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April 12th, 2010
Free Trade, Fair Trade, and Protectionism
Article I Section 8 of the U.S. Constitution gives to Congress the authority to “lay and collect taxes, duties, imposts and excises”. Included in these powers is the tariff—a tax imposed on imported goods. Such tariffs provided the main source of revenue for the federal government until the introduction of income taxes in 1913, and for the first part of our nation’s existence were broad-based taxes applied widely across imports.
As nationalist central planners rose to power, a tumultuous tug of war ensued where tariffs once used in a broad and even manner came to be wielded as political weapons to encourage one industry over another and favor certain companies and goods at the expense of others. It is this latter type of tariff—a “protective” tariff—that has for almost two centuries been a favored method of intervention by the federal government into the economy.
The ideological enemies of such protective tariffs were once commonly known as free traders, though in the latter half of the twentieth century this name became a hiss and a byword among conservatives, as its application morphed into a bastardized version of trade that is more correctly defined as “managed trade”. So-called “free trade agreements” such as NAFTA, CAFTA, GATT, WTO, and all sorts of other acronym-heavy organizations, are sovereignty-eroding, quasi-governmental international bodies that no more resemble free trade than Congress resembles wisdom.
True free trade requires no treaties, no administrative bureaucracies, and no government-directed import/export processes. It is in the absence of these things, rather, that free trade manifests itself most purely. It acts, as economist Frédéric Bastiat once noted, “exactly in the same way as roads, canals, railways, and everything else that facilitates communication by removing obstacles.” Ludwig von Mises, erudite economistic/philospher that he was, narrowly defined it thusly:
There are countries with relatively favorable and others with relatively unfavorable natural conditions of production. In the absence of interference on the part of governments, the international division of labor will, of itself, result in every country’s finding its place in the world economy, no matter how its conditions of production compare with those of other countries. Of course, the countries with comparatively favorable conditions of production will be richer than the others, but this is a fact that cannot be altered by political measures in any case. It is simply the consequence of a difference in the natural factors of production.
The antithesis of free trade, protectionism, crosses party lines, and even so-called conservatives and supposed defenders of liberty embrace this tool of tyranny to wage economic warfare in the name of ensuring a strong manufacturing base here at home. Advocates of this economic manipulation have rallied around the banner of “fair trade” in recent years, asserting that in order for trade to be truly free, it must first be fair. They contend that the imbalance among nations—whether due to natural or artificial causes—necessitates using tariffs to compensate for this inequity and allow domestic producers to compete. But just as Mises noted a difference between countries through favorable or unfavorable conditions (Florida grows oranges far better than Sudan, and Thailand is better for growing rice than is Norway), differences can also occur through artificial means, such as one government subsidizing a certain export which introduces “unfair” competition in another country’s market for that product. Thus, the fair traders cry, tariffs are needed to defend our markets against the flood of cheaply-priced goods coming in from countries for whom these differences are favorable. (Most also hypocritically ignore the massive subsidies distributed by our own government which has the same effect in the markets of other countries; that pesky golden rule must be suppressed!)
Responding to differences of any type, and using his masterful rhetoric to satirically argue on behalf of candlemakers, Bastiat wrote the following to dismantle the protectionist’s argument:
We are suffering from the ruinous competition of a foreign rival who apparently works under conditions so far superior to our own for the production of light, that he is flooding the domestic market with it at an incredibly low price…. This rival … is none other than the sun….
We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights and blinds; in short, all openings, holes, chinks, and fissures.
Yet despite this clear reductio ad absurdum of protectionism, fair traders maintain their anti-liberty argument by noting that without protecting our local manufacturing base, we jeopardize our ability to adequately defend ourselves during wartime. Thus do neoconservatives transmogrify almost any issue into a matter of national security, clamoring for intervention and big government to achieve their aims.
Mises observed the following:
The freetrader is far from denying that the evil that the nations of the world wish to combat by means of a policy of protectionism really is an evil. What he maintains is only that the means recommended by the imperialists and protectionists cannot eliminate that evil.
As the saying goes, just because others shoot themselves in the foot doesn’t mean that we have to follow suit. The fact that other governments—even those hostile to our own—subsidize certain industries whose exports then become cheaper to the American people than their domestically-produced counterparts does not constitute a threat to our sovereignty, security, or liberty. In reality, the protectionists’ standard response to these cheap goods are a larger threat.
Despite being burdened by protective tariffs, heavy regulations, and the bureaucracy of managed trade organizations, the American manufacturing basis has been able to thrive. (In other words, it is in spite of—not because of—such protectionism that business has thrived.) Having access to a greater supply of inexpensive raw materials enables manufacturers to reduce their costs and become even more competitive in the marketplace. On the other hand, inflating the price of imported goods through protective tariffs only leaves domestic access to goods at high prices, thus reducing the production and innovation of new goods and the creation of new jobs. This puts our manufacturers at a competitive disadvantage and discourages economic growth.
“It is an old fallacy that it is a legitimate task of civil government to protect the less efficient producer against the competition of the more efficient,” Mises once wrote. It is, additionally, a laughable absurdity that any government official—whether elected or appointed—can determine what is “fair” for another person, and thus impose taxes to alter an economic transaction and make things “more equitable”.
In pursuit of that mystical equity, fair trade protectionists beg for government’s intervention through targeted (protectionist) tariffs. (The supposed constitutionalists of the bunch will defend their attack on liberty by making the dubious claim that such intervention is authorized by the Constitution; this assertion might find support in the letter of the law, though its spirit is ravaged through such tariffs not having a general application.) But this intervention is simply a contest between “special interests” where each industry and company sends its emissaries to court easily-purchased legislators with the goal of securing favorable legislation that helps them and hinders their competitors. It exposes the sadly true indictment by Bastiat of what government inevitably becomes: “the great fiction through which everybody endeavors to live at the expense of everybody else.”
