Ep. 27 Is Free Trade Good or Bad?

18 March 2016     |     Tom Woods     |     16

Krugman discusses how economists should respond to the growth in sympathy for protectionism. Along the way, his Keynesian assumptions lead him to oddball conclusions. Bob and Tom also spend some time explaining the classical case for free trade and discussing whether that case has been vitiated in light of modern conditions.

Krugman Column

Trade and Tribulation” (March 11, 2016)

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Contra Columns

Krugman Falls into the Keynesian Accounting Trap,” by Bob Murphy
Free Trade and Factor Mobility,” by Bob Murphy
Capital Exports and Free Trade,” by Jörg Guido Hülsmann
The Petition of the Candlemakers,” by Frederic Bastiat

Related Episode

Ep. 26 Trump, China, Trade, and Currency Manipulation: It’s All Here

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  • Jeff

    Here are some interesting videos arguing against free trade. One of the videos is also arguing against free market basic research.

    https://www.youtube.com/watch?v=y8hNYtKRSnE https://www.youtube.com/watch?v=AqRi6n2bIO8 https://www.youtube.com/watch?v=2lLxrscgj94

    • Ron H.

      The Longest I managed to listen to any one of them was #2 for 4:44 before wrongness overwhelmed me.

  • Dagny

    I am the 7% AND I also claim biggest fan status!

  • Dagny

    You guys did a good job recapping the arguments in favor of free trade. There were a couple of things not mentioned that I think many Americans (e.g., Bernie, Trump, Santorum followers) don’t grasp. 1)There is no way the government can bring back jobs with tariffs. Manufacturing jobs are not coming back, and that’s just the way it is. Even if we slap tariffs on China or Mexico, all that will happen is that China will sell them to some other country who will relabel them, and then sell them to us at a higher price. Or we pay more to some country who is less competitive than China and can’t give us a great deal. We will still run a trade deficit over it. Also, a very high percentage of American goods are made of components that come from China or Mexico. This means existing American businesses would have their costs rise by whatever the tariff rate is. In that environment, when they tried to export, they also become uncompetitive globally and will suffer layoffs. So we may move some workers around, but this is not going to result in a net gain in high paying jobs. 2) Even if we stop trading with the “currency cheaters,” the capital structure for the manufacturing jobs doesn’t exist. It would take considerable time to retool factories and train a workforce to do these jobs, not to mention the savings for investment likely don’t exist given the current economic environment. And no entrepreneur is going to make that investment when the only scenario that produces positive cashflows is one involving a tariff. What government gives, government can take away, all without a bit of warning. The uncertainty around a tariff staying in place through one administration or between administrations is enough to prevent entrepreneurs from heading down that road. Luckily, most entrepreneurs aren’t as stupid as the “never built anything” government class. 3) People cheat. Tariffs will just create black markets for “prohibited” cheaper goods. We currently have a tax on marijuana and heroin from Mexico. It’s called the freedom tax. You buy it, we put you in jail. And yet, it doesn’t work. There’s no way marking up a good 30% will prevent consumption of contraband more effectively than jail time. What would most likely happen is instead of those companies suffering layoffs, they would just move out of America and produce everything where their components are being produced so they can compete. So again, job losses result. 4) As Americans, we all need to wrap our heads around standing in the “evolving” line. I just mean, the market can be cruel. It demands the best and the brightest. You either get out there and produce more value than somebody else, or you fall behind and must content yourself with less. We can’t keep wishing for the days we made buggy whips. Creative destruction says that for every job that is destroyed, the resources move to more productive ends meaning new opportunities emerge. Sometimes there’s a lag and structural friction while people retrain. It’s uncomfortable and it’s hard. Gone are the days of working for one company, or doing one thing for your entire life and retiring with a pension. That didn’t make sense then and it doesn’t make sense now. The bottom line is that individuals must embrace the Gretsky advice. A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. That’s the challenge for American workers. Politicians who tell them they are going to make this country great again by bringing back manufacturing jobs are just making empty promises with a recast of 19th century luddite arguments. Americans need to be told the truth. These fairy tales do no good for anyone.

  • Shane Richmond

    How is Paul Krugman recognized as any kind of authority on economics. This man is an utter lunatic.

  • Dezzy

    How do they know who is male or female? Anyway the low female rate doesn’t shock me. Women tend to be big government.

    • TKosh

      That’s why we love to hear from liberty minded women. My mother and sister are voting for Hillary because she is a woman. They don’t care about the laws she has broken or the death she has caused.

  • TKosh

    So what happens when we lose the cheap labor overseas or are claiming that is a permanent situation. Hasn’t our ability to consume insanely the last 2 decades due to voodoo economics taking advantages of cheap labor overseas? Foreign countries are dumping U.S. debt at a record pace right NOW!! How much less will we be able to buy soon?

  • JimD

    Good episode.

    Constructive criticism would be that you spent too much time on straw men or non issues. E.g., net exports (I suspect Krugman understands the concept very well), absolute and comparative advantages.

    Towards the end you all got close to the real issue. I understand there is a good paper from David Autor and others on the adjustment (or non-adjustment) to imports from China. Answers are not so easy. Be interested in your take.

