Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Wednesday, February 25, 2009

Are the Benefits of Free Trade "Just a Theory?"

LTG argues that the benefits of free trade are "theoretical."  He gives every indication that he thinks benefits from trade are pie in the sky.  That we are better off with the status quo than we are taking an essentially blind leap into free trade based on the fantastic and "theological" arguments of economists.  

But is there evidence that free trade helps more people than it harms?  Yes.  Centuries of it actually.  I'll just present one bit of evidence here because it deals with agriculture protectionism.  In 1846 Great Britain abolished the Corn Laws.  The Corn Laws were a system of tarrifs on food imports designed to prop up British farmers who could not compete with - in particular - American farmers from the rapidly developing Midwest.

Some highlights:  

The price of corn in the two decades after 1850 averaged 52 shillings. Due to the development of faster transportation through rail and steamboat and the modernisation of agricultural machinery, the prairie farms of North America were able to export vast quantities of cheap corn. Every corn-growing country decided to increase tariffs in reaction to this, except Britain and Belgium. In 1877 the price of English-grown corn averaged 56 shillings, 9 pence a quarter and for the rest of the nineteenth century it never reached within 10 shillings of that figure. In 1878 the price fell to 46 shillings, 5 pence. By 1885 corn-growing land declined by a million acres (4,000 km²) (28½%) and in 1886 the corn price fell to 31 shillings a quarter. Britain's dependence on imported grain in the 1830s was 2%; in the 1860s it was 24%; in the 1880s it was 45%, for corn it was 65%. The 1881 census showed a decline of 92,250 in agricultural labourers since 1871, with a 53,496 increase of urban labourers. Many of these were previously farm workers who migrated to the cities to find employment, despite agricultural labourers' wages being the highest in Europe.

There are three points here I think are worth mentioning because of arguments LTG makes.  First, the price of corn in Britain fell - it did not rise as LTG suggests.  Second the ag workers who lost their jobs in Britain moved to the cities to find employment in other sectors - the labor side of what Pombat referred to in her comment.  A great number of these workers probably migrated farther... to North America or Australia.  Third, the US at the time was in the role of countries like Mexico now.  American farmers increased their earnings greatly by exporting ag products to Britain's rapidly urbanizing workers.  They were not impoverished by the move to trade but enriched by it.  Both the North American farmers and the British workers benefitted.  Of course some agricultural interests in Britain suffered but the gains were such that had the British government chosen to, they could have compensated them with a percentage of the welfare gains from trade.

So you see, these things are just made up, pulled out of the butt of some economist with a copy of Road to Serfdom in one hand and a ouija board in the other.  There are historical examples of countries successfully switching to the free trade approach.  

Benefits from trade is a "only a theory" in the same way that evolution is a "only a theory."  


The Law Talking Guy said...

Bad example, RBR. Corn laws barred imports of cheap food. That hurt British agriculture, but benefitted British subjects. We aren't tlaking about US tariffs on foreign food, but Us efforts to make American food cheaper. So the economics are totallhy backwards.

The Law Talking Guy said...

Remember, the issue we were talking about were subsidies for US farms, not tariffs on foreign imports. There is a difference in how that affects price, even though both are trade barriers. Subsidies create a trade barrier by artificially lowering prices; tariffs create trade barriers by artificially raising them.

The Law Talking Guy said...

The Cato institute - a right wing think tank that hates ag subsidies even more than RBR, and has less incentive than RBR to be honest - nonetheless has lower figures than RBR quoted. They say the US spends $50billion, not $80billion on subsidies.

The Law Talking Guy said...

I strongly oppose the payments to farmers NOT to produce food, which is probably being counted as a food subsidy by RBR. Obviously the economics of that policy restrict US output rather than dump products abroad.

Raised By Republicans said...

OK, I just double checked my source (the USDA) and I missread their number. They are talking about $8,000 million or $8 Billion. Since the USDA clearly has an incentive to hide and under count various subsidies, I'll buy the CATO numbers. Still, it's not like $50 billion is chump change! And paying 10% more for our food is pretty serious, don't you think? So we are paying $50 billion a year for the privilege of paying 10% more for our food. What a deal!

As best as I can explain it, here is the link between subsidies and higher prices. First, there are the "hidden" costs of taxes that are actually part of the price - that is, when we buy a box of strawberries we're paying the price on the label PLUS some share of the taxes that went into to subsidizing it. Second, there is the dumping issue. When rich countries dump their subsidized crops on the world market they drive competing farmers out of business. Once those farmers are out of business price increases by the farmers in the rich countries are no longer constrained by market competition and so the prices can rise.

The Law Talking Guy said...

Cato's figure about consumers paying 10% more for food is probably based on the "hidden" costs rather than the sticker price of the crops.

Now you're making a different argument: that subsidies lower prices (ahem), these lower prices drive third world farmers out of business, then food prices rise again. This argument is curious. Where are we in the cycle? If we are at a high price point, the economic incentives will now exist for third world farmers to start producing again. If we are early on in the process, then reducing ag subsidies will cause prices to rise, just as I have said.

Either way, I have to ask the question: is it not a good idea to "dump" food into poor countries that could not afford to produce food for less? Because food is a necessity, and because a billion human beings are on the verge of starvation, we should be encouraging any policy that lowers the cost of food. Again, I don't see how ending subsidies benefits third world farmers except by allowing them to charge MORE for their products. Maybe the solution isn't to turn off ag subsidies, but to transmute them into subsidies to third world farmers?

The Law Talking Guy said...

I can agree that a gradual reduction in subsidies over time (say 25 years?) would reduce the short-term pain and allow production to shift to the third world without dramatic price rises. I still wonder if it is a good idea to import our food from Mexico. Despite RBR's delight at munching on Mexican produce, there are undeniable health and safety issues that are, frankly, bad enough with American food products.

Imagine the worst of US industrial food production transplanted to foreign countries (that is what would happen, of course - Food Maquiladoras and plantations - not thriving indigenous businesses) without even the lax oversight we have now. Especially if the WTO forbade imposition of labor, environmental, and food quality standards on imports, it would be a disaster.