Such being the case, the protective tariff becomes not an implement to bolster national security and encourage a strong manufacturing base, but a mercantilist weapon of war turned inward on the American people. Mises commented:
The philosophy of protectionism is a philosophy of war. The wars of our age are not at variance with popular economic doctrines; they are, on the contrary, the inescapable result of a consistent application of these doctrines.
Henry Hazlitt taught that we must examine economic policies by considering their long-term results on all affected parties. Under such scrutiny, protective tariffs are easily exposed as destroyers of wealth, enemies of liberty, and devices of big government bureaucrats.
It is the reduction of government intervention into the marketplace—not more, as fair trade protectionism requires—that will encourage domestic production and investment, strengthen national security, and create wealth. True free trade is the only system of economic exchange in which liberty is preserved and all parties profit. The American economy would be best served by the abolition of all free trade agreements, the substantial reduction of regulation on businesses, and the elimination of all tariffs that focus on a specific product, industry, or country.
48 Responses to “Free Trade, Fair Trade, and Protectionism”
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April 13, 2010
[…] By CONNOR BOYACK, UPP Contributor— Originally Published 04/13/10 at connorboyack.com […]
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Well written. One thing I’d like to highlight is where you state that
This appears to be a good example of something that falls within what is allowed by the Constitution, yet can be widely debated as a wise or useful policy. In short, the Constitution is not a scripted formula that details every step of a scientific experiment. There is, in fact, a fair amount of latitude in some areas, wherein we can implement horrendous policies and yet remain “constitutional.”
Which is why a candidate cannot be assumed to adhere to a certain philosophy simply because they “firmly believe in the Constitution.”
Connor, I’m still studying this one out.
As Lynn notes above, there is nothing fundamentally ‘unconstitutional’ about ‘protectionism’. You could argue that the ways in which we go about protectionism these days (the unwieldy, obtuse, obscure, so-called ‘free trade’ agreements that give up U.S. sovereignty to foreign bureaucrats and well-connected corporations for instance) is certainly ‘unconstitutional’. But not protectionism itself.
Rather, many of this nations’ founders (Hamilton, Jefferson, I’m still studying . . .) were adamant that — despite some of those compelling thoughts from Bastiat and von Mises — that in actual practice — and certain situations — ‘protectionist tariffs’ are an absolutely valid and important use of Federal government. I’m certainly hope you don’t consider me a neocon but I get why they are so quick to run to those Founding arguments. I’d say the neocons (and neolibs, etc.) misuse and abuse the ideals, but the arguments themselves are valid.
I’d say it’s more like national defense or even government in general. It is unwise to break it down into ‘all or nothing’ false dichotomies. I don’t agree with my neocon friends who believe America has to run the world or completely give up on defense. I also don’t agree with detractors who claim that ‘anarchy’ is the ideal result of libertarianism (although I know some who would probably prefer that lol).
I believe some *limited* government is necessary. I believe in judicious, thoughtful use of it with *checks, balances, and transparency*.
In actual practice, my experience has been that many of those who argue vociferously for ‘zero government involvement’ in trade are those same entities that benefit from enabling slave labor and exploitation, the inability of nations to be self-sufficient, etc. [And no I don’t include Ron Paul amongst those entities . . . this is perhaps the only policy I currently disagree with him though, lol]
When a nation like China decides to use slave labor and other immoral practices to engage in ‘trade wars’ in which they undercut the production price of certain markets that the U.S. *could be* self-sufficient in (given that we have the more favorable natural resources, etc.) until the point that no self-respecting fiscal corporation can do anything but choose tainted Chinese slave-produced goods and — consequently — that industry completely disappears from *our* nation, then there are resultant problems. We become completely dependent where our natural conditions should have had us ‘independent’. We are unethically supporting — even encouraging — slavery. Etc.
Our current trade policy and methods of trade governance are at least as broken as our foreign policy. That’s clear. I’m still not sure I agree that we should be clamoring to strip our Federal government of any responsibility and power whatsoever with regard to it. That’s all.
Doug,
Simply imposing tariffs will not mean that Americans will reject Chinese products. For that, you’d need an outright embargo.
If slavery is an issue, then it’s one that we have to tackle ourselves through conscious consumerism, publicity awareness campaigns, etc., in order to persuade people to pressure or boycott the actions of those they’d like to patronize. But slavery (or conditions that are fairly similar to it) have comprised a substantial portion of the economy for years and years. For more, see this book.
In other words, I don’t believe that the tariff is effectively or morally used to suppress nefarious practices of maltreatment in other countries. Forcing Americans to pay higher prices on domestic goods is hardly a rallying cry to encouraging people to shun immoral behavior.
As for the constitutionality of protectionism, the authorization for imposing taxes and duties is followed by the statement of purpose: “to pay the Debts and provide for the common Defence and general Welfare of the United States”. Protective tariffs are not intended to pay debts, nor provide for the defense and general welfare of the nation. One might claim that the manufacturing base needed for a sound defense justifies the use of such tariffs, but the intent of such taxes was to directly provide (in other words, raise money to pay for defense expenditures), rather than indirectly (maybe) having some effect on the overall manufacturing market that might theoretically (hopefully) create more favorable conditions for manufacturing products related to national defense.
It’s a stretch either way, I think.
