Category: Markets

Nations Cannot Win or Lose Trade Wars

~ Jim Berger ~ Leave a comment

Nation-states have no resources of their own. They redistribute the resources of their citizens. Nation-states can neither win nor lose when they play with other people’s resources. Tariffs and other weapons of trade wars disrupt normal trade; helping one group at the expense of another.

Illusion of Trade Deficits

The concept of trade wars begins with the illusion of trade deficits. When looking at the economy as a whole, trade deficits simply cannot exist. An economy, as a single unit, does not exist. An economy consists as a network of individual transactions. Thus, any comments about “an economy” require that we look at the nature of those individual transactions.

When a consumer acquires any good or service, by voluntary means, he always gives something in exchange — something he values less than what he gets. Thus, because the parties to an exchange leave with more value than they enter, no deficit can exist in any individual transaction. To make an hypothetical accumulation of all consumer transactions in an economic system the same logic must apply.

Buyers will always give money for the products they buy, whether from a local supplier or from a supplier in another country. Consequently, no deficit exists.

What Happens to the Money?

If a buyer always pays money for goods that he receives from overseas, what happens to that money?

One of three different things can happen to that money:

  • That money pays for products from the country of origin. Those purchases count as exports from the country of origin and thereby reduce the trade “deficit.”
  • That money acquires investments in the country of origin. Those investments, although not included in the GDP, have future benefit for that country.
  • That money buys government debt, which provides money for government giveaways. Those giveaways add to consumption and thereby the GDP. Not a bad thing from the policy-makers’ perspective.

How Do Tariffs Help Nation States Win War?

Only nation-states engage in “trade wars.” Peaceful traders have no incentive to engage in unhealthy activities.

The people involved in actual exchange do so voluntarily and peacefully. If they don’t like the terms of the exchange, they either renegotiate or abandon the transaction.

Since nation-states have no resources of their own, their actions — either through trade restrictions or tariffs — simply redistribute the resources of their own citizens. Nation-states have no weapons of their own for the conduct of trade wars; thus, they have no way of either winning or losing.

Trade Wars Cause Economic Disruption

The trade wars between nation-states disrupt the economies that they profess to help. In an effort to assist one part of the economy they always cause disruptions in other parts of the economy. The policies used in “trade wars” ignore the complexity of the markets with which they deal. For every player their policies help, multiple parties get hurt.

A couple of diagrams will give a very simple idea of the disruption caused by trade wars using tariffs.

Before Tariffs

This first diagram shows the situation before the implementation of tariffs. The consumer buys good G from supplier F (a foreign supplier) instead of buying the same good from supplier A (an American supplier) because it costs less money.

With the money the consumer saves he can buy products from other suppliers. The money earned by those other suppliers can, in turn, buy additional goods from an undetermined number of other suppliers (depicted by the cloud at the bottom).

The consumer gets more benefit and part of that benefit gets passed on to the rest of the economy.

After Tariffs

After the imposition of a tariff, which makes the price of good G from supplier F higher than the price from supplier A, the consumer will have to pay a higher price for the same product. This causes a chain reaction of negative results.

The consumer no longer has the extra money saved. He reduces his spending with other suppliers. The revenue of these other suppliers declines, and they spend less money with their suppliers. An indeterminate number of people in the economy get hurt as a result of the imposition of tariffs.

Please keep in mind the extreme complexity of international trade. A small intervention at one point in the trade process will have effects that ripple throughout the national economy and the international economy. We have no way of measuring the effect of these interventions. Because they always cause a disruption the normal trade process, these interventions will always have negative consequences.

Conclusion

Nation-states can gain only one thing by engaging in trade wars: political power. Some politicians think they are doing good things for their constituents by engaging in trade restrictions and tariffs. They base the activities of “trade war” on the false premise that trade deficits actually exist and they must be cured.

International markets, just like to domestic markets, are entirely too complex to be effectively managed. Messing with otherwise free markets only causes damage to the participants. In particular, it causes damage to those the politicians have sworn to protect.

 

Economics of Invasion

~ Jim Berger ~ 1 Comment

More people added to the population of the country adds nothing to its economy, unless they bring capital. Invaders generally don’t bring capital, they consume it.

