IS GEORGE WILL SMARTER THAN ABE LINCOLN

Honest Abe Said: Make It In America. Will Says Buy From China

Over many years, George Will has been my favorite newspaper columnist. Even when I disagreed with him, I enjoyed both his reasoning and his inimitable writing style. But today (March 1, 2023) George showed his age.

He attacked President Biden’s new policies aimed at reindustrializing the U.S. economy through emphasis on producing and buying in America.

Will and I are the same age - 81- and so have been around for a long time - long enough to see policy doctrines come and go as circumstances proved earlier doctrines either bankrupt or no longer adequate for new situations.

We were weaned at college (early 1960s) on the doctrine of free trade which the United States had adopted in 1948 in the wake of WWII. Over the prior130 years, America had become the world’s largest, richest economy by dint of mercantilist and protectionist trade and industrial policies. But, in 1948, as the dominant producer in virtually all the industries of a war torn world, it made good sense for America to start buying from others as well as selling to them.

But this was not the way the importance of the new free trade American doctrine was explained to us. Rather, it was drummed into us that protectionism and mercantilism were evil. We were taught that the high Smoot-Hawley tariff adopted in 1930 was the main cause of the Great Depression and even a major cause of the outbreak of WWII. It was drummed into us that every country should concentrate on producing what it does best and trade for the rest, that what a country does best is determined by its natural resources, location, climate, distance from other countries, and capital accumulation.

At that time, international currency exchange rates were fixed by the International Monetary Fund. Thus, we were not educated at all about things like today’s floating exchange rates and intervention into currency markets by governments aiming to undervalue or overvalue their own currencies. We were taught that markets are essentially operating under conditions of perfect competition which means that no producer or buyer has any measurable effect on prices or the total supply of the product (think commodities like sugar, wheat, etc.). That an auto industry dominated by only three producers (GM, Ford, and Chrysler at the time) was not a commodity market was essentially not explained to us. Nor were we told about economies of scale in industries like autos, steel, semiconductors, and many more which entail enormous capital investment and in which the more product a factory makes, the lower the cost of production of each new unit because the high fixed costs of inputs like capital and land can be divided over more and more units making each unit less costly.

Interestingly President Abraham Lincoln fully understood this way back in 1861 when he raised tariffs on imported steel. At the time, Great Britain was the world’s low cost and leading producing country of steel. Lincoln was sharpy criticized for imposing a tariff that it was thought would increase costs for American steel users like the railways. He responded with the following comment: “I don’t know much about tariffs, but I know this: If we buy the steel from Britain, the British get the money and we get the steel. If we buy it here in America, we get the money and the steel.” As things turned out, demand for American steel rose dramatically and the law of economies of scale (the more you make the lower the unit cost) soon made America the low cost and largest global producer.

I do wish Will had checked with Abe before making his comment about the cost of saving American jobs. It assumes there is no plus to increasing U.S. based production which is simply not the case.

I could go on, but the point is that he and I were simply not educated about the emerging realities of the world into which we would be graduating, partly because our professors themselves did not fully understand and partly because the global economy was changing rapidly.

Upon graduation Will and I, of course, went in very different directions, he into academia and journalism, and I into the Foreign Service, international business, trade negotiation as participant in both the Reagan and Clinton administrations, and eventually into founding and running the Economic Strategy Institute think tank where I have written a number of books on globalization and competitiveness.

In his March 1 Washington Post column, Will lambasted President Biden for his recent introduction of some Buy American policies, arguing that trying to save American manufacturing jobs by imposing tariffs on imports and providing government funded incentives for investing in America based production. To back up his argument, Will cited a study by the Peterson Institute for International Economics, a Washington think tank largely funded by former Wall Street maven and Sony of Japan advisor Pete Peterson. The study claims it costs U.S. taxpayers $250,000 per job saved by the Biden policies.

I am sure that Will honestly believes this, but I am also sure that it is wrongly based on an inadequate analysis of the realities of international trade and the over-simplifications of econometric modeling.

The Peterson Institute is well known as a think tank that substantially bases its analysis on models. This has the advantage of appearing to be scientifically and factually based, but it also takes advantage of the ignorance of most people about how econometric models are constructed and operated.

The great weakness of the models is that they depend on a lot of assumptions, and the weakness of the think tanks is (I can say this as the founder and President of a think tank) that they survive on donations from parties who are not usually disinterested.

So let’s take a look at the Peterson Institute conclusion that protection of an American manufacturing job costs taxpayers $250,000 per American job saved. This model was developed or operated in the wake of the Trump administration’s imposition of tariffs on imports of steel and other products from China. Essentially, the model takes the amount of the tariff and divides it by the number of taxpayers to obtain a cost per taxpayer. There is not necessarily anything wrong with the actual calculation, but there is a critical assumption involved here. It is that the tariff is automatically applied to the price of the imported product and passed along to the buyer.

In fact, as one who has been deeply involved directly in international buying, selling, and pricing, I can say without hesitation that the tariff is often not passed along. If I am a steel distributor importing steel from China, I have the option of adding the tariff to my normal price or of simply swallowing the tariff myself so as not to risk losing my customer. No law compels me to add the tariff to my normal price.

Will, of course, is not aware of this and neither are the Peterson Institute analysts because few if any of them have ever engaged in real economic activity.

In fact, a review of the actual pricing of steel in the wake of the imposition of tariffs by the Trump administration shows that prices fell for at least a year. Thus, either the Chinese and European producers to whom the tariffs were applied reduced their own export prices or their distributors in the U.S. ate the tariffs. The model, of course, was not aware of the actual pricing. Its results are only as good as the assumptions fed into it, and in this case, despite the sophistication of the model and modelers, the assumptions were, well, garbage. Garbage in garbage out as they say.

Nor is this the only or even the most important weakness of Will’s article and of the Peterson Institute’s analysis.

Consider for a moment the cost of greenhouse gases and consequent global warming. It is enormous and growing higher by the day. Let’s stay with steel for this part of the discussion. America imports a lot of steel from China which is generally considered to be the world’s low cost producer. But consider two important unincluded factors. Chinese steel mills are mostly fired by coal and much of the coal is imported by China from Australia. This inevitably means that the coal has to be sent to China by ship and then sent from China to global markets also by ship. Such shipping accounts for about 14 percent of global greenhouse gas emissions. Creating energy by burning coal as China mostly does creates far more greenhouse gas emissions than if the energy is created by burning natural gas as is mostly the case with U.S. steel producers. If we were to put a price on emissions and add that to the cost of making steel in China and shipping it to America, it is unlikely that the U.S. would be importing much steel from China or from anywhere else.

Thus, the Trump-Biden tariffs may well be contributing not only to saving American jobs but also to saving the planet.

A similar and perhaps even more obvious example is the far-flung, global supply chain. Using and even relying on such a supply chain must, almost by definition, entail risk. Risk has a cost. Insurance companies exist in order to offset or diminish the cost of risk. Yet, no one insured against the cost of the break down of the global supply chain over the past three years. For multinational corporations engaged in large scale global business, insurance against the risk of supply chain breakdown should be compulsory.

If it were, the supply chains might well become less global and more national, thereby creating more good jobs in the U.S. and elsewhere.

Will is still my favorite columnist, but I wish he’d forget the economics we were taught in the early 1960s.