WEBVTT NOTE Five Most Common Myths about International Trade 1 00:00:00.000 --> 00:00:06.400 Okay, so what I'm technically talking to you about today is the five most common myths of international trade. 2 00:00:06.400 --> 00:00:12.300 These aren't going to be arranged in terms of the most common, but I think the five, as I go through them, you'll agree, 3 00:00:12.300 --> 00:00:17.500 these are things that often come to mind when the common person talks about international trade. 4 00:00:17.500 --> 00:00:27.500 And the relevance, of course, to this topic of imperialism is that once you agree that free trade and the government just standing back 5 00:00:27.500 --> 00:00:57.500 and when it comes to economic matters between different groups of people, once you agree that that would lead to disaster and impoverishment and so the government certainly has a role to protect our jobs, to promote our economic growth, to regulate trade when it comes to these insidious foreigners, that sort of mentality pretty soon leads to more aggressive tactics once you grant the government that freedom. So to the extent that those views are just plain wrong, let alone immoral and violations of abstract rights, it's worthwhile for us to go over 6 00:00:57.500 --> 00:01:05.500 So the first myth, it's a pretty simple one, we'll get through it very quickly, is just that right now we have free trade. 7 00:01:05.500 --> 00:01:15.500 I think a lot of people believe that President Bush is for free trade, and therefore to the extent that you think the economy is in trouble right now, it's because of free trade. 8 00:01:15.500 --> 00:01:25.500 Paul Craig Roberts has been really on the bandwagon for this type of view, and he'll say things, he'll cite all these statistics to show, and I'm not putting words in his mouth, 9 00:01:25.500 --> 00:01:30.380 we're going to be a third world nation in 20 years and it's because of President Bush's 10 00:01:30.380 --> 00:01:34.760 free trade policies. So it's hard to know where to begin with a statement or a claim 11 00:01:34.760 --> 00:01:39.080 like that. So for one thing the statistics a lot of them are misleading that I don't 12 00:01:39.080 --> 00:01:43.980 think the situation is nearly as bad. A second thing is we don't actually have free trade 13 00:01:43.980 --> 00:01:48.220 and a third problem is if we did have free trade it wouldn't be the cause of those problems. 14 00:01:48.220 --> 00:01:52.940 So there's like a triple negative involved so I think that on net means he's still wrong. 15 00:01:52.940 --> 00:02:02.940 Another way to look at it, people talk about NAFTA. I believe NAFTA is literally that document was over a thousand pages long. 16 00:02:02.940 --> 00:02:09.940 If it were really a free trade document, if it were just going to say the US and Mexico will have lower tariffs, 17 00:02:09.940 --> 00:02:14.940 forget about actually having free trade, but if it were just going to really roll back government, get government off our backs, 18 00:02:14.940 --> 00:02:18.940 government is the problem, not the solution, but the Republicans are going to bring us right, 19 00:02:18.940 --> 00:02:24.020 to bring us right, you wouldn't think that document would be over a thousand pages long. 20 00:02:24.020 --> 00:02:29.660 So it's really hard to argue with these people because the politicians that are allegedly 21 00:02:29.660 --> 00:02:36.420 on your side as a free trader, they talk the talk and it's hard to say, okay actually no 22 00:02:36.420 --> 00:02:40.580 I'm for free trade but I'm against the free trade agreement because it's not free trade. 23 00:02:40.580 --> 00:02:46.220 And so it gets really difficult to, and so for example if someone is against NAFTA because 24 00:02:46.220 --> 00:02:51.220 Because it destroys jobs, you have to say, well, you might be right, I'm not sure, but it's not free trade that's doing it. 25 00:02:51.220 --> 00:02:56.220 So it's really difficult, and if the politicians would just stop lying, it would make our jobs so much easier. 26 00:02:56.220 --> 00:03:02.220 All right, the next myth I'd like to address is a very common one that trade deficits are bad. 27 00:03:02.220 --> 00:03:08.220 You hear this all the time. I don't know what the reason is. 28 00:03:08.220 --> 00:03:14.220 An economist one time said that the single most difficult thing to teach undergraduates is the benefits of free trade 29 00:03:14.220 --> 00:03:18.420 and why protectionism is bad and I found that to be the case when I was teaching 30 00:03:18.420 --> 00:03:24.380 at Hillsdale I in my in my macro classes would just hammer for weeks as to all 31 00:03:24.380 --> 00:03:27.820 the different reasons the free trade is good all the things that are just crazy 32 00:03:27.820 --> 00:03:31.620 about protectionism you know listing nine different ways to see how 33 00:03:31.620 --> 00:03:35.260 protectionism is silly and then on the test you know to the point where the 34 00:03:35.260 --> 00:03:38.940 students were just bored out of their minds and you know yeah we get it we get 35 00:03:38.940 --> 00:03:42.620 it let's go on and then on the test you know this is an exercise to see who was 36 00:03:42.620 --> 00:04:12.620 Paying attention, I'd ask him to calculate the deficit. I'd say, what a question. Suppose that Americans buy a thousand cars from Japan at $10,000 each, and the Japanese buy so many TVs from us, or vice versa. What would be the trade deficit or surplus? And one of my students put, we would have a $10 billion trade deficit with Japan, period, sucks, exclamation point. And so, for one thing, that wasn't a complete sentence, so I had to take points off of that. But you see what I'm saying. 