Tyler Cowen recently made an uncharacteristic mistake: But there is another way to pose the question and that is “should the resources in the EU be allocated toward export, or not?” And then exports are VAT-free, and within-EU sales generally are not VAT-free. So there is an encouragement to exports here. America has sales taxes, but VAT rates usually are higher. Thus you can say that Europe does more to encourage exporters than does the United States. Of course you can say the same about many other European government interventions. Germany’s notorious Sunday closing laws also encourage more exports. Send it to the US, and let it be sold on a Sunday, bitte! (Just not in Paramus, NJ.)From an American point of view, I don’t think anything is wrong with this kind of “export subsidy” (and that is not how I would describe it in a first-order sense, but we are steelmanning here). Note that he did not call a VAT an export subsidy, but did suggest that “there is an encouragement to exports here”.  I don’t see how that is true.  If you have a 20% VAT, and export goods to another country with a 20% VAT, obviously there is no advantage.  But what if you export to a country with no VAT?  Consider a $100 item that sells in Europe for $120 due to the VAT.  According to PPP it would sell for $100 in countries without a VAT.  So once again, there is no obvious encouragement to export.  (PPP may not hold for other reasons, but that has no bearing on whether VATs encourage exports.) I’m not suggesting that you cannot construct an argument where VATs encourage exports.  Thus, if you compared a VAT to a situation with no VAT and a bigger budget deficit, the imposition of a VAT might result in a lower real exchange rate and more exports.  But that’s true of any device for raising tax revenues, and I don’t see Tyler making that argument.  The fact that within-EU sales are VAT-free seems completely irrelevant, unless I’m missing something. One other point, and this is not aimed at Tyler’s post.  If it were true that VATs were like export subsidies, then they would be exactly the opposite of tariffs.  European tariffs discourage US firms from exporting to Europe.  European export subsidies would encourage US firms to export to Europe, as export subsidies are equivalent to import subsidies.  So if VATs were like export subsidies, then they would also be the exact opposite of import taxes. (0 COMMENTS)

Michael Huemer’s book The Problem of Political Authority examines various arguments given in favor of establishing the existence of political authority, which he defines as a property containing two aspects: (i) Political legitimacy: the right, on the part of a government, to make certain sorts of laws and enforce them by coercion against the members of its society – in short, the right to rule. (ii) Political obligation: the obligation on the part of citizens to obey their government, even in circumstances in which one would not be obligated to obey similar commands issued by a nongovernmental agency. Huemer spends several chapters examining the most popular arguments for establishing political authority and finds them all lacking. He does take care to point out that this, in itself, does not automatically lead to a conclusion that governments should be abolished: If there is no authority, does it follow that we ought to abolish all governments? No. The absence of authority means, roughly, that individuals are not obligated to obey the law merely because it is the law and/or that agents of the state are not entitled to coerce others merely because they are agents of the state. There might still be good reasons to obey most laws, and agents of the state might still have adequate reasons for engaging in enough coercive action to maintain a state. Huemer devotes two chapters to examining social contract theory as an argument for political authority – the first on traditional social contract theory as proposed by John Locke, and the second on more modern social contract theories based on the idea that a government could have hypothetically been arranged as a result of a social contract, and that real-world authority and obligations are created out of this hypothetical agreement. Huemer pretty convincingly refutes both forms of social contract theory. Among his arguments is that all forms of the social contract argument (whether historical, implicit, or hypothetical) lack any of the features needed for a contract to generate valid agreement or obligations. For example, some people argue that by accepting government services, people are showing that they have implicitly consented to pay taxation as part of the social contract. Huemer argues that doesn’t work, because taking an action indicates consent to some scheme only if you could reasonably believe that had you not taken that action, the scheme would not be imposed upon you. Suppose I forcibly compel you to buy cookies I bake – one hundred dollars for a half-dozen cookies, every month. Let’s say that I later find out that you ate some of the cookies. It would be obviously absurd to say that you eating the cookies shows you had implicitly consented to the transaction, and it was therefore a valid agreement. You’d still have been forced to give me the hundred dollars regardless. There’s one more issue I have with social contract theory that Huemer doesn’t describe. In order for a contract to be validly binding, it needs to be clear exactly what the contract contains. Yet even among social contract theorists, there is surprisingly little agreement here. They’ll all agree that a social contract exists, but wildly disagree about what that contract actually entails. People on the left and the right will both object that some law or institution “violates the social contract” but disagree about which laws or institutions do so, and what the violated terms are. Note, this can’t be resolved by something as simple as pointing to the existing set of laws (or the Constitution, perhaps) and declaring that those laws are what represent the social contract. For one, if the social contract just means “whatever laws are currently on the books,” no social contract theorist would have any grounds to argue some existing law or institutional arrangement is in violation of the social contract. Given how frequently social contract theorists make this claim, it’s clear that the social contract is not the same thing as the existing set of legislation or legal institutions. Second, and more fundamentally, the social contract is itself supposed