Television screens have been filled with images of a large group of people marching across Mexico with the stated intent of seeking asylum in the United States. Many of those people — in fact most of them — state that they will enter the United States by one means or the other. This does, in fact, make them invaders. No other word describes this group of people accurately.

Some people argue that the term invader seems a little harsh for people attempting to get into this country. For that reason, a good working definition would help.

Invaders consist of people who enter another person’s property to take stuff — by force, if necessary.

In addition to objecting to the use of the term invader, some people claim that these people coming to the United States will provide a net economic benefit. I want to question that premise.

Current Economic Drag

It seems that throughout our economy people have the mistaken assumption that increases in population actually add to a healthy economy. More people, in fact, do not strengthen an economy; they weaken it. Only the addition of capital contributes to economic growth and prosperity.

When people move to a new area their presence involves capital consumption. They consume resources that others could use to build businesses. Only when they move to areas that have idle capital do they have any possibility of making a net contribution. The existence of idle capital presumes no workers available in that particular area.

In addition to consuming capital, new residents in a country have a depressing effect on local employment — particularly where minimum wage laws exist. Because minimum wage laws actually reduce the number of low-paying jobs available, these new residents will frequently displace citizen workers.

Myth of Future Contributions

In addition to overestimating the current value of additional residence, people also tend to greatly overestimate the current value of the future contributions of invaders. Even though many migrants to this country have started successful businesses, it takes many years to realize that potential. That future potential has limited value in the present.

Whatever present value future potential may have, it becomes highly diluted by the great majority of unskilled workers who will remain unskilled in the future.

Betting on the probability that large groups of immigrants contain a few individuals with huge future potential makes as much sense as attempting to make a living by buying lottery tickets.

Violent Intervention

No one, including myself, has claimed that these people have any intention of mounting an armed invasion. The means at their disposal consist of using our own violent intervention against us. They will use the resources of the United States the steal the property of American citizens via the violent intervention of our tax system. Our own government confiscates the property of our citizens to pay for the resources used by these people after they cross the border.

Some people claim they have a beneficial effect because they are net tax payers. That assertion is at best subject to question and at worst factually inaccurate. Consider that roughly 50 percent of our own population does not pay income tax. What percentage of these new people will have incomes that require them to pay taxes?

When we include the repatriation of American dollars to the countries that these people left, it becomes even harder to argue that people who cross the border illegally actually make a positive contribution to our economy.

Conclusion

The political and economic plight of the many people attempting to come to the United States does not negate their intent for invasion. They plan — whether knowingly or not — to use the power of the federal government to “steal” the property of American citizens. They do not have the capability, with the resources they bring, to make a positive contribution to the United States economy.

The economic arguments in favor of invaders simply provides weak cover for the political motives of those who encourage them.

Trade Deficits: An Introduction

~ Jim Berger ~ Leave a comment

President Trump’s threat to impose tariffs on steel and aluminum has triggered a blizzard of articles for and against the proposal. Instead of parroting what has been said by others — mostly empirical evidence, I want to give you the tools with which to understand the issue behind the proposed tariffs: “trade deficits.”

Definition

To discuss the issue intelligently we must first come up with a definition for a trade deficit. In the simplest terms:

A nation incurs a trade deficit when it exports less than it imports.

Problems with the Definition

Nature of Exchange

To test the logic of the concept of trade deficits we must examine the nature of exchange. I plan to discuss exchange in far more detail in future blog posts. For now, I consider it sufficient to state that in every exchange both parties gain. Each party values what it gets more than what it gives. Otherwise no exchange will occur. Thus, neither trader could suffer a deficit. Each ends up better off than before they made the trade.

Measure of Trade

I have been careful not to use a unit of measure in stating a simple definition of trade deficits. I have done that because no unit of measure exists for quantifying the goods and services imported and exported. Bureaucrats and most economics express trade deficits in terms of the amounts of money that change hands. Not the amount of goods.

Those figures describe only that—the amount of money that changes hands. They tell us nothing definitive about the benefit (or detriment) to the general economy. They simply cannot tell us that.

