Facts don’t care about your feelings.
Last Thursday Ben Shapiro responded to my article “Why Ben Shapiro is Wrong on Free Trade” with his own piece: “Yes, Tariffs Are Still Stupid. Here’s Why.” He also talked about my article on the Ben Shapiro Show. Ben Shapiro made it crystal clear: he hates tariffs. But no matter how Ben feels, the fact remains: tariffs work.
Mr Shapiro begins with a call to authority fallacy—precisely the error I accused him of earlier this week. Shapiro states:
The reality is that my arguments on free trade have been supported by every major free market economist in history. . .
This is a tautology: of course most “free market” (read: Austrian School) economists support free trade—just as most American School economists support tariffs, or most labor economists support unions. Does the fact that most Marxist economists support socialism prove that socialism works? No. This is sophistry.
Shapiro is also a hypocrite: did he not make his name by ignoring the so-called “97 percent of climate scientists” who believe climate change is anthropogenic, or the (I imagine) 100 percent of gender studies professors who think biological sex and gender identity are different? Why is Ben Shapiro so willing to ignore “experts” on climate change or feminism, yet treat them like (false) gods when it comes to economics? Shapiro would be wise to remain ever-skeptical, and heed the following aphorism:
Take not the merchant at his word, but trust only by the skin of his fruit.
Finally, Shapiro says the articles I cited “do not mention tariffs”, and they are therefore irrelevant. This is like saying a paper on Elizabethan England, that never mentions Shakespeare, is irrelevant to studying Shakespeare—really? This is the difference between scholarship and parroting: my sources lend support to a novel conclusion, while Shapiro clearly googled “path-dependency” and cited the first book he could find—a case study of Microsoft.
While the book does discuss path-dependency, it does so explicitly within the context of a single industry, and makes no claim that the findings should be applied between industries. There is a big difference between supporting Microsoft relative to Apple or Google, and supporting America’s IT entire industry relative to foreign competitors. These are different debates, and the nuance is clearly lost on Shapiro.
Shapiro claims that I favor “total state control of the economy” because I think it is possible to “simply pick the best industries and subsidize them.” Apparently tariffs are communism, and I am Stalin. Not only is this not what I said, but Shapiro has it entirely backwards: tariffs are the form of taxation most consistent with small government. There are a few reasons for this.
First, tariffs are an entirely avoidable tax: if you don’t want to pay them, buy American. Simple. I wish the same could be said of income, property, or general sales taxes.
Second, tariffs are antithetical to big government because they preclude socialism. How? Tariffs make imports expensive. This encourages domestic production and discourages offshoring—thereby boosting demand for American labor. Basically, tariffs create stable jobs and increase wages for American workers. Furthermore, because labor-intensive industries are the first to be offshored, as economist Ian Fletcher notes, tariffs inevitably protect more jobs than free trade generates.
The key to this puzzle is recognizing that employed Americans are less likely to elect socialist governments, because they will not benefit from the policies. The converse is likewise true.
Consider what happened in America’s rustbelt. This region used to be a Republican stronghold. However, when millions of people began losing their jobs because of offshoring—caused by asymmetrical trade—the region turned blue. People voted for socialism to insulate themselves from the ravages of economic globalization. Socialism was a direct, and sadly iatrogenic response to free trade. I say iatrogenic because it did more harm than good: Democratic governments raised taxes and imposed regulations that further crippled American industry. They made a bad problem worse.
Shapiro must answer this question: were the alleged gains from freer trade with communist China worth the proliferation of socialism in America? Was saving $2 on your $1,000 computer worth decades of Democratic governments, who damaged our economy with higher taxes and more regulations? I doubt it. We cannot limit our discussion of tariffs to their economic consequences—political reality forces Shapiro to choose: tariffs or socialism? What kind of “big government” does he want?
I choose tariffs. Shapiro chooses socialism.
Reality also confronts Shapiro with a second dilemma: whose government? If America imposes tariffs, then our government “controls” the economy. But without tariffs, American companies must compete directly with foreign, government-backed rivals—who will outcompete them because of market asymmetries. Thus, America’s economy will necessarily be “controlled” by a government, whether American or foreign.
I choose America. Shapiro chooses China.
Milton Friedman’s secretary
In his article, Ben Shapiro never directly addresses my argument against comparative advantage’s domain-specificity. Instead, he quotes some liberal dogma from the Mises Institute. This is not compelling.
Shapiro should (re)read 7.18-19 of David Ricardo’s On the Principles of Political Economy and Taxation, in which Ricardo acknowledges that comparative advantage is premised upon capital immobility—otherwise there is nothing to stop offshoring. Likewise, his theory is premised on the exchange of goods-for-goods, which necessitates a balance of trade. The fact that we can sell assets and debts in exchange for goods changes the theory’s application entirely. These facts cannot be denied.
Shapiro does attempt to defend comparative advantage on his show, by parroting Milton Friedman’s lawyer-secretary analogy. The analogy can be found in chapter two of Friedman’s book Free to Choose. It runs as follows: there is a lawyer and a secretary. They do legal research and typing. Although the lawyer is better at both, he is far better at legal research than typing. Conversely, although the secretary is worse at both, she is far better at typing than legal research. Therefore, it makes sense for them to work together and specialize in what they’re best at: the lawyer does all the legal research, while the secretary does all the typing. In the end, cooperation makes them both richer—just like international trade.
This analogy’s power comes from its simplicity—why wouldn’t they work together? Of course free trade makes sense. The problem is that this analogy, like the theory of comparative advantage, operates only according to endogenous rules and it lacks a time-horizon.
Regarding endogeneity: Friedman’s analogy follows built-in rules, and the conclusions are only valid insofar as those rules are true. If they’re not true, then there is no reason to believe the analogy. In this case, the analogy’s rules are untrue: while the arrangement makes sense from the lawyer’s perspective, it makes little from the secretary’s. If the secretary really wants to get rich, she should study law and likewise become a lawyer—even a bad lawyer earns more than a good secretary.
In reality, it is far better to be bad at a good job than good at a bad job. The same is true of industries—it’s better to have a small slice of the computer industry than a big slice of hay-farming. Comparative advantage does not differentiate between industries, and this is its fatal flaw.
Regarding time-horizons: this simply means that comparative advantage only purports to tell you what trades are efficient today, not if they are good investments tomorrow. As such, it is literally useless when it comes to policy-making. If we want to make America rich again, we need to look to the future, not live in the present. We need to think like businessmen—not economists.
a pound of flesh
On his show, Shapiro explains why trade deficits are not a problem. His analogy: you technically have a “trade deficit” with your butcher because you exchange money for steaks, but this isn’t a problem because both parties get what they want. Likewise, you have a “trade surplus” with your employer—but this is also good because both parties get what they want. There is nothing inherently wrong with deficits. Therefore, the same is true of international trade: China gets money, America gets goods. Furthermore, the money we pay to China eventually flows back to us, since American money must be spent on American stuff. In a sense, there is no deficit—the payments are balanced.
This analogy is junk.
America does not run a trade deficit with just China, we run a global deficit. In Shapiro’s analogy, he would not just run a deficit with his butcher, but also the baker, and the candlestick-maker—everyone. Furthermore, he would run this deficit for decades. How would he pay for the goods, you ask? He would either need sell his furniture (assets) or run-up his credit carts (debt). In either case, Shapiro would eventually run out of money and need to reduce his consumption, or increase his earnings.
This is what’s happening to America: we’re funding our trade deficit by selling assets and debt.
Regarding assets: foreign investors, flush with American cash, now own 20 percent of all American equities. This is up from just 12 percent in 2007. Likewise, foreigners buy billions of dollars’ worth of physical property in America—everything from penthouse suites in New York to ranches in Oklahoma. In 2015 alone, foreigners bought more than $100 billion in American real estate. Basically, we are trading ownership of our nation for foreign trinkets.
Regarding debt: foreigners loan us money so that we can buy their goods, otherwise we could not afford them. This is reflected in America’s growing debt burden. For example, foreigners now own 44 percent of America’s national public debt, valued at over $6.3 trillion. They likewise own large amounts of our private debt, including 29 percent of all U.S. corporate bonds. Debt is especially pernicious: not only must we eventually repay the principle sum, but we also owe interest, which will cost taxpayers trillions over the coming decades.
We are living in history’s greatest consumption bubble. Eventually, it will burst. At that point we will be worse-off than if we had never ran the deficit to begin with. History and theory attest to this truth. For example, Great Britain ran a large and persistent trade deficit at the end of the Victorian Era, which contributed to the country’s economic decline. Likewise, the Nobel Prize-winning economist Joseph Stiglitz has shown that chronic trade deficits inevitably lead to consumption declines when the bubble bursts. In fact, his models suggest that it’s a “mathematical certainty.” The piper always gets paid.
We are selling our inheritance, and shackling our children with debt to pay for cheap pencils and tacky bobble-heads. Apparently Ben Shapiro is fine with this.
semiconductors, not soy
Ben Shapiro claims that tariffs are ineffective at spurring economic growth because we cannot know which industries will generate it:
. . .you cannot tell which sectors will be the most profitable, because you cannot tell the future, which means that government is far more likely to “lock-in” particular pathways than to spur future growth. . .
While it’s true that we cannot know which industries will generate economic growth, we can forecast which are the most likely to generate growth.
Research from the Brookings Institute finds that nearly all of America’s economic growth in recent decades was generated by our advanced industries—those which focus on inventing new technologies. Examples of these include America’s advanced manufacturers like Boeing, and information technology (IT) companies like Apple. Although these advanced industries employ just 9 percent of America’s workforce, they file 85 percent of all patents, provide 90 percent of private sector research dollars, and employ 80 percent of all engineers. As such, these industries are far more likely to generate growth than are America’s horse-and-buggy industry.
This should come as no surprise, as technological advancement is the engine of long-run economic growth. This observation is supported by both the preponderance of economic history and modern non-linear mathematics. In his book Antifragile, the stock trader-turned-philosopher Nassim Taleb shows that economic growth is non-linear, and depends upon “black swan” events—those which are both highly consequential yet highly improbable. Good examples of these are the invention of the printing press, the steam engine, or the microchip. Importantly, economies without access to these technologies could never be a wealthy as those using them, no matter how freely they traded.
Tying to this is the fact that invention builds on invention, creativity feeds creativity. That is, a Paleolithic tribe could never invent steel, because they did not know how to work iron, nor could they invent bronze because they did not know how to work copper. Knowledge and technology build upon what came before. So too does economic growth—this is path-dependency.
Shapiro’s claim that we cannot distinguish the growth potential of industries flies in the face history, logic, and common sense. Does he really think America’s soy farms have as bright a future as our IT industry? I doubt it. In fact, I know he doesn’t. On episode 399 of the Ben Shapiro Show, Shapiro said (emphasis mine):
There’s a weird misconception about the economy, and that is that every dollar that is spent is equally helpful for the generation of a healthy economy. This is untrue. If I spend a dollar on a hamburger, this is not nearly as helpful to the generation of a stronger economy than if I spend that dollar investing in hiring someone to grow the Daily Wire.
The reason for that is that I’m inventing new products and services at the Daily Wire. The reason that your life is better twenty years ago, the reason that you have cool new stuff, the reason you can go on a computer. . . is because people were innovative. Because people created new products and services. . .
A lot of the people who generate new things. . . they generate lots of new things. It’s not that they generate one new thing and then they’re done: they generate lots of new things with that money. Or they give it to a bank, and do you know what the bank does? It doesn’t invest in hamburgers, it goes and invests in new businesses that are generating better products.
In this quote, Ben Shapiro acknowledges that (i) not all industries are of equal value when it comes to economic growth, (ii) economic growth depends upon technological development, and (iii) growth is non-linear in that certain individuals (or industries) generate most of it.
Wait a minute! Shapiro just said that we “cannot tell which sectors will be the most profitable.” Which Ben do we believe? This is a perfect example of domain-specific knowledge in action. When Ben Shapiro has his “businessman” thinking-cap on, he acknowledges that you can tell which industries are most likely to generate economic growth—he even gives us an example. Yet when he has his “economist” thinking-cap on, he denies this categorically. This is what happens when you parrot sources without evaluating them for yourself.
Assuming Shapiro acknowledges these three facts to be true, he should also acknowledge that the best way to grow the economy is to cluster those high-value industries in America that are the most likely to generate new technology. To do this, we need tariffs.
Right now America’s advanced industries are moving abroad at an alarming pace. According to the Brooking’s Institute, America’s trade deficit in advanced industries was $632 billion in 2012, which is “in line with similar yearly balances since 1999.” Meanwhile, the US Census Bureau reports that America’s trade deficit in advanced technology products was $110 billion in 2017. Furthermore, America ran a deficit in the sector every year since 2002—before this, America ran surpluses. Although the reports use different methods of categorization, and thus arrive at different numbers, they tell the same story: America used to build the future, now we buy it.
el Condor Pasa
When Ben Shapiro says he opposes tariffs and supports “free trade”, what he means is that he supports asymmetrical trade. That is, American businesses compete against foreign, state-backed businesses and inevitably lose—regardless of whether they are more efficient or produce better products. Remember from my previous article: efficient American factories are the ones moving to China, not relatively inefficient German factories. Likewise, American, not Japanese, IT firms are moving to India.
Asymmetrical trade kills American businesses and makes us poor. Consider that Chinese firms can operate in America, but American firms cannot generally operate in China unless they partner with a Chinese firm. This is exceedingly common in the IT industry, where American technology companies trade technology for access to Chinese consumers—only to face insurmountable competition from Chinese copy-cat companies months later. Tied to this is the fact that Chinese companies (with the government’s tacit blessing), steal over $500 billion worth of American intellectual property every year.
How can American businesses compete against China’s monolithic government? They can’t. Nor can they compete with Germany’s feudal-industrial system, nor Japan’s keiretsus. Those who demand free international trade must recognize that tariffs are not the only impediment—different legal structures, business models, and economic philosophies preclude free trade, and guarantee that liberal “free traders” will get screwed.
This explains why all successful historical economies adopted economic nationalism, as opposed to liberalism, as their modus operandi. History shows us that any time a nation embraced free trade, said nation was plundered by foreign nations. For example, free-trading Britain was flooded with artificially cheap German goods at the end of the nineteenth century. This undermined British businesses, and deprived them of the capital they needed to expand. British industry starved, economic growth plummeted, unemployment increased, and Britain lost her status as the first among nations. What is currently happening to America is eerily similar, and it’s no coincidence, it’s just what happens when the hammer becomes the nail.
Ben Shapiro should step out of the ivory tower and into the trading pit—he should walk the kill-floor, break rocks with his hands. Perhaps then we would learn how economics really works. America doesn’t need more economists. We need businessmen. We need industry. We need tariffs.
In the end, President James Monroe said it best:
. . .whatever may be the abstract doctrine in favor of unrestricted commerce, [the necessary conditions of reciprocity and international peace] have never occurred and can not be expected. . . [reality] imposes on us the obligation to cherish and sustain our manufactures [through tariff protection].
History may not repeat, but it does rhyme. Always remember this.