to be what provides an explanation for why the government has the authority to create legislation in the first place. So using existing legislation or legal institutions to try to demonstrate the existence or content of the social contract is question-begging. If existing legislation or state institutions are “the social contract” then it’s meaningless to say the social contract is what justifies existing legislation or state institutions. In practice, much social contract theory discourse seems to be little more than different people equivocating over the term “social contract” to mean “whatever arrangements I, personally, happen to favor.” Now, maybe I’m wrong about that, but there is a way to test. If social contract theorists were attempting to work out what the contents of this unwritten social contract really are (rather than using it as a Trojan Horse to smuggle in their own policy views), we should frequently expect to see social contract theorists highlights aspects of what the social contract contains that they might dislike. Jason Brennan made a similar criticism of much of Constitutional legal theory, arguing that it tends to follow this process: 1. Start with a political philosophy–a view of what you want the government to be able to do and what you want to the government to to be forbidden from doing. 2. Take the Constitution as a given. 3. Reverse engineer a theory of constitutional interpretation such that it turns out–happily!–that the Constitution forbids what you want it to forbid and allows what you want it to allow. When I read academic writing by constitutional legal theorists, it seems like basically everyone (conservatives, liberals, libertarians) does this. Isn’t that bizarre? For example, why don’t more libertarian legal theorists just say, “Yes, the Constitution allows X, even though X ought to be forbidden, and so to that extent, the Constitution is bad.” Why don’t we see more left-liberals saying, “A just society would allow X, but, alas, our Constitution forbids X and is to that extent a bad Constitution.” We do sometimes see this, but for the most part, people of every ideology tend to argue that the Constitution allows or forbids exactly what they would want it to allow or forbid. In the same way, I can’t recall any social contract theorists arguing “the social contract unfortunately allows X which should be forbidden and it forbids arrangement Y which should be permitted.” It always seems that whatever the terms of this social contract are, it just so happens to contain the exact terms that are most conducive to the political ideology of the person arguing about the importance of upholding the social contract. Any real-world contract with contents so hopelessly indeterminate would never be validly binding. I see no reason why a hypothetical social contract would be either. (0 COMMENTS)

The recently announced auto tariffs are expected to raise roughly $100 billion per year in revenue. How does that compare with other major tax increases? According to the Tax Foundation, the previous record was $76.8 billion for the 2011 tax increase to finance the ACA (Obamacare).   In real terms, the auto tariffs are not as large as some of the previous tax increases, but it remains one of the largest tax increases since 1968.  (The CPI is up about 50% since 2009.) With more tariffs expected soon, the ultimate Trump administration tariff program may well end up being the largest tax increase, even in real terms.  So what do the Democrats think of this policy, one of the most consequential changes in federal tax policy in my entire life? I checked with the New York Times, and as usual they had very long article that contained lots of interviews.  I was especially interested in learning what the Democrats thought of the policy.  The article did present the views on a number of key political figures, but none of them were Democrats.  Indeed, other than Trump, none of them were Republicans.   You may believe that the NYT has a liberal bias, but I’m quite certain that when Obama’s tax increase was proposed, the “newspaper of record” provided at least some coverage of Republican views of the legislation.  Do the Democrats plan to repeal the auto tariff next time they take office?  Do Republican congressmen have views on the issue?  Isn’t that something that we should know? It is certainly interesting to learn that Trump’s tariffs are opposed by the leaders of Canada, Mexico and France, but given that the tax is actually paid by Americans, I wish they’d told us what American politicians thought of the idea.   Here’s AI Overview: The U.S. Constitution grants Congress the power to “lay and collect Taxes, Duties, Imposts and Excises” (Article I, Section 8), including tariffs, and to regulate commerce with foreign nations. However, the President also has authority to impose tariffs, particularly through delegated powers and under certain conditions, such as national security threats or unfair trade practices. I’m having trouble understanding the legal basis for these tariffs.  It’s hard to believe that Canada is a national security threat, and our free trade agreement with Canada was negotiated by President Trump in 2020.  As recently as last fall he called it the best trade deal ever.  So the “unfair trade practices” also doesn’t seem to apply. In the past, the Supreme Court has often taken the view that governments can do pretty much whatever they wish.  Thus although the “takings clause” says that eminent domain applies only to projects with a “public use”, the courts have ruled that a public purpose is almost anything the government says it is.  Maybe that reasoning applies here as well. I notice that the administration denies that the bombing raid on Yemen is a “war”, and yet insists that we can use “war powers” to deport Venezuelans.  So war also seems to be one of those things that have a fairly loose definition–war is migration, not bombing. The bottom line is that we should not expect the Constitution to be an effective limit on the powers of the US government. PS.  It is also expected that there will be a major tax cut enacted later this year, which will take the form of extending the earlier Trump tax cuts, which were otherwise set to expire.   (0 COMMENTS)