Doug,
If by “valid” you mean “legal” then I accept that there is a case to be made but as Connor has said, protective tariffs don’t work very effectively (unless the plan is simply to squeeze more money from the consumers). To be truly effective you would need an embargo.
If the Chinese subsidize their slave-labor tire production (to use your example) and we do not impose tariffs to make the price of their tires comparable to our tires the result is that the Chinese are putting more money in the pockets of American consumers. They become poorer and we become richer. They can’t keep it up forever and when they stop we can compete AND we are richer because of the subsidizing they did. It’s not as if we would forget how to make tires. The economic arguments for protective tariffs just don’t hold water.
Connor,
Thanks for cutting through the noise with some economic and political truth. People really need to look past the words (NAFTA must be “free trade” because it says so in the name) and look at the real meaning of the proponents of fair trade. When examined their arguments tend to show themselves as short-sighted.
Tariffs are a means to an end – economic prosperity being the goal. As pointed out in the book Bad Samaritans, the US used tariffs to protect its manufacturers from competition until they became strong enough to compete on equal footing with foreign firms. Developing nations often require tariffs and capital controls to protect the agricultural base necessary to give them some self-sufficiency for food and to protect their infant manufactures.
With capital now able to move around the world in milliseconds without restriction, and with huge nations like China able to build anything we can build here at a fraction of the price due to cheap labor and government subsidy, a “free trade” policy has resulted in the destruction of the American manufacturing base, and along with it the good paying jobs that formed the basis of our middle class and gave us the kind of upward mobility that was the envy of the world.
Now due to “free trade” and tax cuts, the US has the greatest wealth inequality of any industrialized nation. How can we possibly regain our dominant position or give our children the same possibility of being better off than their parents without government intervention? Rest assured our global competitors will not be hamstrung by an unwillingness to permit government intervention in the market.
Governments don’t create wealth out of nothing. If they are subsidizing an industry they are burning through some wealth to do so. If the standard of living among the Chinese rises their cheap labor will disappear and economic parity will return without tariffs.
I can accept the possibility that some developing nations might benefit from using protective tariffs to get started and become productive but to follow that with an argument that the largest developed nation must therefore protect itself through tariffs is ridiculous. It may be that real free trade is simply exposing the fact that some of our apparent prosperity is an illusion with no economic foundation. Instead of levying protective tariffs we should lower our minimum wage and reduce the welfare dole thus lowering our labor costs so that our businesses can compete and our people have reason to go be productive rather than living on unemployment checks for a year or on welfare indefinitely.
The dominant economic position we have held is not a God-given right, it must be earned day by day through our hard work.
Industries exist because someone was willing to invest wealth without an immediate return, and the wealth invested is unavailable to purchase other goods and services. It really doesn’t matter whether the investor is an individual, a bank or a government. Like individuals, governments are capable of bad investments as well as good and they need to look at the long-term benefit to the nation as a whole when making investment decisions.
What you are suggesting is that the United States compete with China by lowering our wages, lowering our standard of living, and eliminating what’s left of our social safety net – in other words, become a third world banana republic. If you checked the graphs I linked to in my post, you would see we are already well on our way.
This nation became an economic super power with the highest standard of living in the world primarily because our government first protected our industries, then protected our workers and made investments in education, housing and social security that enabled poor people to rise to the middle class and enjoy college educations, good jobs and home ownership.
We didn’t gain the American dream by simply working hard as individuals, we got there because we worked together through our government to create the conditions that propelled us forward. Now we are losing that dream because we have been tricked into believing that government is the enemy and should do as little as possible. The result of that philosophy over the last 30 years has been the destruction of our manufacturing base, the decimation the middle class, and children with less opportunity than their parents. More of the same? No thank you.
I’m still not completely convinced of any of the positions I’ve heard expressed. Our nation’s founders were much influenced by the Austrian school of economics and yet they still chose not only to keep tariffs “as an option” but rather to feature that system as the primary revenue stream for the Federal government. Fast-forward to now where we’ve completely demonized tariffs (and thrown them overboard) and had to adopt all sorts of crazy and unreasonably burdensome tax schemes to fund our overgrown central government.
Furthermore, if you read Hamilton, for instance — the great champion of the Constitution that wrote most of the Federalist papers — he is quite clear about the wisdoms in using a protectionist tariff for revenues. He does not shy away from why they are a useful and reasonable defense for a nation. That verbage may not have been deemed necessary for inclusion in the actual Constitution, but it’s hard to argue it wasn’t “original intent”.
Significantly, I don’t buy the argument that nations who employ immoral practices (like slavery) in trade wars “cannot keep it up forever”. Certainly they can. And will. Slave-labor is a renewable resource. It is practically inexhaustible. And it is not simply a matter of ‘remembering how to make tires’ someday. As we continue to allow large U.S. based corporations to outsource agriculture, manufacturing, etc. we lose factories, farm fields, trained researchers and workers, etc. There aren’t the sort of thing you simply pick up and restart based on ‘remembered practice’.
Consider the energy industry. In the past century many competing technologies have been well-represented in the United States. Many of these could make our nation completely self-sufficient. Perhaps even oil. And yet do we pursue independence in the energy sector? Nope. Do we drill enough of our own oil to power our needs? Nope. We’ve been happy to outsource it’s collection. Several times in recent decades this has brought our nation to near crisis. In fact, we’ve cited our inability to quickly ramp up domestic oil production as a primary justification for pursuing optional wars in the middle east. And that is just one trade commodity!
