Intermission: Disrupting the Status Quo Isn’t Just About Silicon Valley
(a discussion over email among twelve ex-college roommates)
Subject: Hire American, Buy American Program Is Protectionism & Redistribution | National Review
From: 😎 / To: [Meat_Locker] / Thu, Apr 20, 2017 at 7:47 AM
At the risk of starting a flame war, I thought this article was a really good critique of the “economic nationalism” of Trump from the right. (Or maybe just from an understanding of the modern economy since I agree with it and other arguments against protectionism).
From: email@example.com / To: [Meat_Locker] /
Sun, Apr 23, 2017 at 8:37 AM
😎, I’m guessing this hedge-fund-to-silicon-valley capitalist is the last person you expected to start a flame war with here. But I mostly disagree with this article, and this is the one area I actually sometimes find myself, shockingly, agreeing with Trump. If Democrats want to win back the White House they’re well-served to understand the deep (and in many ways pretty justified) chord these economic nationalism arguments struck with the very people who won Trump the election. Seriously, we gotta get out of the coastal elite bubble — this is the bubble that saw all the upside, but none of the downside of policies that the conservative National Review supported. I’ll try to keep this entertaining, mostly by being liberal…in my usage of the word fuck.
If you’d showed me this article when we graduated college I would have had the exact same opinion as you. But, basically, I’ve seen some shit. Some shit that runs completely counter to the reality-divorced economic theories that became well-accepted in the 80s and 90s, and were particularly influenced by the man 😜 once put his arm around after storming the field in Harvard stadium, completely sober of course.
Stick with me, but let me start with some basic statistics, for context, we have to admit are just plain fucking shocking:
- Real median wages in America haven’t increased in our lifetimes
- For men they have actually gone down
- Income inequality in 2014 matched the all-time high levels we saw prior to the Great Depression
- Life expectancy for white middle-age Americans has been going down since the beginning of the Millennium
- So has labor force participation for all Americans of prime working age
I’ll give you references if you need them, but they’re all easy to google.
Let me also prompt the discussion with what I consider one of the most important papers in Macroeconomics this century, written last year by the MIT economist David Autor: The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade (2016). Here’s the key line from the abstract: At the national level, employment has fallen in the US industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. Better understanding when and where trade is costly, and how and why it may be beneficial, is a key item on the research agenda for trade and labor economists.
Translating this from polite-Economist-in-an-academic-journal speak, I’ll summarize for you in layman’s terms what the author would tell you he really meant if you got him as hammered as 😋 got me on my 21st birthday: All you old-fart Macroeconomists have been totally fucking wrong about trade. Make no mistake, this paper is a complete revolution.
Up to now the conventional wisdom among economists was that more trade is always a good thing. But now that whole idea has been blown apart: here’s a case where there was serious, academically-verified damage from a large trade relationship. Areas of the US most exposed to China (read: what became Trump country) went down, and stayed down. That’s not to say the pendulum should swing to the other extreme — trade can be a good thing when it’s done on the right terms. But for reasons I won’t go into here, and that were specific to this trading relationship — starting with massive, persistent intervention in the currency market by the central bank of China to keep the Chinese currency artificially weak— things didn’t go down as the old-school theory would have predicted.
OK, onto the National Review. There are some major parts of the NR article I disagree with. Starting with this gem of a line:
The goal of an economy is to create better products and services at a lower price, thereby creating new cycles of supply and demand.
Totally fucking wrong. The goal of an economy is to serve the needs of society. You know, like, the people thing in We the People.
Here’s another fun one:
The [mistaken] notion here is threefold: American companies should be forced to hire American labor; government contracts should go to American companies; American producers should be protected from domestic competition by revoking or altering international trade agreements. All three of these policies have a long, ingloriously stupid history.
Also totally fucking wrong. The US has an incredibly protectionist history. And by the way, so do most countries. This country was built on protectionism. Don’t believe me? Well, let’s look at the first line of this fine Wikipedia article, Protectionism in the United States:
Protectionism was America’s de facto policy from … 1816 to World War II.
It’s actually really important to understand this history, because if you don’t you won’t understand why America changed its policy and why the chickens are coming home to roost right now. So why did America change its policy at the Bretton Woods conference in July 1944, the single most important economic event of the 20th century? Was it because the Americans, who basically were dictating their terms to the rest of the world, wanted “to create better products and services at a lower price, thereby creating new cycles of supply and demand”?
Of course fucking not. The world was in shambles (except for America, in pristine condition), and our newly-emerged Superpower didn’t want to have to keep rescuing the world after two wars. Not to mention the Cold War loomed.
So basically America bribed the fucking world. The Democratic world that is. “Hey allies! Yes you, even you Germany and Japan! Let’s make nice now, we’re all friends, and we want you to be with us and not with scary Russians. No more wars, they’re pointless and a pain in the ass. Let’s all get rich together too, and we’ll use that money together to fight the Soviets. Here’s the deal: you get complete access to the American market for all your exports. What do you have to do in return you say? Nothing! Absolutely nothing! Just dig yourself out of that massive economic hole.
Oh, actually there is one thing. You’re not allowed to have a Navy. And you have to buy US Treasuries with all that money you’re getting rich off. But don’t worry, we’ll be the one with the massive Navy protecting all trade, and why would you want to have an expensive Navy anyway — you only really needed it to protect your trade! Now we do all the work for you! And none of you will want to fight when you’re all getting so rich!
And let’s be honest, I’m making you an offer you can’t refuse.”
Really, that’s basically how it started. Worked like a charm.
My main point is that Free Trade started as a Geostrategic policy, not a fucking economic policy for its own sake.
That sets the stage for part 2 where I explain why the whole system has been coming under strain and how the theoretical idea of “Global Free Trade” has often played out far differently in the messy modern world than what theory would suggest. Hope this was a fun read. Flame away.
OH, and if you want to be entertained and educated in the meantime, see this absolutely prescient 1994 interview of investing legend Jimmy Goldsmith warning about the predecessor to the World Trade Organization. Margaret Thatcher called Sir James “one of the most powerful and dynamic personalities that this generation has seen.” He was also smart as hell, and rumored to be Princess Diana’s secret father, among many other colorful facts about him: Charlie Rose: A Prophetic Interview with Sir James Goldsmith
From: 😎 / To: [Meat_Locker] / Sun, Apr 23, 2017 at 10:28 AM
Haha that is a fantastic email! And thank you for liberally using the word fuck to describe economics. I feel like I would have paid much more attention in econ if my professor sounded like us playing Halo.
The first U.S. Secretary of the Treasury, Alexander Hamilton, advocated tariffs to help protect infant industries in his “Report on Manufactures.” Heeding Hamilton’s advice, George Washington signed the Tariff Act of 1789, making it the Republic’s second ever piece of legislation. Increasing the domestic supply of manufactured goods, particularly war materials, was seen as an issue of national security. Washington and Hamilton believed that political independence was predicated upon economic independence. For the most part, the “Jeffersonians” strongly opposed it. However, after the War of 1812, Thomas Jefferson himself acknowledged that tariffs were necessary for preventing import dependency, which undermined the nation’s security.
-Wikipedia, Disruptor of the Encyclopedia status quo
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