I wonder how Christians who favor the current US government’s war on immigrants can reconcile their stance with Leviticus 19:34, which reads (King James version): But the stranger who dwelleth with you shall be unto you as one born among you, and thou shalt love him as thyself, for ye were strangers in the land of Egypt. Would they reply that the Bible is merely epic poetry? Or are they CINOs—Christians In Name Only? One endearing characteristic of the Catholic Church, which was the only Christian church for 15 centuries, was its universalism—globalism as we would say today. This feature, as well as its spiritual message, provided multitudes of poor and exploited people, the bulk of the population on earth, with the ability to feel that they were elsewhere, just as culture in its learned sense is a way to be elsewhere. American history is replete with testimonies to the openness of this country. Hector Saint John de Crèvecoeur was a Frenchman (original name: Michel-Guillaume-Saint-Jean de Crèvecoeur) who immigrated to colonial America in the early 1760s. In the chapter “What Is An American” of his famous Letters from an American Farmer (1782) celebrating America, he wrote: We know, properly speaking, no strangers; this is every person’s country. Despite my classical-liberal attraction for universalism, I also share Friedrich Hayek’s and James Buchanan’s arguments against totally free immigration: it could, at a certain point or level, compromise the maintenance of a free society. My post of June 19, 2018, “Immigration: A Confession and a Value Judgment,” offers a skeleton of this sort of argument. This argument against totally free immigration is what Alex Nowrasteh and Benjamin Powel call “the new economic case against immigration” in their 2021 book Wretched Refuse? They claim it has no empirical support. As for the argument that an immigrant who comes and works in America imposes a net cost to “society,” it is, of course, economically invalid: if it were valid, we should also blame a woman or a student who decides to join the labor market. My main point is that the treatment of immigrants, especially very recently, has become tribal, irrational, and “un-American”—to the extent we can make sense of the last qualificative as opposed to the ideal of a free society. The treatment of immigrants has also become contrary to the rule of law and increasingly barbaric. There can be no acceptable ideology and no free society without human decency. ****************************** Hector Saint John de Crèvecoeur on his farm, as viewed by DALL-E (4 COMMENTS)

There’s a widespread perception that trade with China caused increased unemployment in America. This is false. Imports from China did reduce jobs in some industries, but this did not have any effect on the overall unemployment rate, as even more jobs were generated in other industries. Last year, the Chinese trade surplus rose to nearly a trillion dollars.  If the mercantilists were correct, then China should be experiencing a boom in manufacturing employment.  In fact, just the opposite is occurring—millions of manufacturing jobs are being lost and China’s unemployment rate is higher than ours. The Financial Times reports that jobs are being lost in a wide range of manufacturing industries: The FT points out that while some jobs have migrated to other East Asian countries, the main issue is automation: Manufacturing is far from dead in China, however. In a factory in Panyu on the outskirts of Guangzhou, humans work in synchronisation with machines to churn out new electric vehicles every 53 seconds. . . . But in parts of the line — such as when seven robots lift, rotate and fit windscreens on chassis passing on a conveyor belt — humans are vastly outnumbered by machines. Other tasks, such as the hazardous welding and coating of car doors are entirely automated, while the overall automation rate of the final assembly process is about 40 per cent. That is by design, says Li Xiaoyu, an engineer: the factory has a goal of reducing its human workforce by 10 per cent a year. Automation was also the primary cause of job loss in US manufacturing.  Unfortunately, politicians have blamed the job loss on trade, and this has contributed to the global rise in nationalism.  If trade really were the issue, then China’s vast trade surplus would be generating lots on manufacturing jobs.  Instead, they’ve lost over 7 million such jobs, just since 2011: Analysis of 12 labour-intensive manufacturing industries between 2011 and 2019 by academics at Changzhou University, Yancheng Teachers University and Henan University found that average employment shrank by roughly 14 per cent, or nearly 4mn roles, between 2011 and 2019. Roles in the textile industry shrank 40 per cent over the period.  An FT analysis of the same 12 sectors between 2019 and 2023 found a further decline of 3.4mn jobs..   (0 COMMENTS)

I posted on Monday about where I agreed and disagreed with a statement by Veronique de Rugy about imports and exports, particularly about exports. In doing so, I was also disagreeing with Don Boudreaux. Don responded the same day with 2 lengthy comments on my post and 1 new post on his CafeHayek. But Don told me that this post best represents his thinking. Here, in a nutshell, is my thinking: People have multiple reasons to export. The usual purpose of exporting is to make money, but there are others. People don’t always export in order to import. (As you’ll see, Don Boudreaux agrees with this.) One way to pay for imports is with investment by foreigners rather than with exports. While consumption is the one main goal that motivates people to make money, it is not the only one. When we see people being paid for something, that does not mean that they had to be paid. Finally, remember the 7th Pillar of Economic Wisdom. Before I give my specific responses, I acknowledge something Don said upfront: I here try once more to explain why I disagree – uneasily, to be sure – with my dear friend David Henderson on the question of the relationship between imports and exports. I feel the same way about Don. Nothing about our friendship is at stake in this discussion. This discussion is solely about technical economics. Here goes. Don writes: As I wrote in my earlier post, wanting to do something does not imply that that something is an end. “I want to sell my car” does not mean that my end – my goal – is to get rid of my car. I want to sell my car only because, by doing so, I will get money that I can then spend on some other consumption goods today, or to invest, which will increase my access to consumption goods tomorrow. Selling my car is a means toward the end of improving my consumption. If I were prevented from receiving anything in exchange for my car, I would not sell it or otherwise