Ideal Taxes Association

Ian Fletcher, Free Trade Doesn’t Work: What Should Replace it and Why (Washington, D.C.: U.S. Industrial and Business Council, 2010)

Edward Luttwak, Senior Fellow at the Center for Strategic and International Studies, writes in the Foreword “it is hard to imagine how America can rebuild its manufacturing and rebalance its trade, without repudiating free trade –to some carefully chosen extent. If nothing else, the need to neutralize foreign mercantilism demands this.” Ian Fletcher in this book proceeds to demolish the myth perpetrated and perpetuated by economists that “free trade” is good and protectionism is harmful. This is a must read book. It covers more ground than our book, Trading Away Our Future (Ideal Taxes Assn., 2008). We disagree with some of his arguments but applaud his attack on free trade which has cost the U.S. millions of industrial jobs, caused wages to stagnate, worsened the distribution of income, and contgributed to the current economic crisis.

His introduction is entitled, “Why We Can’t Trust the Economists.” While admitting that all trade deficits are not bad, he castigates the huge U.S. trade deficits of 2006, 2007, and 2008 as obviously a critical problem and yet “Americans remain afraid to do anything about it.” Economists have made protectionism a dirty word and “so we remain paralyzed in the face of the crisis.” On the other hand, the trade deficits were not created by accident. “Foreign governments treat trade as war and use every trick in the book—legal and illegal under international agreements—to grab their industries a competitive advantage.”...

[This review was origininally published on our old blog on July 14, 2009]

Among the relatively few economists who view the loss of American industry to foreign countries as a catastrophe in the making is Prof. Ralph Gomory, Research Professor at the Stern School of Business at New York University and President Emeritus of the Alfred P. Sloan Foundation. Prof. Gomory is no ordinary academic. His Ph. D. is in mathematics and he made his mark as Senior Vice President for Science and Technology at IBM.

He is the co-author with Prof. William Baumol, distinguished former Professor of Economics at Princeton University, of a seminal work published in 2000, Global Trade and Conflicting National Interests. In their book, they took issue with the theory of comparative advantage that explained what products nations specialize in and the gains from trade when countries specialize in producing what they do best.

They showed that countries can acquire a “comparative advantage” by specializing in any industry in which they can obtain economies of scale, a wide range of possibilities. With acquired advantages playing a decisive role, Japan could specialize in autos and the U.S. in airplanes or Japan could specialize in airplanes and the U.S. in autos. Who is first to achieve economies of scale in an industry is likely to continue specializing in that industry and potential foreign competitors have a high hurdle to overcome to compete successfully.

Their analysis, like the traditional analysis it displaced, presumes that in equilibrium, trade will be balanced. They do not discuss or analyze whether there can be chronic trade deficits such as the U.S. has been experiencing for more than two decades. Here is what they say in a footnote to chapter 6:...

Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (New York, Bloomsbury Press, 2008)

If you are a skeptic and believe economics cannot be a science, or if you are a Marxist, or just hate America or capitalism, or you believe your country’s backwardness is all the fault of the Americans and Europeans, or all of the above, this is the book for you. The author attacks what he describes as neo-liberal economic beliefs, the principal belief being the advantages of “free trade”. He describes himself as an economist but not a “neo-liberal” economist. If he is not a neo-liberal economist, what kind of economist is he? Neo-liberal is not an economic term but a political one, like calling economists by the policies they recommend. You are a Keynesian or non-Keynesian, a Marxist, a neo-classicist, a free trader, or, God-forbid, a protectionist in a rich country. The author’s thesis is that it is all right to be a protectionist in a poor country....