I do not believe it “conservative” to kowtow to globalist corporations insistent on glamorizing the glorious [Machiavellien] ends of far-away slave production and the demonization of self-sufficient nations. It seems completely inconsistent with all other discussions of sovereignty, independence, and especially when our Founders proclaimed that “all men . . . are endowed by their Creator with certain unalienable Rights”
Certainly with the mess we’re in today, a simply tariff is not going to end all our problems. By itself it cannot restore independence. It cannot replace the personal income tax system overnight (thus saving 12 million acres of forestland every year from eradication to print the tax code!). A U.S. tariff — explicitly ‘protective’ or not — is not going to single-handedly end global slavery. Agreed. All that said, I’m still not convinced that a tariff isn’t a better revenue stream for federal government than our current system nor am I compelled that even a defensive tariff is necessarily immoral or unwise. It may even be a good armament in the battles against dependence and slavery — the suspect arguments of globalists with unimitably cheap outsourced labor notwithstanding.
Finally, re: ‘rule of law’ concerns, what is removing all defenses against slave-produced goods really but encouraging theft? When work is extracted from a people without payment and then we allow our own corporations to fence those goods here without even a discussion or question . . . where is our stand against such theft?
Did you mean the last 30 years where we have been raising minimum wage and government has been doing more and more to shore up our social safety net – or was there some other past 30 years you were referring to?
No amount of government intervention will make up for a lack of hard work by the citizens of the nation. In fact, had it not been for widespread hard work the government programs would have done nothing to improve our standard of living. If we are not working we do not deserve the standard of living we inherited. Did we get here by working together? Yes. But no matter how much we stick together we will not be able to maintain this standard of living while so many of us hold an entitlement mentality.
We are looking more and more like a Bananna Republic not simply despite the social safety net and government intervention that we still have but precisely because those things have masked the growing laziness that follows the ever more pervasive something-for-nothing attitude in American society. Instead we should have left the lazy to suffer the consequences of their attitude.
This has led us to raise generations of children who don’t know how or why to work. We call them unfortunate and say (rightly) that it’s not their fault but the fact is that someone has to pay the price for the mistakes of the past and the only available debtors are the people of the present or the children of the future.
Doug,
You still need to distinguish between general tariffs and protective tariffs. Protective tariffs are not about funding government. I’d love to get back to a government that was small enough to be funded by reasonable general tariffs.
David,
While I agree that government intervention is something to limit, hold suspect, and watch like a hawk, I personally am still not an anarchist.
I think a tariff, for instance, might actually be a valid use of government. On the Founders advocated not out of cluelessness, but thoughtfulness.
In recent decades our entire nation has become somewhat akin to lazy slave-owners. When a handful of pocketchange (aquired through some sort of unreasonable government entitlement, sure, why not?) can purchase a plethora of food at the local market — food that continues to grow cheaper despite the fact that it is grown thousands of miles away, packaged, and then transported all that way — then there is little motivation to run a family farm or even plant a garden for instance. Why work at all when the necessities of life — and even most luxuries — are produced so cheaply overseas (due to immoral practices we never ever discuss in polite company, if at all) that it takes very little effort to acquire them here?
I submit that tariffs were one of the things that helped protect against such things.
re: distinguishing
We’re commenting past each other. I saw your comment after I’d posted my other one.
I don’t so readily distinguish between a ‘protective’ tariff and a general tariff. I see the dangers for abuses that Connor itemizes in some targeted tariffs, for sure, but the general premise that tariffs weren’t intended to be defensive in nature isn’t one that I’m sure I accept yet.
I can understand that position Doug.
Doug, you raise an important point in your comment #12. There are not only a number of hidden immoralities in the production of food, but hidden costs – more specifically costs that have been absorbed by the government or ignored.
For example, if I run a chicken farm and simply dump waste in a pool that leaches into a water table and poisons wells or lakes and rivers, I don’t pay for that and I don’t pass that cost along to the consumer. If I ship my chicken on refrigerated trucks across the country, I don’t really pay most of the cost of the interstate highways, law enforcement, and other infrastructure that makes that shipment possible. I probably also spend a portion of my profit to fund the chicken farmer lobbyists that work to reduce or remove regulation, lower my taxes, and insure that ag subsidies that advantage me remain in place.
Government “interference” in the market can take a lot of forms, it’s not merely tariffs or regulation, it can also be the lack of regulation and the lack of taxation that allows me to socialize my risks and maximize my profits.
Charles said (comment 8):
This nation became an economic super power with the highest standard of living in the world primarily because our government first protected our industries, then protected our workers and made investments in education, housing and social security that enabled poor people to rise to the middle class and enjoy college educations, good jobs and home ownership.
Huh? We’re an economic superpower because the government “made investments”? You site our education system, our housing condition and social security as good examples of government involvement? Have you compared a publicly educated person to a privately educated person? Are you aware of the housing crisis that we’re in? (And no, the private sector isn’t to blame for this… Government has been distorting the demand for homes by adjusting interest rates and manipulating the market to make malinvestments by offering housing grants to builders and buyers. These have caused the supply to exceed actual demand for decades now). Do you really think that social security has lifted the lower class to the middle class? What economic/history lessons have you been studying? Social security was an immoral idea to begin with since it’s based on the premise that government will forcefully take from the haves and give to the have-nots. But your arguments are based solely on pragmatism. So I’m addressing the fact that socialized education, socialized retirement, and making housing investments don’t work long-term. Social Security didn’t financially work for very long and the only reason it keeps going is because there isn’t the political will to phase it out. It’s bankrupt. It continues its ponzi-scheme existence at everyone’s expense.