get rid of it. David writes that “our exporters want to export: that’s their end.” I disagree – or, rather, I think this wording is too confusing to be justified. Because exporters demand payment in return for their exports, their end is not to export but, instead, to receive something in exchange. Their exports are a means. I almost agree. I think the vast majority of exporters do so in order to earn payment that they can use for other things. Why “almost?” Over the years, I’ve met, or heard of, a number of successful entrepreneurs who produce things they really believe in and sell them to poorer people in other countries who will benefit big-time. The entrepreneurs get paid. I hear them saying that satisfying people in those countries is a big part of their reward. Could they be lying? Maybe, but I doubt it. I think they’re sincere. In short, they want to make money but that’s not their only motive. Don writes: What exporters receive in exchange, of course, is money (just as money is what I receive when I sell my car). But clearly the money isn’t the exporters’ end any more than the money is my end when I sell my car. If, just before shipping their goods abroad, the exporters were informed that the moment they receive the (say) $1M worth of euros they must stuff those euros into mattresses and never retrieve them, the exporters would immediately become not-exporters. I agree. There may be weird exceptions—I’m looking at you, mattress stuffers—but I basically agree. Don writes: Exporters accept money as payment only because they’re confident that they can exchange that money, now or in the future, for real goods and services. And ultimately the real goods and services are consumption goods and services. The exporters’ end is to increase their standard of living by increasing their access to real goods and services. I agree with the first sentence. The third is too much of a generalization. Do firms in which Elon Musk has a large stake export? I think they do. Is Elon trying to increase his standard of living? I doubt it. Or take Warren Buffett. I think that Berkshire Hathaway, the firm he owns a big part of, exports some things. That firm makes money and because Buffett is a major shareholder, he makes money. Is he trying to increase his standard of living? Consider the home Warren Buffett lives in. He bought it in 1958 for $31,500. It’s worth about $1.4 million today.  Couldn’t he own a nicer house? He says that he tends to forswear expensive $100 meals and instead he eats a hamburger and a Coke. I just don’t think a major part of his motive is to consume. Don probably foresees my argument because in his very next paragraph, he writes: The exporters can spend their export earnings today on consumption goods. Or the exporters can invest their export earnings. David might say that, in this latter case, the investment was the exporters’ end, but I would disagree. People invest, ultimately, to increase their or their families’ or heirs’ spending power – that is, to increase their or their families’ or their heirs’ future access to consumption goods and services. Investing, in short, is a means to greater consumption. But that’s why I chose Warren Buffett as my example. He has made clear that he is leaving very little of his wealth to his heirs. Don might say that he said, “families’ or heirs’ spending power” to account for heirs who are not part of his family. If that’s what Don is getting at, then touché: score one for Don. Don then writes: In reality, the individuals who export need not be – and frequently are not – the individuals who import. This fact might be taken as indicating that exports cannot correctly be said to be the means and imports to be the end. After all, if exporter Smith has no desire to purchase foreign-made outputs, how can it be that importing is the end of his exporting? It indeed cannot correctly be said that importing is the end of Smith’s exporting. But at least two relevant things can correctly be said. The first is that Smith’s exporting was, as explained above, nevertheless a means to his increased consumption. The second is that Smith’s exports are a means to increase imports of the country in which Smith resides. Smith’s fellow citizen Jones is able to import only because Smith exported. Note the first sentence of his second paragraph. Good. Don and I finally agree on something. Importing is not the end of Smith’s exporting. And, to remind you, that was one of my major points in my Monday post. So at least that is settled. Don then goes on to show how the money Smith makes from exporting is then used by others to buy imports. Given the way he sets that up, he’s correct. So money from exporting is then used to buy imports. Don’s crucial assumption, though, is that none of the money Smith makes from exporting is used to invest in real assets in America and none of it is held as $ by foreigners. Both assumptions are at odds with reality. Don recognizes that he has simplified because he then writes: This simple example can be made more complicated by introducing investment uses of the euros, but as I argue above, that complexity only means that the consumption end of exporting is delayed in time. That gets back to consumption being the only end of exporting, which I’ve challenged above with my benevolent entrepreneur example. Moreover, Don needs to go back to one of the original statements by Vero that I challenged. She wrote: If we could acquire imports without exporting anything, that would be the best of all worlds for us. In my original post, I disagreed with that by pointing out that we could export nothing but still get foreign investment in return. Some of the commenters on my original post tried what the Supreme Court might call a “saving construction:” regarding foreign investment as exports. That would make Vero’s statement true by definition. I don’t like that definition but if that is what she (and Don) really mean, then we are arguing about definitions. Such arguing rarely makes sense. Don ends with this: People must be paid to export. This fact proves that exports are not an end in themselves. People are paid to export. But the fact that someone is paid for doing something doesn’t automatically mean that he must be paid. I’ll take an example from my own life. When I give talks at local Rotary Clubs, I am not paid, except for a meal. But what if they offered me $500? I would accept. An outside observer might see me being paid $500 and assume that I must be paid. But that person can’t get inside