 16 inch TV was $7,900. (adjusted for inflation). By 1952, a 20 inch B&W TV was going for $3,700.

Both were built in the US, with US labor. Are you telling me that between 48 and 52, that wages for labor fell by 50%? Really?

No, you are wrong. Sorry.

Labor did not drop - productivity went up. Also, as time goes on costs for other expenses related to the manufacturing process drop dramatically as well. Those represent very similar outcomes.

The cost of manufacturing a product is very much a part of the price (and that includes labor). Your pricing structure that you explained in post 25 completely ignores competition which is going to drive prices as close to production costs as possible and still turn reasonable profits. When I can produce a TV for 500 dollars I can grantee that you are not going to see them on the market for 100 dollars. It is not feasible. HOWEVER, when my competition in China can use slave labor to drop that production cost to 400 they are going to price their TV's at 450 and put me out of business. Other companies will utilize that same slave labor and the price of the products will reflect that.

Yes productivity went up. Which means the supply of TVs went up. Which, just as you said, drives price down. Now obviously, it can't go below production cost.

See you are again believing the lie that if prices go up, people will still buy the stuff.

That's not true. Simply not true. I know from my own experience, that I do not go out to eat as often as I used to in the past, and the reason is simply that the prices have gone up since the minimum wage went up.

I'm not going to spend $8 on a "value" meal as much today, as I did in the past when it was $4 value meals. As the price goes up, my purchase goes down.

This is why in Norway, where McDonald's employees are paid $15/hr, they have a fraction of the number of McDonald stores, and thus, a fraction of the jobs. There simply are not a ton of McDonald jobs available, because fewer people buy restaurant food.... because the price is high.

There's a trade off. There is always a trade off.

So you drive up prices on TVs, then a lot fewer people will buy the TVs... (or illegal import them which happens routinely), and the TVs that are made, are made by machine, and we still don't have employment, but now TVs are expensive.

How is that a benefit?

Take where I used to work for example. They built custom industrial printers, that are an alternative to the off-the-shelf plastic use and lose it, imported printers. These are not your Lexmark or whatever, but the kind of printer you would find a McDonald Kiosk (in fact are biggest market is kiosk printers, that replace workers).

The kicker is, our product is hand built, maybe 100 a week. Their product is built in a massive factory by automation, 100 a day. We hire 20 people to make our hundreds. They employ maybe 2 guys to make their thousands.

Now our company is pretty much a vertical market. We do not have any direct competition. They largely don't exist. The only real company the was competing with us, we own. We bought them. If you wanted a custom designed printer, you had to come to us.

So in theory, we should be able to just pay $20 an hour to everyone, and charge the customer whatever we want. Just like you claim if we tax imports, we can drive up the cost of TVs to whatever we want, and pay everyone $100,000 a year to build them (or whatever you think a "living wage" is).

Here's the reality: We jacked up our prices, and our customers stopped buying our printers. We started poking around and discovered they were buying off-the-shelf printers. These printers didn't have any of the custom design they wanted.... but they didn't care. At some point, you find a cheaper alternative, or do without.

Just like I stopped going to Chipotle. When a burrito was $4.25, back in 2006, I used to go there all the time. Now, a burrito is $6.50.

So today, I sometimes don't even bother with lunch, or I go to the get-n-go and buy one of their $3 subs. Why? Because the price is too high to go to Chipotle for a Burrito.

When my company realized our prices were driving away business, we were faced with either outsourcing our work, or going out of business.

We choose to outsource. Now our CPUs are built in China, and shipped to us. If you jack up tariffs on imported goods, our company toast. Outsourcing allowed me to have a job for the last 3 years, and all the dozens of people who still work there.

You are not going to cause their wages to go up, you will cause them to be unemployed.