Individual Transactions

The definition of “trade deficit,” as normally stated, presumes that the nation trades as a monolithic entity. Trades, however, do not occur between nations. Trades occur between individuals within nations.

I repeat. Aggregating the amount of money that crosses international boundaries provides no useful information about the benefits of individual trades.

The Consumer Pays

All economic transactions ultimately serve to satisfy the needs of consumers. If consumers do not have the willingness or ability to pay for lower order goods (“consumer goods”), transactions involving higher order goods (“producer goods”) would not occur. A market for steel exists only because steel ultimately contributes to the production of consumer goods. Rolled steel produced by a steel plant has no market value, if it ultimately doesn’t produce a product purchased by a consumer.

This means that not only do consumers ultimately pay for all voluntary transactions, they suffer the negative influences of intervention in this voluntary process. Income taxes, sales taxes, use taxes and — important for this discussion — tariffs, all distort the costs incurred by consumers. Taxes also distort the prices of goods. As a result, they distort the distribution of the resources used to produce those goods.

Complexity

Economies and markets all exhibit an irreducible level of complexity. This means that no one can accurately predict the effects of market intervention. Tariffs, for example, may have the direct and immediate effect of prolonging the life of inefficient domestic operations. When all the influences and feedbacks are taken into consideration, however, no one can predict for certain who will bear the ultimate cost. We can only say with certainty that some consumer, in some market, will bear the burden of tariff imposition.

Political Language

Politicians love to throw around phrases like “level playing field” or “trade deficits.” By doing so they manufacture nonexistent problems. No such thing as a “level playing field” exists in any market. Markets by their very nature work to level the playing field, but, like the mythical idea of equilibrium, they never achieve that objective.

The “trade deficit” also has a misleading connotation.

When you look behind the shroud of rhetoric, you realize that no such thing as a trade deficit exists. The idea only manifests in the minds and books of accountants (a topic for another day). In the process of trying to solve nonexistent problems we usually make problems worse.

Conclusion – Your Decision

I would say unequivocally that tariffs inflict damage on the members of any economy.

I don’t want you to take my word for it. Ask those who believe in trade deficits how either party in the exchange of goods suffers a deficit. Ask them how any intervention that helps one group of people, by force, does not simultaneously harm another group of people. Asked them how only politicians have the mental capacity (or clairvoyance) to understand all aspects of highly complex systems.

Ask these questions and then decide whether you believe in the concept of trade deficits.

Then you can judge whether tariffs will help anyone.

Flocking Markets

~ Jim Berger ~ Leave a comment

What does a flock of birds have to do with markets?

Probably not a whole lot.

But, they do have a lot to teach us about the behavior of markets and other complex living systems, e.g. individual humans, neighborhoods, markets and a flock of birds.

Flocks of birds, like the one in this video, consist of ten, hundreds, and maybe thousands of bird, each acting individually without external controls. Yet, they perform these amazing, intricate, maneuvers without crashing into one another. Does that mean that these bird-brains study massive instruction manuals full of rules? Do they have flight controllers in a tree near by, guiding their every move with broadcast signals?

It seems that very simple rules can guide these complex systems. Students of complex systems have built computer models that emulate the flocking behavior. Without the benefit of interviewing the participating birds, modelers have succeeded in building models that behave very much like flocking birds with only a few simple rules. One such model uses only three rules:

1. Separation – avoid crowding neighbors (short range repulsion)
2. Alignment – steer towards average heading of neighbors
3. Cohesion – steer towards average position of neighbors (long range attraction)

See description of Flocking Behavior.

Might the people who believe that markets require extensive regulation and supervision — to prevent crashes and collisions — have it all wrong? Could markets — composed of large numbers of individuals acting in their own self-interest, just like the birds — operate far more efficiently than the highly regulated markets we have today.

Consider three possible rules:

1. Live your life and allow others to live theirs.
2. Exercise your liberty by taking responsibility for your actions and expect others to do the same.
3. Do what you want with your own property and leave other people’s property alone.

Oh, of course, that would not work. People all have such self-destructive tendencies. Markets require outside intervention — and lots of it. After all, the market participants don’t have the mental capacity of birds.