my brain. Another example. I’ve given my talk titled “How Economists Helped End the Draft” several times, mainly as a guest lecturer in classes at the Naval Postgraduate School. When I give the talk, I usually refer to the All-Volunteer Force (AVF), which was the term that was normally used to refer to the U.S. military for the first 15 years or so after the draft ended in 1973. A student in one of my talks told the rest of the class and me that when he had heard about the all-volunteer force, he wanted to join. His big surprise came with his first paycheck. He had taken the word “volunteer” to mean that he wouldn’t be paid. (I asked him why he had joined, and he said it was to get out of the small town in California that he had grown up in. The town, Paradise, burned down a few years later.) Someone observing him being paid might say that he had to be paid. But that was not true. One last thought. For the last 25 or so years I taught at the Naval Postgraduate School, I would start each class with my 10 Pillars of Economic Wisdom. Pillar #7 is, “The value of a good or service is subjective.” When I see people claim that someone does something only because of a particular goal, I get suspicious. Many people have multiple reasons for valuing things and doing things.   You might wonder why I’m spending so much time on this. It’s not because I don’t believe in free trade. I do. It’s not because I think imports are bad. They’re good. It’s because I think we free traders should make good arguments, not bad arguments, for free trade. (0 COMMENTS)

Writing for the Peterson Institute for International Economics (PIIE), Dr Maurice Obstfeld has a great, non-technical piece addressing some of the claims made by Michael Pettis (among others) that a trade deficit must be “managed.”  Obstfeld details the theoretical and empirical issues with Pettis’s claims very succinctly.  Allow me to supplement Obstfeld’s comments with my own. First, a technical note: there is a difference between the trade balance (the difference between exports and imports) and the current account (exports, imports, and some financial transactions like income from investments and transfers).  However, for the purposes here, I will not worry too much about that difference; it won’t matter much for the point I am making.  With that out of the way, let’s begin. In national income accounting, the current account is the difference between national savings and national investment (for those interested in the algebra, you can find it here).  Mathematically, we have: Current Account = Savings – Investment. This accounting identity is deceptively simple.  If one thinks a current account deficit (that is, investment is greater than savings, is a problem (an unjustified claim we will get to in a moment), then the solution is easy: either increase savings or decrease investment.  Do that, and the problem is solved.   But realistically what can a government do?  I emphasize “realistically” because there seems to be some confusion on that point.  Reformers love to propose actions that are utterly divorced from reality.  Realistically, there’s not much governments can do.  Most of the elements of savings and investment are determined exogenously.  It’s not like an individual making a budget.  Rather, national savings and national investment are determined by factors far beyond a government’s control: desires of people within the border, desires of those outside the country, plans made by firms, and countless other factors.  Savings and investment, in other words, are emergent.  They are not things that can be manipulated, not levers to be pulled and tweaked.  It’s not that it is difficult to manage them.  It is impossible to manage them.  That simple accounting equation hides magnitudes of complexity.   Of course, governments can influence one aspect of the identity: savings.  National savings is made up of private savings and government savings.  Governments can increase their savings (that is, not operate in a deficit) which could, all else held equal, reduce the current account deficit.  Although, even that method has its limitations, as Obstfeld discusses.  Further, governments have sometimes tried to influence private savings and investment through various incentives and capital controls, but incentives are not mind control.  They do not always work and often end up having unintended consequences. All this assumes that a current account deficit is a bad thing, something to be avoided.  Nothing, however, could be further from the truth.  More often than not, trade deficits are a sign of good things, as Central Washington University economics professor Robert Carbaugh explains: Often, countries enjoying rapid economic growth possess long-run current account deficits, whereas those with weaker economic growth have long-run current account surpluses.  This relation likely derives from the fact that rapid economic growth and strong investment often go hand in hand.  Where the driving force is the discovery of new natural resources, technological progress, or the implementation of economic reform, periods of rapid economic growth are likely periods when new investment is unusually profitable.  Investment must be financed with saving, and if a country’s national saving is not sufficient to finance all the new profitable investment projects, the country will rely on foreign saving to finance the difference.  It thus experiences a net financial inflow and a corresponding current account deficit.  As long as the new investments are profitable, they will generate the extra earnings needed to repay the claims contracted to undertake them.  When current account deficits reflect strong, profitable investment programs, they work to raise the output and employment growth, not to destroy jobs and production. (International Economics, 18th ed, pg 302, emphasis in original). Current account deficits are not a bad thing when they reflect profitable investment opportunities like in the US.  It’s why the US has been able to run current account deficits for over 40 years and frequently sets new record levels for industrial production and remains one of the world’s most productive places.  But that could change with Trump’s trade war.  If countries relocate to the US to avoid tariffs, that is because they are, pretty much by definition, less profitable operating in the US than abroad.  Consequently, trade deficits that emerge from the trade war are a worrying sign.   (0 COMMENTS)