  • VladRatzen

    “free trade agreement”? really??

    it should be called a “free trade regulation”! but when trade is regulated, you even cant call it “free” any more.

    when politicans choose names for their bills, its typical that the title of the bill has the exact opposite meaning from whats in it. so these “free trade agreements” are not about “free trade”. instead they are a tool to archive something no politican ever dares to do.

    the simple purpose is to evade their own laws, and to eleminate the influence of citizen completely.

    this the is result you get, when politicans, the media, and the richest are working togehter against us, while they having nice partys in davos, or somewhere in switzerland.

    what we now see is the ugly face of PURE fascism

  • Adrian Gutierrez

    I really enjoyed this discussion. In regards to the empirical data, it seems that the idea South Park came up with in their episode on immigration was actually true to certain respects. For example, as Mexico seemed to open itself up to free trade with the US, albeit it being through a nuanced free trade agreement, Mexico has experienced an acclivity economically and immigration trends from that country have been falling, especially for the last 30 years.

    Furthermore, as Mexico has become more wealthy there has been more skilled labor from there, entering the US markets (to our benefit) as well. As a matter of fact, after India and Chine, Mexico has the highest number of skilled immigrants to the US. Indeed all people read about is the conflated idea of all or even the majority of immigrants from Mexico being unskilled, and that Mexico is war torn from the drug war. Mexico is going to surpass Brazil, especially since Brazil has extreme inflation right now, as the most powerful country in Latin America.

    I would attribute this to free trade. Indeed Mexico could stay away from free trade agreements since they are a bit crony, but the laxing of markets there is helping them extensively. Not to mention, it seems to be happening in India right now (I’m being pragmatic instead of looking at the inflated stock market and extra money in the system creating false booms globally).

    In regards to the medical analogy Dr Murphy mentioned, medical salaries have stayed relatively stable over the years even if we take into account the process of outsourcing. The main thing that affects salaries, in any sector is inflation. Students loan debt does weigh on salaries as well, especially for doctors. This is an example of a bad case of government intervention, not at all in regards to outsourcing. And we all know the affects of immigrants on salaries, it’s practically zero if not minimal. The greater affect to salaries or profits is inflation.

  • http://www.economicmanblog.com Roger Barris

    Here is a great one related to this discussion, which is an updated version of Bastiat. I mention it in the section “The Absurdity of it All” in this blog: http://www.economicmanblog.com/2015/06/17/headscarves-and-the-first-amendment/
    Elizabeth Warren is violently against the Trans Pacific Partnership. (Forget whether this is a good agreement or not — she is not against it for the reasons we could be; she is against it because she is opposed to free trade, period.) Simultaneously, she is in favor of a $300 million project to dredge and expand Boston harbor so that it will be able to handle the larger container ships coming through the enlarged Panama Canal and bearing, without a doubt, imported goods from Asia. So, let’s spend money to make it easier and cheaper to import things from Asia, but then let’s slap a tariff on them when they arrive. But, hey, the dredging project probably creates a few jobs — at about the cost of a few million bucks a job — so it has to be a good idea, right?
    As I say at the bottom of my blog piece, “They obviously don’t teach irony at Harvard Law School.”

  • Lodewijk Hof

    Once again a great odcast. I love what you said about the way America, and the west, are running there economy. In war we shut the economy down but now we are doing it ourselves.
    I would simply say that free trade is great and, see it this way, if a mri scan would go to a radiation person in Africa or Asia it saves costs for the healthcare system and it allows a person from the west ot have a great life at a low cost life

  • Uffe Merrild

    Regarding the statement that if you are a low-skilled worker, then free trade will make you poorer in the next 20 years compared with the last 20 years I think is not defensible.

    The overall wages of low-skilled workers increase along with the increase in their DMVP by capital accumulation. Currently the wage-increases in the so-called “emerging economies” are more rapid than the wage-increases in the developed countries.

    Why do you still believe, on balance, that the standard of living will be worse for low-skilled workers in the developed countries if free trade is the policy of the world? I think it is reasonable to question this comment based on the experience we obtain as we go along from now.

    I work as an engineer, so that’s not a low-skilled job, and a lot of tasks have been outsourced to India in the company that I work in. Five years ago the average indian engineer earned about 1/6 of my salary – today this fraction has changed to be 1/3.

    Why would this drive of the market economy to equalize wages and at the same time increase wages across the board based on capital investments not also be applicable to the low-skilled workers?

    Besides I should probably mention a point which I think Dr. Walter Block would bring up “How dare you make predictions as an austrian economist? Traitor :)”

  • http://tklist.us TKList

    Has Krugman responded at all to this site?

  • Matthew Sercely

    I will say, I’m a huge fan of both of you, but have not been blown away by this podcast, in general. That said, this episode was great- particularly when you started actually teaching economics.

    I would ask you, if possible- please be careful of how derogatory you are of Krugman. I’ve had several friends who I have gotten to listen to an episode or two, but between the “Destroy of Nations” line and multiple statements you have made (in other episodes) about how deceptive Krugman is, they are refusing to listen anymore.

    As a hard core Rothbardian, it grates on me too.