Richard Duncan is currently chief economist at Blackhorse Asset Management. He has worked or served as a consultant for ABN\AMRO in London, the World Bank in Washington, Capel Securities and Salomon Brothers in Bangkok, and for the IMF in Thailand during the Asian Crisis of the late 1990s. His previous book, The Dollar Crisis: Causes, Consequences, Cures, published by John Wiley (Asia) in 2003, dealt with the instabilities that the “dollar standard” that Pres. Nixon inaugurated by going off the gold-exchange standard in 1971 caused in the world economy. Capital flows to the Asian Tigers led to hyperinflation of financial assets and real estate, bubbles that could not be sustained, and caused the Asian Crisis. The capital flows from China, Germany, and Japan by their reinvestment of their trade surpluses in the U.S. produced the American stock market and real estate bubbles which he confidently predicted were unsustainable and that the disequilibrium must eventually result in plunging the world into the “most severe downturn since the Great Depression.” Events proved him right.

The current book goes into great detail of the forces at work. Duncan’s description of the causes of the current crisis, the New Depression as he calls it, makes this almost a great book. But, as a Keynesian, his prescription for emerging from the depression is misguided economically and politically.

Paul M. Weyrich & William S. Lind, The Next Conservatism (South Bend, Indiana: St. Augustine’s Press, 2009)

In a column he wrote on the day he died at the age of 66 in December, 2008, Paul Weyrich wrote, “It is the worst of times because conservatives appear lost and without a serious agenda or a means of explaining such an agenda to the Public. It is the best of times because … the Next Conservatism .. should ignite a meaningful debate about the future.” This review joins that debate.

The simplest way to define conservatism is that it is the policy of preserving institutions and policies that are good and resisting changes that are bad. Some environmentalists consider themselves conservatives, wanting to retain nature in its pristine form wherever it can. At the same time, they want to roll back man’s intrusions into that pristine environment. There is cultural conservatism that wants to preserve Judeo-Christian religious values and beliefs and rejects challenges that weaken such values and beliefs. Then there is political conservatism which wants to preserve the policies that have made the U.S. powerful, our constitution and the free market that have enabled our economy to innovate and create the highest living standards in the world.

The “next conservatism” includes most of the social and political positions of the old conservatism. It opposes abortion but the authors would not make abortion illegal. It supports traditional marriage. It advocates lower marginal tax rates and reduced government spending and a balanced budget. It advocates a strong national defense. It wants better control of our borders and wants English to be the only official language. These old goals remain important but there are new challenges, they believe, that require changes which they call the “next conservatism.”

The “next conservatism” must deal not only with dangers by the state but dangers to the state. The dangers by the state, we agree, are constant. The continuing growth of government and weakening of the constitutional restraints on government’s growing intervention in the economy require strong action by conservatives. But we disagree fighting terrorists poses a threat to our liberties. They ask, “What indignities will we have to undergo to get on an airplane after the first terrorist employs an explosive suppository.” [How prescient!] But we believe the greater danger is from those who want to extend our civil rights to enemy terrorists and try them in our civil courts. In our view, they should have no right to trial or release until the war is over; in this case, the war on terror. As for invasion of our privacy and civil liberties believed by the government to be necessary to expose and fight terrorism, conservatives can argue against the abuse of the information collected, i.e., using it for purposes other than the war on terror.

The authors rightly ascribe many societal ills to multi-culturalism which equates good cultures and bad ones. It equates a culture based on Judea-Christian values with voodooism; it equates an economy that brought hundreds of millions of people out of poverty with one with communist-fascist values that murdered tens of millions and impoverished hundreds of millions on its way to failure. They believe there is a need for “retroculture,” restoration of Judeo-Christian culture to counteract cultural conservatism. Conservatism they write is a way of life, not ideology. We believe that conservatism is essential both to progress and stability.

They argue that we need to substitute conservation for environmentalism, conservatives should support family farms, farmers’ markets, and organic farming, that conservatives should be against autos and favor trolleys. We believe that none of the foregoing are a matter of conservatism. All of these have to justify themselves. Conservatives should ask, “Do these require a government subsidy to sustain themselves?” If so, there have to be other reasons why taxpayers should support them. We do not see a conservative position on conservation versus environmentalism. Any government policy must justify itself by an evaluation of all its benefits and costs. These need not be monetary, but social benefits should not be overvalued.