A while back, I wrote a post criticizing Yoram Hazony’s concern that free trade, while generally good, can undermine the bonds of mutual loyalty among citizens. My claim was that “mutual loyalty” by itself does not give a positive reason to prefer intranational over international trade: Suppose I’m looking to build a house, and I need to purchase a certain amount of lumber to do so. Walter, from Washington state, can provide me what I need at a certain price. However, Carl the Canadian can also offer me the same lumber at the same quality, but Carl’s selling price is $35,000 lower. Under free trade, I am free to favor Walter over Carl, because I prefer to buy from an American, or I may also choose to buy from Carl over Walter to save a significant sum of money. Presumably, Hazony thinks there is an obligation rooted in loyalty to buy from Walter over Carl, but it’s not clear why. After all, what Hazony invokes so often is the idea of mutual loyalty – and the thing about mutual loyalty is that it’s mutual. The obligation goes in both directions. So why would we say I’m failing to show Walter proper loyalty by buying from Carl? Why not say Walter would be failing to show proper loyalty to me, by insisting I buy from him despite the huge additional financial burden it would impose on me? Simply saying “mutual loyalty” does nothing to resolve this. However, this point of mine doesn’t strictly defeat Hazony’s objection. At best, it only puts things in a stalemate. As I argued elsewhere, we need some kind of symmetry-breaker to resolve situations like this. For people whose worldview aligns with classical liberalism, it’s easy to cite individual liberty as breaking the symmetry. But this would be inadequate as a response to the argument Hazony makes. As part of his own argument and worldview, individual liberty can’t simply be thrown out as a trump card that overrules every other consideration. As Hazony put it, Conservatives, on the other hand, consider the liberty of the individual to be a precious good to be cultivated and protected, but one that finds its place within a complex of competing principles that must be balanced against one another if the life of the nation is to be sustained. So to Hazony and his fellow thinkers, in situations like this, there is more at stake that needs to be considered beyond what maximizes the liberty of the individual. As a general strategy of discussion, you’re unlikely to make progress by offering responses to your interlocuter that require them to assume the truth of your worldview and falsity of their own. Responding to that argument by saying “But we should still favor free trade because it maximizes individual liberty!” in this context is question-begging – it’s assuming the very point under dispute. Hazony, and NatCons more generally, don’t deny that free trade would more greatly expand individual liberty. Their argument, rather, is that maximizing individual liberty can conflict with the mutual loyalty that holds societies together, and in those cases, these are two competing goods that must be traded off against each other. There are two routes I can see to respond to someone like Hazony in these cases. One is to shift the argument to whether or not individual liberty should be a trump card, or should be maximized in all cases. The other is to argue that even within Hazony’s own worldview, there are reasons to prefer a system that allows – even encourages – buying lumber from Carl over Walter. It’s this second scenario that I argue for here. If two people wish to interact with each other in a way that not only considers their individual liberty to do what they wish, but also factors in bonds of mutual loyalty that bind them together, what would those two people want? If Walter and I are motivated by bonds of mutual loyalty, we would truly want what is best for each other. And this desire, if held in a mature way, looks beyond what is best for one of us merely at the present moment, or in an individual transaction. We would want what is best for each other in a more holistic and long-term way. We would be motivated by the sympathy Adam Smith wrote about, and that David Schmidtz unpacked so eloquently in is book Living Together: Second, it makes perfect sense for the author whose first book treated benevolence as primary to subsequently ask how to respond benevolently to trading partners. Why, as a benevolent person hoping to truck and bater with brewers and bakers, do you address their self-love? Answer: because you want them to be better off for having come to you. Notice that Smith does not say bakers are motivated solely by self-love. He says we address ourselves not to their benevolence but to their self-love (WN, Book I, chap. 2). This is a reflection on our psychology, not theirs. He is offering insight not into the self-love of bakers but into what it takes to be benevolent in our dealings with them. In sum, the author of Moral Sentiments gives center stage to virtue and benevolence, but, in elaborating what benevolence means, the author of Wealth of Nations belabors the obvious: namely, a man of true benevolence wants his partners to be better off with him than without him. The point of addressing other people’s self-love is to give them their due. That’s what it’s like to succeed in one’s attempt to be sympathetic. Thus, Walter and I would both consider more than what makes one or the other of us better off in a single transaction. We would want to work together within a system that makes both of us better off in the long term – not just in this one transaction, but throughout our lives. And this is what a system of free trade does. Looking at a static picture, it might seem like free trade would make Walter worse off, because he’d need to either substantially lower his price, or lose the sale of lumber. But in a system of free trade, in the longer term, Walter gets much more than he loses. Walter, too, can avail himself of the widest possible selection of goods and services made at the best possible prices. Think of how I, specifically, would benefit under free trade in the lumber transaction. I would get the benefit of the lumber, plus I’d be able to consume a significant amount of additional goods and services on top of that with the money I’d save from the lower price. Or instead of increasing my consumption, I could put the extra money away into a retirement account, or to a college fund for my children. If I buy from Walter, I get only the lumber and lose out on the rest. But this same situation holds true for Walter, for