Charles also says (comment 15):
Government “interference” in the market can take a lot of forms, it’s not merely tariffs or regulation, it can also be the lack of regulation and the lack of taxation that allows me to socialize my risks and maximize my profits.
What do you mean by socializing your risks? Do you mean sharing the risks that you take with others? If you lose, so does everyone else?
Sounds AWESOME! (sarcasm intended)
No Charles, your keynesian economic-syle education has failed to teach you the proper role of government. It has failed to teach you that personal freedom supersedes government economic planning. It has failed to teach you that when government makes investments, if they work, they will only work for a short term. Besides, such arguments focus solely on “what works” but fails to see “what’s moral”.
Jim, I’m sorry you are so misinformed. It is really difficult to get unbiased information these days. Of course, there has never been a time when private education (for those who could afford it) has not been superior to public education (for people like us), but at one point in our history, public education was so good that many of our greatest minds were educated in public schools and universities.
The housing crisis of course was due to a bubble inflated primarily by Wall Street firms. The government efforts to extend home ownership to lower income families was not a factor in the collapse. Because of social security, people of relatively low incomes have been assured that they will not be impoverished in retirement and that has led them to go ahead and retire thus lowering unemployment.
The Friedmanesque economic ideas that have been perpetrated by the foundations and think tanks funded by the super-rich have twisted your understanding so that you now support policies that are against your own interests. You have been taught a false morality that focuses on method rather than outcome.
You just took the “ends justify the means” argument. That is a false morality. Christianity teaches to do good that good may come (Romans 3:8). I believe that is the true morality. We shouldn’t be using the devils methods to get the Lord’s work done (in secular terms we shouldn’t be justifying immoral methods because it will lead to a supposed greater outcome). We should do what is right and let the consequence follow. So I’m not solely focusing on method, I’m focusing on both method and outcome. The means and the desired ends should both be moral. I want to retain my property and be free so that I can do good things like clothe the naked, feed the poor, provide shelter for the homeless, or make my own investments. When over 50% of my income is taken by government so that they can do these things for me – I consider that immoral.
As it applies in our discussion here- we shouldn’t be advocating for a group of citizens (government) to steal from other citizens (me and you) in order to redistribute that money and engage in speculative investments. That’s not what I consider to be the proper role of government. It’s using immoral means (unjustified force) in an attempt to reach some greater economic good (ie- education, homes, and retirement for everyone).
I can see that you’re a practical guy. But don’t you think it would be best to filter ideas through good principles first, and then consider the practicality of those issues?
But even when I look at these issues you present through merely practical lenses I have a hard time coming to a rational conclusion that government-ran social/welfare programs provide economic prosperity. From a practical point of view socialized education has dumbed down America more than it’s lifted it. Socialized retirement has created less incentive and more entitlement mentality for individuals and has also created unreasonable obligations/deficits than the government is able to bear long-term. I would agree that Wall Street has something to do with our current housing crisis but the government didn’t play a factor in creating that housing bubble??? The government created artificially low credit (which Wall Street took advantage of) and is mostly the root of the problem. It’s not the solution as you propose it to be.
Who says that government programs are inherently immoral? You may be philosophically opposed to all government programs that actually help people, but that doesn’t render them immoral.
I have not said that government social welfare programs provide economic prosperity, what I’ve said is that the lack of such programs and an fidelity to so-called free market economic principles and limited government causes poverty. The data are clear on that subject.
We provide Social Security to our older and disabled citizens because it is the right thing to do since otherwise many would die in abject poverty. That program has run from payroll taxes, not “unreasonable obligations” for most of its existence and would be today if conservative economic policies had not resulted in a major economic recession. The T-bills held by the Social Security Trust Fund are no more or less unreasonable than those held by any other creditor. No one is talking about defaulting on our bond obligations to Chinese or Japanese banks, but if the creditor is granny down the street then paying that debt is unreasonable?
The current housing crisis is the result of two things: First the Federal Reserve and other regulators allowed a housing price bubble to inflate beyond all reason; and Second, the Wall Street banks demonstrated beyond any doubt that if left unregulated and allowed to increase in size without restraint, they would commit repeated an enormous acts of fraud. Both these are the result of the deregulation mania pushed by conservatives for the last 30+ years.
Then when the entire Ponzi scheme blew up in our face, the “small government”, “fiscally responsible” Republican White House asked for and received $7 Trillion to bail out the criminals, no strings attached. Now with Democrats in office, we are still bailing them out and any attempt to re-regulate gets howls of opposition from the right and not even so-called liberals are discussing breaking up the toobigtofail banks or locking up the perpetrators of the frauds. Only government has the power to prevent this kind of meltdown and punish those responsible, but the government we have is owned lock, stock and barrel by the bankers.
Charles (comment 19):
I have not said that government social welfare programs provide economic prosperity…
Charles (comment 8):
This nation became an economic super power…because our government…made investments in education, housing and social security.
Charles (comment 19):
…what I’ve said is that the lack of such programs and an fidelity to so-called free market economic principles and limited government causes poverty. The data are clear on that subject.
Freedom and limited government causes poverty? Real data/history proves that a responsible AND free people don’t cause poverty but actually create prosperity. Governments who have guaranteed things like food, shelter, health-care, education, retirement, etc. haven’t been able to provide those things for very long (e.g. Soviet Constitution). On the other hand, our Constitution doesn’t guarantee any of those things and yet, for the part of our history that our government didn’t guarantee those things we enjoyed them in abundance.
Charles (comment 19):
We provide Social Security to our older and disabled citizens because it is the right thing to do since otherwise many would die in abject poverty.