They argue against foreign wars and adventures. They write that we cannot force democracy on the rest of the world. But there are some just wars, World War II for example. They argue that our invasions of Iraq and Afghanistan were wrong. Some of those advancing that argument approved of our invasion of Kosovo and the bombardment of Bosnia. These are all political, not conservative decisions. The conservative position is don’t go to war unless you can win it at a justifiable cost and your reason for going must meet the test of the first conservative principle: conserve what is good and be careful about what you change.

They reject the national security state, as represented by the Patriot Act enacted after 9-11which increased the ability of law enforcement agencies to search telephone, e-mail communications, and financial records and gave law enforcement authorities the power to detain immigrants suspected of terrorism-related acts. How far the state should go domestically in fighting its foreign and domestic enemies is a policy issue that has to do with survival. We believe that this is not a conservative vs. leftist issue.

The ACLU position appears to be that even terrorists are entitled to civil rights. The authors do not go that far but believe conservatives should oppose invasion of the privacy of Americans. Pres. Lincoln suspended the right of habeas corpus. His action is still being debated. Fortunately for him (and the country), the Union won the war. What if we lose the war on terror? We would lose all our rights, including the right to speak English!

They appear to be for term limits, for referendum, initiative, and recall, and a level playing field for elections. In our opinion, these often run counter to conservative values. Sometimes, they achieve results that conservatives support. But they are not intrinsically conservative values. We believe that the essence of government in the U.S. is that it is a republic, that our representatives make the laws.

They believe our failure to achieve conservative values may force conservatives to secede and create our own homogenous islands like the home-schoolers, the Amish, and so on. We understand homeschoolers wanting to avoid the brain-washing of the multi-culturists and the Amish wanting to preserve their culture, but that is no solution to the national need to promote conservative values for the preservation of the United States.

We are in full agreement with their position on international trade. They write:

If economic efficiency means, for example, that America should send all its manufacturing jobs overseas, as free trade seems to demand, the next conservatism should not say, “Oh, well, I guess we have to go along with it.” Better we toss our sabots into free trade’s grinding gears. Economic security requires that people be able to get good-paying jobs, which means manufacturing jobs.

As economists, we maintain that nothing in economic theory justifies the foolish unilateral free trade policy we’ve followed the past three decades which cost millions of industrial workers their good-paying jobs, caused the wages of American workers to stagnate, worsened the distribution of income, and contributed to the current recession. That is the case we made in our book, Trading Away Our Future (Pittsburgh, PA., Ideal Taxes Association, 2008)

On the other hand, we take exception to their approval of “a new infrastructure of bus routes, streetcar line, electric interurban railways,” as a means of freeing America from dependence on foreign oil. The environmental extremists say the same but they are not conservatives. Let the free market and freely fluctuating prices decide which mode of transportation is most efficient and let American households and businesses decide for themselves. The authors are on a slippery slope here.

We believe we have plenty of domestic energy resources but the man-made climate change environmentalists have been successful in preventing the successful exploitation of our oil and gas reserves and nuclear energy production. Eventually we shall begin to run-out of fossil fuels and the ensuing rise in prices will encourage the exploitation of alternative fuel sources. But to do it prematurely is like building an apartment building and keeping it vacant for fifty years.

They argue for tort reform and so do we, and not only because it increases the cost of health care. Our opposition is based on the fact that juries are awarding punitive damages to plaintiffs. But punishment should be decided in a criminal proceeding with the fine paid into the government treasury, not into the pockets of the plaintiff. Civil proceedings should be based upon the principle of fairness, and should not involve punishment.

Weyrich and Lind have opened a debate that should be joined by all who consider themselves conservatives. They have put forward a number of arguments that conservatism has to change to meet the changing conditions that our country faces. They have suggested changes they call the “next conservatism.” Some are true conservative principles but others are policy issues that need to be evaluated based upon a careful analysis of the costs and benefits.

True conservatism never changes. It is the system of thought that tells us that the past has much to teach us about the present. It is the study of the good forces that have contributed to human well-being and of the bad forces that have been harmful. Conservatism doesn't provide all of the answers. Often we must engage in a careful analysis of the costs and benefits of a policy action, including the unintended consequences. But conservatism allows us to conserve what is good in the world, and fight what it is evil.