all the goods and services he consumes as well. In a system of free trade, he gains all these benefits from all of his purchases. The clothes he buys, the food he eats, the materials used to build all the durable goods he enjoys – in all these transactions, he would gain from free trade in the same way I would gain from free trade in lumber in this one transaction. But might Walter end up losing his job under free trade? It’s possible, yes. Free trade doesn’t destroy or create jobs on net, in the long run. But it does change the makeup of jobs. As Alan Blinder put it, the effect of protectionism isn’t so much job saving as “job swapping. It protects jobs in some industries only by destroying jobs in others.” And because protectionism shifts jobs to areas where goods and services are more costly to produce domestically, and away from jobs where American workers have a comparative advantage, it makes jobs in the long run less productive and lower paying than they otherwise would be. Lastly, if Walter was himself motivated by mutual loyalty, he would consider the costs he’s imposing on his fellow citizens by seeking protection for his industry. Research has consistently shown that the costs imposed on American consumers in the forms of higher prices vastly exceed the protected wages of workers whose jobs are preserved by protectionism. To quote from Blinder’s essay linked above, “one study in the early 1990s estimated that U.S. consumers paid $1,285,000 annually for each job in the luggage industry that was preserved by barriers to imports, a sum that greatly exceeded the average earnings of a luggage worker.” Let’s be generous and assume that these luggage workers were very well paid – perhaps making a salary of $250,000 per year. Even then, the costs being imposed on that workers fellow citizens is over five times higher than the benefit they obtain. Would I, as someone truly motivated by the benevolence Adam Smith so eloquently described, and motivated by a desire to honor a sense of mutual loyalty to my, support a policy that imposes costs on my fellow citizens five times higher than the benefit I gain? The answer to that seems to be a clear no to me. Just as “a man of true benevolence wants his partners to be better off with him than without him,” a man motivated by mutual loyalty, too, wants his fellow citizens to be better off with him than without him. Benefitting one’s self at a greater expense being forcibly imposed on your fellow citizens is not upholding mutual loyalty. It’s simply taking advantage of them for personal gain. And anyone who wants to honor bonds of mutual loyalty among citizens should reject such behavior. (3 COMMENTS)

Cosmopolitanism is the idea that all people on the planet are part of a global community.  The philosophy of cosmopolitanism is very broad, sometimes advocating universal rules, or that we should all have the same partiality to people far away than we do closer to us.  By appending the modifier “methodological” to “cosmopolitanism,” I mean to invoke a meaning similar to the philosophical one, but more limited to just one’s analytical method.  In short, I am using the phrase “methodological cosmopolitanism” simply to mean that when examining the economic effects of something, the costs and benefits to all parties affected must be taken into account.  Arbitrary distinctions like race, nationality, gender, wealth, class, etc., do not determine whose costs matter and whose do not.   Methodological cosmopolitanism is necessary to economic understanding.  Consider the so-called optimal tariff.  Given certain conditions, a sufficiently small tariff could potentially create a net social welfare gain: consumer surplus losses plus the deadweight loss from the tariff can be less than the surplus gains to the producers and the government.  This outcome is quite unique among taxes: with the exception of taxes on goods that generate externalities, the model of taxes indicates a net welfare loss.  Tariffs are not taxes on externalities.  So, how do they generate net welfare gains?  Though an accounting slight-of-hand.  Optimal tariffs only suggest a net welfare gain because the reduction in surplus to the foreign producers is not counted in the model.  If those reductions were counted, then the optimal tariff no longer creates a net welfare gain. Many economic nationalists object at this point.  When discussing the point above, I often get a retort along the lines of,  “Who cares that foreigners have their welfare reduced?  We should only care about our nation!”  Whether or not the wellbeing of a foreigner matters from a moral standpoint is irrelevant; it matters significantly from an economic standpoint.  Trade, all trade, is reciprocal.  In the initial exchange, both parties benefit (the buyer gets something of higher value than their money and the seller gets something of higher value than the good they sell).  But the exchange process does not end there.  The seller sold and now has dollars.  They can do any number of things with that: buy goods from the other nation, invest in the other nation, etc.  When trade is reduced between two nations, then economic wellbeing is reduced twice: once through the tariff reducing primary exchanges, and again when the foreigner, who has been made worse off, now has fewer dollars to spend on exports or investments in the economy.  As Abba Lerner pointed out in 1936, a tariff on imports has a similar reductive effect on exports.   This effect, well known to economists (indeed, one of the reasons why an optimal tariff has to be sufficiently small is to minimize the loss to domestic producers/consumers attached to the export market) is missed by nationalists and others who reject methodological cosmopolitanism.  Even if one does not think the wellbeing of foreigners should matter, one must be a methodological cosmopolitan to fully appreciate and consider the total effects of policy (as opposed to simple single margin effects). (0 COMMENTS)