Demagoguery doesn’t work here. We should be taking care of the poor, sick, and old. But to argue that if the government didn’t do these things that these people would just die is an irrational appeal to emotions. Not everyone in our society is as greedy and cruel as some would imagine. The responsibility to take care of these people properly lays with us as individuals according to our own free will.
(T)he Federal Reserve and other regulators allowed a housing price bubble to inflate beyond all reason.
You almost got that right… Let me change “allowed” to “manipulated”.
We do have our philosophical disagreements but let me point out a way that we almost agree. I agree that there are criminals in big business and the banking industries. I agree that they have played a big role in our economic crisis. What I am adding to that is the damage wouldn’t be nearly as severe if government weren’t involved to begin with. The fraud you speak of is government sanctioned. The banking cartel is government sanctioned.
You’re proposing that we add the ingredient of government regulation to business/banking when this combination has continually proved to hurt our economic freedom/prosperity. You admit that our current government is owned by outside interests. Shouldn’t this be proof that combining big business and big government is bad for all of us?
“Who says that government programs are inherently immoral?”
“We provide Social Security to our older and disabled citizens because it is the right thing to do since otherwise many would die in abject poverty.”
I believe they are most definitely inherently immoral. FIrst and foremost because they are born out of force. When you take away agency, you rob individuals of their ability to make the right choice and grow. Government welfare destroys self-reliance and individual responsiblity which weakens character. Finally, government programs discourage voluntary charity as those who would have helped don’t have the resources anymore or they assume the goverment will take care of the problem. The right thing to do would be allowing family/church to take care of their elderly and disabled and not steal from one person to give to another. You will be amazed at what a free people donate when they are given the fruits of their labor.
“what I’ve said is that the lack of such programs and an fidelity to so-called free market economic principles and limited government causes poverty. The data are clear on that subject.”
Hogwash! How can data be clear on something that doesn’t exist? The argument that our current situation is evidence of the failure of capitalism and free markets is utter nonsense. True free-market capitalism is not what we have today nor for the last 100 years. True free market capitalism cannot exist in a world where privately owned central banks bastardize free markets by manipulating the engine…money and interest rates.
“but the government we have is owned lock, stock and barrel by the bankers.”
I couldn’t agree more. The Democrats on the Left and the Republicans on the Right are just two wings of the same Turkey! We have a one-party system masquerading as two. If you feel yourself cheering for one side or the other google Tommy Douglas’ Mouseland speech and see how true it rings to our current situation.
Well, let’s talk about the areas where we agree. Jim says “I agree that there are criminals in big business and the banking industries. I agree that they have played a big role in our economic crisis…The banking cartel is government sanctioned.” Mike agrees that the the government is owned by the bankers.
The first order of business is to get the bankers and the other wealthy special interests out of the people’s government. We will never have a decent government if we permit Wall Street to run it. Both of our political parties are in the clutches of the “malefactors of great wealth” (as FDR called them).
The banks spent $5B over 10 years on campaign “contributions” and lobbying so they could destroy federal regulation that interfered with their ability to defraud their investors. They’re still spending a fortune to make sure no new regulation is put in place – and judging from the Rep/Dem proposals for financial reform, that “investment” is working.
In a capitalist society, money talks and if unregulated its voice will drown out the needs of the people, the restrictions of the Constitution, and stifle dissent. If you look carefully at the think tanks and foundations that agree with your economic and political views, you will find the same interests that have usurped the power of the American people over their own government.
Charles,
Assuming that you understand the differences between true free market capitalism and the corporatism (pseudo-capitalism) that we have now then I’ll defend the true free enterprise system without fear of you confusing the two.
First off, let’s define terms:
Capitalism comes from the word “capital”- the means for production (e.g. tools, machinery, money etc).
Free market enterprise is a self regulating system where all parties are free to transact with one another and individuals have full private ownership of their capital. But where force, fraud, or injury damages one party- the government’s only legitimate role is to punish the offender and vindicate the victim. Under a true free enterprise system, government is to be a negative force- protecting/safeguarding rights to life, liberty, & property.
Socialism is state ownership of capital/industry. Government regulates transactions and allocates capital (redistributes wealth). Under socialism, government is to be a positive force- providing benefits and privileges to certain parties.
The difference between the two economic systems I just listed is who owns the capital. The socialism that you are apparently advocating has an obsession with capital. Instead of leaving people and their property alone, the system’s primary objective is for the state to claim ownership of private property and to treat people and their property as capital.
This video plainly explains the differences and consequences in political/economic systems.
If you look carefully at the think tanks and foundations that agree with your economic and political views, you will find the same interests that have usurped the power of the American people over their own government.
Dido.
Jim, I understand your desire to differentiate between what you call capitalism and corporatism (a term I think we both use to mean the same thing). My problem is that both the capitalism and socialism you describe are utopian ideals, not actually practical ways to operate an economy in the long term.
If we allow a market to self-regulate and restrict government’s role as you describe, we will in rather short order come to a situation where a small number of individuals or corporations own an overwhelming percentage of the property and capital and the majority merely subsist. Also, it is perfectly natural that the winners in the free market system will begin to view government as a natural ally and will usurp control in order to increase their power and wealth. I think you would agree that the Founders did not set out to develop a corporatist state, but we were well on our way to that condition within 60 years after the Constitution was ratified and after the civil war, we had almost unbroken corporatist control until the Great Depression.
Socialism too, in its purist state as you describe it, also fails rather miserably. I would never advocate such a pure form of socialism, and since I prize democracy, I doubt any electorate would put up with such a system anyway.