37 00:04:12.620 --> 00:04:14.620 The Theory of Money and Credit 38 00:04:42.620 --> 00:04:59.620 So all it means if you have a trade deficit is that the group that you're talking about are buying in terms of dollar expenditures or whatever the monetary unit is, that number in terms of their expenditures on the other group's goods is higher than their expenditures on your goods. 39 00:04:59.620 --> 00:05:03.620 But the thing that's tricky is you restrict it to certain types of expenditures. 40 00:05:03.620 --> 00:05:12.620 In some cases it's just on merchandise goods, not even services, which is particularly strange. 41 00:05:12.620 --> 00:05:19.620 And then in other measures when they talk about what's our trade deficit with Japan, they'll include the trading of services also. 42 00:05:19.620 --> 00:05:26.620 So the idea is if we have a trade deficit with some country, that means that we're buying more of their goods and services than they are of ours. 43 00:05:26.620 --> 00:05:29.060 But again, it's narrowly defined. 44 00:05:29.060 --> 00:05:31.460 And so, again, there's all sorts of ways 45 00:05:31.460 --> 00:05:34.060 to see why that's sort of an arbitrary, 46 00:05:34.060 --> 00:05:35.500 meaningless statistic. 47 00:05:35.500 --> 00:05:38.900 One way I try to bring the point home is to say, 48 00:05:38.900 --> 00:05:40.860 unless you're running your own business 49 00:05:40.860 --> 00:05:43.260 and you have all sorts of different paying customers, 50 00:05:43.260 --> 00:05:45.780 if you're just working for some company, 51 00:05:45.780 --> 00:05:48.400 I bet that you have a huge trade surplus 52 00:05:48.400 --> 00:05:51.300 with the city in which your job is located 53 00:05:51.300 --> 00:05:52.720 and that you have a trade deficit 54 00:05:52.720 --> 00:05:54.820 with every other city in the world, all right? 55 00:05:54.820 --> 00:06:24.820 The theory is that if you, for example, occasionally go on vacation to a neighboring state, probably you have a huge trade deficit with that state, meaning you buy more goods and services from businesses located within those geographical boundaries than they buy of your services, whatever your job is, whereas you probably have a huge trade surplus with the city in which you live because that's where your employer is, and so if every month, for example, you calculate and say, okay, I got this much of people buying my services who live in this region, namely your employer, 56 00:06:24.820 --> 00:06:54.820 Let me add up how much money I spent on merchants in this city and probably the number you got paid from your employer would be bigger than what you paid out and so you'd have a trade surplus with that city, you'd do the same calculation with other neighboring regions and you would have a trade deficit with them because more money is flowing out to them than they're flowing into your wallet and so you're going to go bankrupt, right? You better start washing dishes every time you go to a restaurant outside of your city because otherwise you've got to get rid of these trade deficits with the neighboring town. So if you start thinking about it like that, you say, 57 00:06:54.820 --> 00:07:14.820 It would be silly to worry about trade deficits with various regions on an individual level, but that's all the trade deficit is when it comes to national levels, which is you take those calculations for each person in the U.S. and add them all up, and then compare it to, say, the Japanese and add all those numbers up, and the net is the trade deficit vis-a-vis Japan. 58 00:07:14.820 --> 00:07:33.820 OK, so that's one way to see it. Now, a sophisticated critic could come back and say, OK, but there's a flaw in your reasoning there, because chances are, unless you really are going bankrupt, you have a big enough trade surplus with your employer so that it balances out, and so on net your wealth is growing. 59 00:07:33.820 --> 00:07:37.740 but again that's you got to be careful because here the conventional trade 60 00:07:37.740 --> 00:07:43.020 statistics they only look at certain things so for example just to give you an 61 00:07:43.020 --> 00:07:46.180 example to show why they could be misleading let's say an American 62 00:07:46.180 --> 00:07:50.420 entrepreneur wants to start a new business and he let's say it's going to 63 00:07:50.420 --> 00:07:56.100 be he needs to buy an office and equip it with computers and so on and all the 64 00:07:56.100 --> 00:08:00.620 plugs and keyboards and everything that you need the office equipment lighting 65 00:08:00.620 --> 00:08:30.620 and so forth that you need copy machines for a new office and let's suppose he needs to raise some capital for that and so somebody in Japan has saved up money and wants to invest and so the agreement they reach is he says oh the American entrepreneur says all right if you lend me you know he's got yen initially he converts into dollars you lend me a hundred thousand dollars to start my business I'm going to use that to buy all sorts of office equipment maybe some of which he's buying from Japanese producers and then in exchange you will own 66 00:08:30.620 --> 00:08:32.860 Let's say 50% of my company, all right? 