[This review was initially published on our old blog on October 12, 2009]

Congressman Ron Paul has just published his latest book, entitled End the Fed (NY: Grand Central Publishing, 2009). He writes:

The Federal Reserve should be abolished because it is immoral, unconstitutional, impractical, promotes bad economics, and undermines liberty. Its destructive nature makes it a tool of tyrannical government. … The Federal Reserve’s monetary policy has brought us to where we are today – in a tragic economic mess.

Not a word of this is true. What brought us to the mess we are in is without doubt the economically illiterate Presidents of the United States and economically illiterate majority of Senators and Representatives of the Congress of the United States, in which “august” group Rep. Paul finds himself.

The Federal Reserve is the central bank of the United States, a quasi independent institution that Congress established in 1913 to regulate the supply of money and supervise the banks. Until its creation, money consisted of the banknotes issued by the individual private national banks which by law were redeemable in gold or in the coins and currency issued by the U.S. Department of the Treasury. When a recession occurred, caused usually by too many private banks making too many risky loans, they were faced with bankruptcy as they began to run out of gold or Treasury money. Most of the money in circulation or in the banks today consists of banknotes issued by the Fed.

Rep. Paul ignores the fact that while we were on the gold standard, we experienced the Great Depression, the panic of 1907, often credited as the principal reason for the creation of the Fed, not to mention the recessions in the 1890s, the 1870s, and the panic of 1857 and earlier periods of recession.

The Fed consists of a Board of Governors appointed by the President, currently chaired by Chairman Ben Bernanke, the Federal Open Market Committee which buys government bonds when the Board votes to increase the money supply and vice versa when it wants to decrease the money supply, twelve Federal Reserve Banks owned by the member banks in their districts, and the private member banks which are required to subscribe to non-transferable stock in the Federal Reserve Bank of its district.

Under the Full Employment and Balanced Growth Act of 1978, the Fed is charged in Section 108 with making an annual report to the Congress setting forth a review and analysis of recent economic trends, the objectives and plans of the Board and the FOMC with respect to the ranges of growth or diminution of the monetary and credit aggregates, and submit the report to the Senate and House committees on banking, finance, and urban affairs. The purpose of the act was to achieve and maintain full employment, growth, and “reasonable” price stability, with proper attention to national priorities.

Congress Caused this Mess, Not the Fed

Rep. Paul states, “I’ve written this book to explain why I think the system of Fed domination must come to an end.” According to the Full Employment Act, the Fed reports to the Congress. It is Congress that dominates the Fed not vice versa. You could make a much better case to abolish the Congress than the Fed. The Fed did not cause this mess; Congress did. It was Congress that passed the Community Reinvestment Act in 1977 and Presidents GHW Bush, Clinton, and GWBush who strengthened it.

Fannie Mae and Freddie Mac were encouraged to provide a secondary market for bad mortgages. Congress brought pressure on banks to make mortgage loans to unqualified borrowers. Why not make mortgages available to everyone? Democrats wanted the poor to own their own homes and Republicans wanted every family to own its own home because homeowners tend to be conservative.

The CRA enabled community groups like ACORN to blackmail the banks and to get paid by the U.S. government to do so! Wall Street soon saw a way to profit from such government policies, but when the housing bubble burst, the entire financial system was about to go under.

The Treasury used TARP money to bail out the banks and the Fed did as much as it could to reduce interest rates and increase the money supply to prevent a collapse of the economy. It has little to apologize for. Congress should apologize; the CRA has not even been repealed.

It is Congress that does the decision-making and the appropriating. And the Fed is bound by the rules of the game to do the best it can to minimize the harm that wasteful government expenditures cause.

Ron Paul Ignores Trade Deficits

The other major causes of our economics problems are our chronic trade deficits, which are also the primary cause of the dollar's weakness. These trade deficits on goods rose to the enormous sum of over $800 billion dollars in 2008, and cost 5 to 7 million industrial jobs, thus worsening the distribution of income.