Essentially we have a power struggle. If I value private property, free enterprise and a small role for government, then I have to find some way to prevent corporations from taking over and running the entire economy for the benefit of their executives and shareholders – in other words, corruption. If I value equitable distribution of goods and services and health and welfare of all citizens, then I have to find some way to prevent bureaucrats from stifling innovation and progress and create incentives that promote economic growth.
I come down on the side of a mixed economy. Let corporations or entrepreneurs own and operate the means of production, but have enough government regulation and democracy to insure that they do not grow to an anti-competitive size, that they do not interfere in government, and that their business redounds to the good of the nation as a whole as well as their shareholders. If the market is unable to provide a necessary good or service at a reasonable cost, then the government should step in, but private enterprise should first be given every opportunity (short of government bailouts) to make the market system work.
Charles,
I see two points where some confusion may reside here. First is in what we mean by “regulate.” I’m confident that we all agree that government should monitor the practices of businesses and ensure that they are not doing anything unethical or which would restrict competitors from any ethical practice they might pursue. The argument that government should ensure that businesses do not grow to an anti-competitive size exposes the false assumption that sufficient size is inherently anti-competitive. The only thing we have to ensure regarding how large a business or businesses grow is that we have the moral and mental fortitude to allow them to fail even when it is uncomfortable for the rest of us.
Having government ensure that the produce of businesses redound to the good of society mistakenly implies that a legitimate and ethically run business could possibly do anything other than benefit society.
The second point of confusion rests in the assumption that government is capable of proactively providing a necessary good or service that the private sector cannot provide at a reasonable cost other than some of those which are ennumerated in the Constitution as properly being the role of government.
I am confident that any good or service you would argue that private enterprise cannot provide at a reasonable cost will either fall under the ennumerated powers in the Constitution, be shown to be not actually necessary (no matter how desireable), or else government will be unable to provide it at a cost that is even as reasonable as what the private sector can provide (especially once any government accounting illusions are factored in).
Our problems today are related to ethical businesses being stifled by overregulation while large businesses are being allowed oftentimes to engage in unethical practices while regulators look the other way. More regulations will stifle ethical businesses further while the regulators continue to turn a blind eye to any unethical practices by large businesses.
For example having government regulations insist upon lenders providing home loans to people the market has determined are unable to afford the homes does not make home ownership any more truly affordable but it does open the door for unethical lenders to peddle sub-prime mortgages which later bankrupt people who often were already the poorer among us.
As to your first point, I see no earthly reason why we should allow a business to grow to the point where its failure threatens the economic well-being of the entire nation. We also must acknowledge that it is not the purpose of corporations to compete, the purpose is to win and eliminate competition. Monopoly power is never in the best interest of the nation or the consumer, so again why should we permit it? This is the economic equivalent of permitting the kids to play with matches around the house and simply having the moral and mental fortitude to allow the house to burn down to teach them a lesson.
Private enterprise can provide any service as long as that service can be provided at a profit. I would agree that most services can be provided with a reasonable profit, but corporations, unlike family businesses, cannot be satisfied with a reasonable profit, but must continually increase profit and shareholder value. If we have a public service for which demand is inelastic but for which a significant percentage of people cannot pay a price sufficient to meet the corporation’s demands, then we have a problem. Either prices rise to the point where many people cannot afford the good or service, and/or the quality of the good or service declines to that which can be delivered for a lower price.
The problem of regulation you point out is true primarily because we permit large unethical businesses to corrupt government so that the laws are written to exclude them while the burden falls on their more ethical and generally smaller competitors. This is a failure of government to regulate equitably due to corruption, not over-regulation.
In the home finance example, I would agree that the government should not have encouraged home ownership, since that had the effect of increasing the amount of household debt. The Federal Reserve failed to act to deflate the housing bubble instead working to inflate it, and it should have been obvious that the combination would at some point explode. The government failed to require banks to actually retain and service their own mortgages and failed to maintain adequate capital requirements on banks. The government also failed to regulate or prohibit the market in derivatives that magnified the effect of the bubble and its ultimate collapse.
As I said earlier, there is always a power struggle in the economy. The only force large and powerful enough to prevent corporatism and to mitigate its effects is the federal government. If Washington fails to exert that authority, we can expect more bubble and burst, and eventually something more akin to the rampant corruption of post-Soviet Russia.
There has never really been such thing as a monopoly. Think about it. Free markets, being self regulating, will always have multiple corporations competing to give the best product/service for the cheapest price. If a company provides these things so well then they might crush their competition. This isn’t necessarily bad (computers vs typewriters, cars vs buggies). Hypothetically, if a company actually became a monopoly, free from government involvement, and began to unfairly raise their prices then another company would naturally prop up to compete. I propose this hypothetically because there has never been a true monopoly in a true free market. We do, however, get cartels when government is thrown in the equation.
You propose that government is the only force large enough to mitigate the effects of corporatism but what I’m saying is that government is the only force which makes corporatism and cartels possible. You don’t trust big business but you do trust big government. I don’t trust government because, like business, it naturally exists to enlarge itself and retain power/money. Unlike government though, a free-market business can’t use the element of force when things don’t go their way. Government, unchecked, perpetuates its existence gaining power at the expense of the people’s freedom and property.
Both government and business need to both be in check but the responsibility lies with the people. I don’t trust either the government or business to keep the others in check. I realize that there are negative consequences to freedom. But as Thomas Jefferson put it:
I would beg to differ with you on the subject of monopoly. If one company so dominates a market that consumers have no viable alternatives, that may not be a pure monopoly but it has the same liabilities.