In previous posts, I’ve criticized ambiguity in foreign policy. I cited the example of the Gulf War (1991), which occurred because a US official gave Saddam Hussein the impression that we would not object to an invasion of Kuwait. That was clearly an incorrect signal, and as a result we were drawn into a costly war.  It also seems likely that the subsequent Iraq War (2003) would not have occurred without the previous Gulf War. Saddam almost certainly would not have invaded Kuwait if the US has correctly explained its intended response before the invasion, as his mistake ended up proving to be very costly. Jordan Schneider and Jonathon Sine recently interviewed Sergey Radchenko, who had this to say about the events leading up to the Korean War: Kim Il-sung in North Korea wanted to reunify the country and kept asking Stalin for permission, saying, “Comrade Stalin, the moment we cross over the 38th parallel, there will be revolution in South Korea. Everything will turn out just fine. It’ll be very quick.” Stalin would refuse him permission to do that time and again. The reason for that is pretty obvious — Stalin was worried about American intervention. He was a very cautious individual in this particular instance. . . . The question is, why does Stalin change his mind from thinking that the Americans might intervene to thinking that they will not intervene? That is where it becomes complicated. First of all, we have Dean Acheson’s remarks in the press conference, which are straightforward, where he says, “America has a defensive perimeter, which does not include Korea.” That is probably the most misguided statement ever made by an American foreign policymaker. That, in retrospect, was a very bad idea. . . .  Even Mao himself did not know what was going on. Stalin did not inform him. Then I see Anastas Mikoyan’s response, which is, “Our intelligence intercepted cables by the Americans that said that they would not intervene in the conflict.” The entire interview is quite interesting and well worth reading. If this claim is correct, then a war that resulted in 3 million deaths occurred because the US had an ambiguous policy regarding our willingness to defend South Korea.  To be sure, it is possible that North Korea might have eventually invaded South Korea even without Stalin’s approval.  But if the invasion had been delayed by a few decades, it would have given the South more time to build up its defense forces (perhaps with US assistance.)  So now we have two or even three wars that may have occurred because the US sent out ambiguous signals on our willingness to defend various countries.  Does this have any implications for today? Both the Biden and the Trump administrations have made it pretty clear that we will not use US troops to defend Ukraine.  So I see no major ambiguity on that front.  But elsewhere, policy ambiguity is rising sharply. The Biden administration was firmly committed to Nato, which commits each member to come to the defense of other members if attacked.  For instance, a number of Nato members helped the US in Afghanistan after the 9-11 attacks.  President Trump has sent out mixed signals on Nato, and thus it is no longer clear that the US government is committed to this organization.  That increases the risk of miscalculation in some place like the Baltic region. With regard to Taiwan, there were mixed signals even within the Biden administration.  President Biden would occasionally suggest that the US was committed to defend Taiwan if attacked, only to have other administration officials walk back these statements and restore “strategic ambiguity.”  In contrast, President Trump has not firmly committed to defend Taiwan. In this post, I’m not trying to defend any particular Taiwan policy.  (I’m not a fan of either the Biden or the Trump approach.). Rather, I am trying to describe how previous examples of policy ambiguity have led to some costly foreign policy disasters, and also show that in recent years there has been a dramatic increase in policy uncertainty. How can we have more transparency and clarity in US foreign policy?  One approach would be to return to the original intent of the Constitution, and have Congress make decisions on whether or not to go to war.  Because the Senate has 100 members, it is easier to predict its response to foreign aggression than it is to predict the response of a single individual (i.e., the President).  There’s also the “wisdom of crowds”, which suggests that decisions made by large groups are usually superior to those made by a single individual.  (Tariffs are another area where the founders thought it wise to give Congress the authority.) PS. In general, it makes sense to have a foreign policy that reduces the “tail risk” of extremely bad outcomes.  In my view, war between Mainland China and Taiwan would be very bad.  But war between Mainland China and the US could be several orders of magnitude worse.  PPS.  After writing this post, I noticed that a bunch of top administration officials were caught discussing war plans on an insecure Signal chat that included a reporter for The Atlantic, and then lied about it afterwards, even after the administration had confirmed the Atlantic story.  There are so many other things going on that I suspect this story will be forgotten within 24 hours.  So many scandals, so little time.  The chat messages revealed some of things that I’ve been talking about: For a continent already worried that Trump may not honor any NATO Article 5 request or would be willing to shake down allies by withholding the spare parts and software upgrades needed to keep their F-35 Joint Strike Fighters flying, the content of this unintentionally leaked discussion has provided confirmation. . . .US allies in the Asia Pacific and Middle East can only conclude that this might soon be them, too, should Trump and his officials ever decide that they aren’t paying enough for their defense or making sufficient trade concessions.Russia and China, meanwhile, will also draw conclusions, though viewed from their perspective this offers exploitable opportunities. At least as important as all this is that America’s friends and foes alike are finding out what happens when you get group of poorly qualified ideologues to run the most powerful military in the world. The short answer is either recklessness or, under a more generous interpretation, a group with a steep learning curve. The chat discussion also revealed that when considering the pros and cons of this military action, the fact that it might also help Europe was viewed as a negative.  (No, I’m not joking.)  As I keep saying, the US has shifted its alliance from the West to Putin’s Russia.  Here’s a Bloomberg story: Russia and the US Both Want to Finlandize the World “Finlandization” is about weaker countries having to cede sovereignty to appease stronger bullies, such as Russia and, now, the US. A few years ago, commenters viewed me as an anti-American extremist for claiming the US government was a “bully”.  Now that view has gone mainstream. (0 COMMENTS)