Rep. Paul is proud of being a free trader. Free trade works when there are no barriers to trade as in the USA. It does not work when our trading partners like China pursue mercantilism as a policy, with all kinds of barriers to our exports and all kinds of subsidies to their exports to us, including refusal to let her currency fluctuate and to allow her citizens the dollars to buy our goods. (See our book, Trading Away Our Future, 2008).

Unilateral free trade is not a sound policy no matter what Ron Paul and his teachers of the Austrian school say. The purpose of trade is to buy goods one values more in exchange for goods of equal value one values less. Most American economists in academia unfortunately have been brain-washed to extol free trade. None of them face international competition, the same goes for Congressmen and their staffs and government employees.

The Fed and Money

Rep. Paul states that his great teachers belonged to the Austrian school of economics. I am in total agreement with the Austrian school that the growth of government is a threat to individual liberty. Yet someone has to produce goods and services that are worth doing and which the private sector cannot do, will not do, or cannot do as well, like public goods.

One of the services that the government must do if it is to be done well is to maintain the quantity of money at a level that promotes price stability and is adequate for sustained growth and full employment. An independent agency free from political bias is required. The Fed was created to do the job. I know of no agency or institution, certainly not the free market that is better structured to do the job. Federal consumption of goods and services plus investment as a proportion of GDP was 7.5 times greater in 2008 than it was in 1929. Not too bad a record.

The Fed when it creates money does so because it believes it to be necessary for growth of the economy, or to prevent unemployment, or to stimulate investment or consumption or both. Its decisions may be wrong but they are not always wrong. Given the growth of the economy since 1929, it has erred more by making money easier that by keeping the expansion in check. The median change in GDP from 1929 to 2008 was 3.6 percent annually. Not a bad record, we believe, given the number of negative years in depression and recession.

The Fed and War

Rep. Paul argues that central banks facilitate war: "It is no coincidence,” he argues, “that the century of total war coincided with the century of central banking.”

In his view, central banks make it easy for governments to raise money. Aside from the fact that nothing stops a government from printing money itself without issuing debt, the reason for wars has nothing to do with the supply of money. It would be more accurate to say that economic growth creates the ability to wage expensive wars. Financing wars by domestic debt or printing money simply allocates a larger share of the national income to the government to use as it sees fit.”

Governments do often finance their war on borrowed money. What is the central bank supposed to do? Veto the government?

Hitler argued that Germany needed “lebensraum” which he thought could only be accomplished by force. Economic growth is what enabled Germany to do as well or better post-war as territorial acquisition could or would have. Wars are the result of political decisions. We were involved in WW II? Did our central bank cause it? The German, the Bank of England, the French?

The Way Out

What does Ron Paul suggest we do after we abolish the Fed? He fails to make a philosophical or economic case for ending the Fed. His chapter entitled “The Way Out” continues to blame the Fed for our debt when it clearly was the Congress and the Executives that must bear the responsibility. He writes: “In a post-Fed world, we will still have the dollar, banks, ATMs, online trading, Web-based systems of fund transfer” and so on. “What will be added to the system will be vastly more financial options that are currently being kept at bay, including trading and contracting in many different currencies and new, sounder investment opportunities.”

Money would be “a market-created good that emerged out of trade … whether that be beads or animal skins or jewels or precious metals. Gold became money because it had all the properties people look for in a good money. Government had nothing to do with it.” “At the same time, the dollar would be reformed so that it again would be redeemable in gold.” Where will the gold come from?

Whatever this is, it is not economics. Physician, heal thyself, or take some courses in money and banking or even Econ 101 from a teacher who is not a member of the Austrian school. This book makes the Austrian school look bad. The book has no index, no footnotes. It is not a book worth reading.

We are attracted by the Rep. Paul’s consistent conservative record in the Congress on spending. We disagree on some foreign policy issues including his view that wars are all bad. We’re glad that we are not forced to speak German or pray to Allah. But thanks to the Congress, not the Fed, all of us had better be learning Chinese!