Donald Trump spoke in western Pennsylvania on the evils of free trade. It is time to dispel the myths in his speech.
The destruction of the U.S. steel industry, and smokestack industry generally is not the result of NAFTA and China’s entry into the WTO.
That those two events and a reduction by 1% off the historical growth rate of annual inflation adjusted GDP is not an indication of causation. For example, also it comes after the stock market crash in April 2000 and American manufacturing had been in decline since 1970.
Trump declares that at the founding of the United States, there wasn’t an income tax, only tariffs on imported goods. Well, at the nation’s founding there wasn’t a welfare state either. Trump wants people to think that foreigners should pay taxes, not Americans. The problem is that Americans pay those taxes in the form of higher prices.
The problem with today’s economy is a severe case of secular stagnation, an idea from the 1930s that has been resurrected by Larry Summers to explain the low growth, high unemployment, low investment, low interest rate environment we find ourselves in. The idea is that savings are high and investment is low, because demand is low (i.e., it is going into savings). Fundamentally it is a failure of demand. It is a function of demography and changes in the amount of capital investment needed to create value. The computer changed the equation. In an industrial world, to build a billion dollar company took tremendous investment in plant and tools. Today, it takes a few computers to build a billion dollar company. Summers cites the example:
Another way to think about it, or a more sort of practical way to think about it, is to think about canonical leading companies, and their cash position. It used to be that the canonical, leading, fast-growing companies in the country needed to go to the bond market in order to expand, and couldn’t make dividends because they had so many investment opportunities. Think about Apple, as dynamic as any company in the economy. What activists are demanding it do is pay dividends and repurchase stock. Think about Google. Similarly awash in cash. That kind of, you can already think about.
My favorite example for thinking about these dynamics is think about two companies. Sony, the company is a strong company. It has factories, it’s got offices, its got tens of thousands of people working for it. It’s worth $18 billion. Now, think about Snapchat. All of it – the machines, the people, everything – could fit in this room quite comfortably. It will … It’s about to be valued by our nation’s capital markets at $19 billion. What’s that say, suggests that when you can start a company for nothing, and with nothing, that you will have the possibility of wealth creation without substantial investment, again, reinforcing an increase of savings over investment.
Tariffs will do nothing to change the dynamics of labor and capital in the developed world. This is not something that can be addressed with protectionist trade barriers. The barriers prevent the flow of deflation around the globe—i.e., the flow from Germany and Japan to the United States, but it does not address the aging of the population and the deflationary impact of technology.
Ham-handed policies like living wage laws, just speeds the replacement of workers with robots, which accelerates the process. It is as if most workers are like the artisans when industrialization happened. What happens now is anyone’s guess. Perhaps we may end up with most people on the dole. We may be at full employment now, even with a large fraction of working aged people not working.
Demonizing China and Mexico will not solve our problem. Both Trump and Clinton are profoundly nostalgic. Trump believes America could become a small mercantile power as it was 200 years ago and Clinton would return us to a mid-twentieth century industrial model. Neither are viable in the twenty first century.