If you leave business unregulated, then it will naturally move to control government and use government to achieve its market goals. Because government has both great inherent power and a nearly endless source of revenue (either through tax or debt), unregulated business will always try to co-opt it.
I don’t trust government if it leaves business unregulated because government itself will become corrupt as a result. That’s exactly what has happened here in the US. Responsibility for checking the excesses of government and business does lie with the people, but the people cannot exercise that responsibility effectively as individuals or through state or local government.
At some point, we have to realize that the contest is not between “big government” and freedom, the contest is between property and people. If property controls government, then it will use government to increase its profit and undermine the people’s freedom. If people control government, they can insure that property rights are respected while maintaining the balance of people and property. The Founders created a structure that balanced those interests, but American corporations in their day were far less powerful then than they are today. Where the Founders were worried about the people usurping the interests of those with property, we are in the opposite position. How do we regain that balance?
Business will naturally move to control government to further their market goals only so long as government is permitted to manipulate the market. If the people insist on keeping the government limited so that it is not permitted to take any active role in the market – in other words leave the government role limited to defending against corporate manipulation of the market – then businesses will have to find other tools to further their interests.
Big businesses are desperate for people to continue to believe that small businesses cannot compete with them, and in the realm of manipulating government it is largely true, but so long as a business is not satisfying the demands of the market it can never be so big as to be immune to competition no matter how small if the market is free.
The way to regain the balance then is to take away the biggest tool that businesses have – government as a positive force in the market rather thana defensive force.
If business is allowed to manipulate government then they will insist that government support them with tax breaks, subsidies and bailouts and they have the money to get what they want no matter how much people “insist” on limiting government’s role. You and I can complain all we want but if big businesses can spend unlimited amounts of money on candidates for office, lobbyists in the halls of legislatures and media campaigns, the voice of the people cannot hope to balance them.
The way to regain the balance then is to take away the biggest tool that businesses have – their ability to use corporate funds to influence the political process and control the media.
Charles,
You’re focusing on limiting the free market to achieve these ends. We’re advocating limiting government.
Limiting the free market destroys liberty. Limiting government helps to preserve it. Limiting the free market has never taken away the government/business relationship. Limiting the government to its proper role has prevented corporatism (like when our government followed the Constitution once upon a time).
Jim, you can’t limit government if it is controlled by those who want it corrupted to serve their interests. The reason our government wasn’t under the thumb of corporations for it’s first few decades was because government controlled them.
Corporations were originally chartered by the states for specific functions and if they failed to carry out those functions or if they violated the law, the state revoked their charter. They did recognize the danger these entities possessed, as Thomas Jefferson wrote in 1816 “I hope we shall… crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country.” Now that aristocracy runs our country, dominates our markets, our media, and our political process. Regardless of the model of government you favor, you will not achieve it if you have no influence over it.
The free market as you seem to characterize it is a myth. I recommend this article by David Korten on the subject. He makes the argument better than I.
Charles,
How exactly do you expect government to effectively regulate businesses when, as you say, government is controlled by those who are using it to serve their business interests?
David, I am presuming that the people would have to regain control over the government before it would even attempt to effectively regulate business. I don’t know how or even if “we the people” can regain control, but if we ever do, we will have to then regulate business in order to keep control.
The only way that we the people can regain control of the government is to pursue every effort to reduce it’s size and scope.
Au contraire. Small government is the goal of the corporations. Small government with no regulation and low or no taxes. Small government privatizing every possible function with little or no oversight so that taxpayer money can be funneled directly into their coffers.
First, we have to eliminate corporate money from our political process, then we have to strengthen the people’s government so that it will be able to hold the power of corporations in check. Then we can discuss the optimal role of government.
If small government is the goal of corporations and corporations control government then why is government growing by leaps and bounds?
Perhaps you and corporate America have a different definition of small government, or perhaps you and I have a different definition of government growth.
I’m now confident that you and I have different definitions of government growth and it is entirely possible that me and Corporate America have different definitions of small government.
I am still confident that my definition of small government is the solution and according to my definition of government growth the government has been growing by leaps and bounds. Based on that anyone should be able to make a pretty fair guess about how I define government growth.
The government growth that worries me is the growth in the power it has over citizens, specifically the usurpation of the rights granted in Amendments 1 through 8 as they apply to individuals. (I don’t believe those rights should apply to corporations, only to the people who own them and work for them.) The bailouts and health insurance mandates worry me, but not as an examples of growth, but as examples of corruption.
I certainly don’t believe that small government will solve any of our problems. Smaller government is weaker government and weaker government is more easily corrupted.
Unless you can cite examples to the contrary, big government is corrupt government. I prefer a government that “is more easily corrupted” to a government that is already corrupted.
Then you will need to root out the corruption of government by corporations and banks which will require….
… returning government power to the most local possible level of government for each given government service where people have the best chance to keep watch on government and keep it’s powers in check.
You may want to read Matt Taibbi’s article on the Rolling Stone site about Jefferson County Alabama to see how well people are doing keeping a watch on local government.
There is no guarantee that people will effectively keep watch on local government. What is guaranteed is that they are better able to watch local government than distant governmen.
If the people fail to watch government who will watch it? I certainly would not count on big government to police itself in any less selfserving a fashion than big business.
The key to any effective watch or control on government at any level is to remove the corrupting power of corporate money and keep it away. We cannot possibly succeed at keeping corporate power in check without a strong federal government. Admittedly unless and until we get corporate power in check, a strong federal government is generally counterproductive.
It isn’t government that is the problem. It is the corruption of government and the corrosion of democracy.
That is much easier to do with local government than with distant government.
Walter Williams has a recent column on this issue. An excerpt: