Friday, February 7, 2020

China Should Stop Manipulating Its Economy

Why I Want China to Stop Manipulating Its Economy
(Psst...It's probably not what you might think)

In his State of the Union Address--February 4, 2020--President Trump outlined his reasons for punishing nations like China that manipulate their economies in order to achieve some internal policy goal. The president claimed that such manipulation was unfair and harmful to its trading partners. The president's main concern is that by manipulating its economy China "steals" jobs. It does this in several ways.

 1. By keeping the yuan at a lower exchange rate with other currencies--meaning that the People's Bank of China gives more yuan for each dollar than would occur in a free currency market--Chinese goods are cheaper in terms of foreign currency than they would be otherwise.

2. By subsidizing its industries, Chinese goods can be offered at a lower price.

3. By erecting tariffs against some imported goods, China prevents foreign companies from producing more and employing more people than they would otherwise.

The president claimed that his policies were working...that manufacturing jobs were returning to the US and have created a "Blue Collar Boom" with unemployment statistics at very low levels for many politically sensitive segments of the labor market.

I agree with the president in his desire that China cease manipulating its economy, but my reasons are not the same as his. More importantly, I would not recommend reciprocal interventions to punish China. Instead I would follow the Barron maxim of "minding our own business and setting a good example". I would point out the following consequences of Chinese economic interventions.

1. China itself pays for the interventions, not its trading partners. In fact, Chinese economic interventions constitute a transfer of wealth from China to its customers overseas. Goods that previously cost X in the US market now cost less than X. Americans pocket the difference which increases our wealth. The Chinese people pay high taxes or higher prices. China's subsidies to business distort the Chinese economy away from producing other more desirable products. (If this were not the case, there would be no need for subsidies.) Its tariffs on imported goods reduce supply within China, leading to higher prices and/or shortages within China. In other words, Americans and the rest of the world benefit at the expense of the Chinese people.

2. In the short run this is good for Americans, so why should we complain? Remember that I pointed out in number one above that Chinese economic interventions are good for Americans in the short run. What about the long run? By intervening in its economy China weakens its productive capital base. It is this capital base that will pump out the many things desired by Americans in the future. Anything that weakens a trading partner's capacity to generate wealth means that its trading partners will be less wealthy too. Therefore, even loyal Americans should advise China to eschew economic manipulations that benefit them in the short run. No one ever explained this phenomenon better than Frederic Bastiat in his classic essay That Which Is Seen, and That Which Is Not Seen. Henry Hazlitt brought Bastiat's insights up to date in Economics in One Lesson. There actually are two lessons. The first is that one must consider the consequences of an economic act not only upon those who will benefit but also those who will be harmed. Of course, it is usually easy to point out those who will benefit. It is difficult if not impossible to quantify those who are harmed, especially if the harm constitutes benefits that never occurred but would have absent the intervention. Hazlitt's second lesson is that one must look not only to the short term benefit of an economic act but also to the long term costs. For example, steel import restrictions may result in a boom for the US steel industry with no apparent short term consequences. But if US steel were already competitive in terms of price, quality, and service, there would be no need for import restrictions. Therefore, we can conclude through economic logic that steel prices, quality, and/or service will deteriorate, harming Americans in the long run.


The president measures economic progress by an increase in employment and/or a decrease in unemployment rather than an increase in wealth. Laboring more is not necessarily a sign of economic progress. Communist countries, such as the former Soviet Union, had zero unemployment! The state chose a job for everyone. But no one would claim that decades of full employment made the unfortunate citizens of the Soviet Union wealthier. The opposite occurred. In a free market economy without the burden of onerous labor laws, high taxes, and other interventions, there is no barrier to full employment for the simple reason that there is no limit to economic satisfaction. Even a frugal person who desired no additional economic goods certainly would be pleased that he need labor less to achieve and maintain his current level of economic satisfaction.

The greater China's capital base, the greater the potential for a further expansion of the division of labor to employ this additional capital more productively. We Americans should wish that the entire world were free market capitalist economies, so we would have access to cheaper, better, and more varied products and services. China's integration into the world economy has benefited Americans tremendously. So, Mr. President, I also want China to end its economic interventions, but I do not want to punish China through tariffs and other means for doing so. Our response should be to declare unilateral free trade. Let's lead the world by setting a good example and look forward to a world of peace and prosperity.

Saturday, January 18, 2020

My letter to the NY Times: Why the Predictions of Luddites Never Happen

In the closing paragraph of her review of Daniel Susskind's A World Without Work, Alana Semuels writes...

"The dire predictions of workers losing their jobs to machines have not come true in the past. That doesn't mean they never will."

If economics were an empirical science, Ms. Semuels would have a point. But economics is a deductive/a priori science. As such we can know without a doubt that increased productivity is a result of savings to accumulate capital in order to invest in processes to reduce the human effort and cost per unit of production of an economic good. Economic science is as true for labor as for any other scarce resource; i.e., man aims to economize its use. Unemployment, especially chronic unemployment, has other causes, mostly the result of policies recommended by Mr. Susskind, such as redistributing wealth through higher taxes. The most laughable of Mr. Susskind's concerns is that government must "create leisure policies to help people occupy themselves in a world without work." Is Mr. Susskind REALLY a fellow in economics at Oxford? I find that hard to believe.

Friday, January 3, 2020

Central Banks: Enemies of Freedom

Central banks are enemies of a free and prosperous society. Let me count the ways.

1. Like the military, central banks are creatures of the state. Suggestions of them being independent are pure fantasy.

2. There is a symbiotic relationship between central banks and the state. Central banks are created by legislatures with the full understanding that they will finance the state's spending, primarily war and welfare.

3. Since the main threat to freedom comes not from foreigners but from the state itself, central banks are willing accomplices in the state's attack on freedom.

4. Central banks are the source of fiat money expansion in society. In other words, central banks create money out of thin air. We commoners call this counterfeiting. Well, so does the state if done by anyone except the central bank.

5. As the source of money expansion in society, central banks are responsible for the boom-bust credit cycle. Main stream media falsely calls a central bank induced credit cycle as a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       business cycle, implying that it is business or free market capitalism that is to blame. Alasdair Macleod has explained in many essays why central banks and only central banks are to blame.

6. Central banks are responsible for excessive state debt. In a sound money environment, state spending is limited by two factors, both of which are natural. One, the state can raise taxes to pay for new spending, but the public's tolerance of increased taxes has a natural limit. Two, the state can borrow to pay for new spending, but it must compete for funds in the bond market to do so. Either it must outbid other borrowers and/or induce a shift in public sentiment from spending to savings. Either tactic causes the interest rate to rise. Spending falls and the cost of capital increases, causing a reduction in investment in the future prosperity of the nation. (Note that this scenario is opposite of the one touted by Keynesian economists, who view government spending as beneficial, especially when an economy goes into recession due to previous money and credit expansion by the central bank.)

7. The central bank funds an almost unlimited confiscation of resources by the state. Whether to finance war or welfare, in a sound money environment the people will begin to question the options to excessive government spending. Not so when the central bank creates money out of thin air. The consequences of central bank monetization of government debt are delayed and poorly understood. When these consequences can no longer be ignored--price inflation, unemployment, never-ending war, an expanding dependent class--the state will blame others.  Furthermore, it is likely to recommend even more of the same poison that caused the crisis in the first place--increase government spending to continue war beyond the public's tolerance, to save politically connected industries like banking, or to continue to buy votes through welfare expansion.

8. A corollary to number seven above is the corruption of public understanding and need for limited government. Unlimited money via the central bank makes it appear that the state can fund anything, especially in the short run. Of course, all spending programs then become short run necessities, as if the lack of government funded, free healthcare was an existential threat; whereas, healthcare is one of many economic products for which the public must make individual, rational spending choices. After all, there is no magic limit to how much is appropriate spending on healthcare. It is a subjective personal choice of each individual in society.

In conclusion, central banking is not compatible with a politically free and economically prosperous society. Through money printing the central bank empowers the state to confiscate resources beyond what the people would accept if the true state of affairs were known, as in a sound money economy. This is NOT self-government or limited government. Furthermore, central bank credit expansion causes capital decumulation. Spending becomes the goal, not savings. Individuals understand intuitively the harmful effects of excessive spending. When our personal finances are strained, we would not entertain the idea that the way to restore them would be to take long, expensive trips, buy expensive cars, etc. Of course not. We reduce our spending to well within our income. The excess of earnings over spending is savings, which is the lifeblood of any economy. So simple for the individual to understand, yet the lesson is sneered at by Keynesian economists when applied to government spending. Time for getting back to basics and away from Keynesian fantasy.