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 Richmans' Trade and Taxes Blog

The Scaled Tariff would Resuscitate the U.S. Economy
Raymond Richman, Howard Richman, and Jesse Richman 7/19/2010

[Note: This commentary was initially published by Enter Stage Right (www.enterstageright.com) on July 19, 2010.]

In a commentary in the July 5 issue of Business Week (How to Make an American Job Before It’s Too Late), Andy Grove, a founder of Intel and its former CEO makes the spectacular prediction that the outsourcing of production of technologically advanced products by our product innovators is an act of economic suicide. He writes:

To read the rest of the commentary, go to: http://www.enterstageright.com/archive/articles/0710/0710scaledtariff.htm.

Comment by Larry Eubank, 7/22/2010:

Excuse this long comment, but here's a letter I wrote to EnterStageRight about this issue:

To the editors:

Raymond Richman, Howard Richman and Jesse Richman are among the few economic commentators who have seen through the whole  "protectionism" line of rhetoric. They say

. . .U.S. businesses must stop outsourcing the production of their products. "If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us." And "If what I'm suggesting sounds protectionist, so be it."

That's exactly right. Our economy is in dire straits, and it could use some protection(-ism).

The long and short of our current economic woes is this: Outsourcing means impoverishment. To cease to produce -- to delegate the actual making of things, the manufacturing, the work, to other countries -- is the path to the poverty for a nation. Our economic problem is disinvestment, not "protectionism." 

The anti-protectionists, like all untalented generals, are fighting the last war. They have constructed a massive Maginot line of rhetoric against protectionism, while disinvestment destroys the U.S. economy. They need to put aside their Cliffs Notes booklets on Adam Smith's Wealth of Nations, and go to the source.

The central passage of that Wealth of Nations -- the very core of Smith's explanation of the source of wealth of a nation -- is this:

There is another balance, indeed . . .  which, according as it happens to be either favourable or unfavourable, necessarily occasions the prosperity or decay of every nation. This is the balance of the annual produce and consumption. If the exchangeable value of the annual produce . . .  exceeds that of the annual consumption, the capital of the society must annually increase in proportion to this excess. The society in this case lives within its revenue, and what is annually saved out of its revenue, is naturally added to its capital, and employed so as to increase still further the annual produce.                  -- Wealth of Nations, Book IV, Chapter III, Part II

The key to wealth is production – production that is greater than consumption, thus leaving a surplus of capital to invest in yet more production. When excess capital is reinvested,  productive capacity increases in a continuing cycle, like a snowball rolling downhill.*  That process  is the key to the wealth of nations.

* Alice Schroeder used that metaphor in the title of her book, The Snowball: Warren Buffett and the Business of Life; Buffett himself compared life to a snowball, saying "the important thing is to find wet snow and a really long hill."

On the other hand, if production is less than consumption, the process of wealth creation reverses itself, the snowball rolls back uphill, and wealth shrinks. As Smith said:

 
If the exchangeable value of the annual produce, on the contrary, fall short of the annual consumption, the capital of the society must annually decay in proportion to this deficiency. The expence of the society in this case exceeds its revenue, and necessarily encroaches upon its capital. Its capital, therefore, must necessarily decay, and together with it, the exchangeable value of the annual produce of its industry.

-- Wealth of Nations, Book IV, Chapter III, Part II

 
If surplus capital is invested not here but abroad, we end up on the negative side of the equation. The investment of capital elsewhere increases production there, but not here, and as a result we have less production, less surplus capital, and a decline in production and wealth.

In regard to the alienation of capital, NAFTA and other policies have made it profitable for manufacturers to move production overseas, to take advantage of  minuscule labor costs. Thus manufacturers invest productive capital elsewhere; they disinvest in our economy and invest in the productive capacity of China, Mexico, etc.  Rather than snowballing, our economy goes into a death spiral, a vicious cycle wherein every rotation brings decreased production and decreased productive capital.

Our leaders think disinvestment is wonderful. They have decided that we don't need to produce - only consume. And we don't need to invest additional productive capital here; we can send it to China. We will live by consuming, by depending on China to produce, and by going into debt up to our eyeballs in order to purchase cheap goods from the producing nations. As a result, we are experiencing the decay of our capital now, and that decay will continue; the rot will set in deeper and deeper, unless we take some measures to withdraw capital investment from China and other countries, and increase production here.

(Whether this is mostly a result or China's currency manipulation, or of the simple fact that China is essentially a third-world economy with minimal wage rates, is a side issue. We have to fight disinvestment whatever the cause.)

A scaled tariff would no doubt help us prevent and even reverse disinvestment. If the Chinese retaliate, that's unfortunate, but as it is, our economy is being destroyed by the loss of investment capital. We can do without trade with China much more easily than we can do without a prosperous, working economy.

The two contradictory aims of "securing economic growth," and fighting "protectionism" cannot be combined. What we have to fight is disinvestment, not protectionism. But God knows what it will take to make our economically semi-literate leaders see that.