Wednesday, 23 September 2009

When myth meets economics

Economists get a bad rap a lot of the time. And, on occasions it is well merited. But more often than is commonly imagined fault lies in alarming widespread and firmly held beliefs that support damaging policies by government.

Trade is a goldmine of examples. Take the experience of the Great Depression. One feature of the this tragic period in modern history was a descent into protectionism and an unwillingness to trade (i.e. import) goods and services from other countries. The graphic below is modestly famous, appearing in an Economist article on the Hawley-Smoot Tariff, that was arguably the catalyst to a general retreat into economic isolation around the world. Some think it ugly, or contrived, but I find the chart illustrates the annual contraction in the volume of trade. Each circle encompasses an amount of trade which gets smaller and smaller. Hawley-Smoot brought into effect more than 800 different tariff increases. Naturally, other countries followed suit. The result was less trade.

While supporters of these tariffs might try to maintain that the affect was as intended (keeping out foreign imports in favour of domestic production), they might baulk slightly when one explains that the chart below shows the decline in total world exports; most anti trade proponents tend to be of a mercantilist flavour and believe, no insist, that imports are bad while exports are good. Everyone was exporting less. This is of course a trick, every import is in fact an export, but the point is valid. There are no exports without imports. A type of Yang and Yin if you like.

What you don't see when you look at this chart is the loss in income and welfare around the world as we stopped trading with another.

That is an interesting trip down memory lane, but what relevance is it for today. Well there is more than one point to make.
  • Firstly, economists fight a never ending battle against the enemies of trade. Strangely, over time, this continues to be the overwhelming proportion of the population.
  • Secondly, trade protectionism is a classic knee-jerk response that comes at time of recession. It is intuitive, but badly flawed, to believe that you can "save jobs" by buying locally produced goods or services only or preferably.
  • Third, we are facing a rising specific threat at the moment. This is partly related to the point in the economic cycle in which we find ourselves, with unemployment high and rising nearly everywhere. But we also have to deal with Climate Change catastrophists who are lobbying and legislating for taxes on anything with a carbon-based energy component in it. Unfortunately, that is everything, because the use of energy has been the bed rock of our improving welfare ever since man lit his first fire and dramatically reduced mortality from hypothermia, nocturnal predictors and bacterial infection from eating raw meat. And given our present technology there is no cost comparable alternative.

One of the darrrrlings of the Climate Change Catastrophe industry is the Waxman-Markey Bill in the US which has plans to place an explicit or implicit tax on fossil fuel use. This would increase the cost of energy as a way of reducing its use. However, such a law introduced in the US would simply mean that production would move overseas. So the Bill has provision for tariffs to be applied to imports of goods from other countries. Bad news.

It doesn't end there, Nicolas Sarkozy is a fervent admirer of such an idea (what, an anti trade Frenchman???) as it could also help square the political circle for the EU thinking of doing something similar.

And people lap it up, keeping out those nasty imports.

I live in dread.

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