67 00:08:32.860 --> 00:08:34.560 So you're not actually getting anything tangible 68 00:08:34.560 --> 00:08:37.180 for me today, I'm giving you stock certificates 69 00:08:37.180 --> 00:08:39.060 or I'm giving you some sort of agreement 70 00:08:39.060 --> 00:08:43.180 that says you'll get 50% of any future net income 71 00:08:43.180 --> 00:08:44.740 that this firm generates. 72 00:08:44.740 --> 00:08:47.180 All right, so that transaction, once all is said and done, 73 00:08:47.180 --> 00:08:49.460 once he gets the money and then uses it 74 00:08:49.460 --> 00:08:52.580 to buy office equipment, some of which is from Japan, 75 00:08:52.580 --> 00:08:54.740 that would have increased the American trade deficit 76 00:08:54.740 --> 00:08:57.660 with Japan because if you think about it, 77 00:08:57.660 --> 00:08:59.340 there would have been, if you stand back 78 00:08:59.340 --> 00:09:00.460 and look at that, what would have happened, 79 00:09:00.460 --> 00:09:05.860 There would have been copy machines and computers flowing across the ocean from Japan to the 80 00:09:05.860 --> 00:09:09.240 United States, and there wouldn't have been any Japanese people buying U.S. products. 81 00:09:09.240 --> 00:09:12.620 And so they'd say, oh man, these Americans, these profligate Americans are crazy, they're 82 00:09:12.620 --> 00:09:19.360 just getting a wash in debt here, that they're just buying goods today in promising away 83 00:09:19.360 --> 00:09:22.100 future earnings to pay for it. 84 00:09:22.100 --> 00:09:26.020 So that's, whereas if you're looking at the individual transaction, it doesn't seem that 85 00:09:26.020 --> 00:09:29.100 that's actually very short-sighted, it actually seems that's productive and that's what we 86 00:09:29.100 --> 00:09:39.100 All right, now having said that, it doesn't mean anytime there's a trade deficit that that's a good thing and I'm not saying that Americans shouldn't save more. 87 00:09:39.100 --> 00:09:45.100 I think probably they should in terms of if I want to be paternalistic and give people free advice that's worth the price that I'm charging for it. 88 00:09:45.100 --> 00:09:53.100 Yeah, I would say you probably should save more, you know, but it's not that a trade deficit per se is a signal of something bad. 89 00:09:53.100 --> 00:10:23.100 One last observation on trade deficits to try to see that is that if you look at, if you go to these websites like FRED, the St. Louis Fed website or these other, the BEA, and you look at the trade deficit over time and you see the graph from your view, it looks like this, and a lot of times if you're familiar with these economic charts, they have columns that are shaded and then it'll say in the legend, you know, shaded regions indicate recession as defined by the BEA or whatever. And if you look at the trade 90 00:10:23.100 --> 00:10:29.480 Trade Deficit, that number, the line, typically goes down in those shaded regions and goes 91 00:10:29.480 --> 00:10:35.480 up when it's not shaded. So what that means is the trade deficit historically drops during 92 00:10:35.480 --> 00:10:41.600 recessions and rises during growth. And not only is that sort of irrelevant, it's actually 93 00:10:41.600 --> 00:10:47.200 that makes sense because what happens for a sort of capital-intensive country like the 94 00:10:47.200 --> 00:10:51.860 United States is when our economy is booming, when people feel like they have more disposable 95 00:10:51.860 --> 00:10:55.300 Income and they're willing to make more purchases naturally that's what you would 96 00:10:55.300 --> 00:11:00.220 expect is that we buy more manufactured goods and services consumption services 97 00:11:00.220 --> 00:11:04.020 from the rest of the world while they're investing more in the United States 98 00:11:04.020 --> 00:11:07.020 right that happens during periods of growth when there's a recession people 99 00:11:07.020 --> 00:11:10.340 are afraid to spend that's when we buy less from the rest of the world and so 100 00:11:10.340 --> 00:11:14.900 the trade deficit drops okay so it's not really that the trade deficit is 101 00:11:14.900 --> 00:11:18.900 harmless from a certain point of view at least for capital rich countries a trade 102 00:11:18.900 --> 00:11:23.540 Trade deficit might actually go hand-in-hand with economic growth. 103 00:11:23.540 --> 00:11:27.060 A lot of, I think, the reason that the trade deficit is considered to be a bad thing is 104 00:11:27.060 --> 00:11:29.220 just the term, deficit. 105 00:11:29.220 --> 00:11:34.900 But a trade deficit, the way these accounts are calculated, is equivalent to a capital 106 00:11:34.900 --> 00:11:39.100 surplus, a capital account surplus, a way to see it. 107 00:11:39.100 --> 00:11:42.340 It's easier if you think about it in terms of gold, because with different currencies 108 00:11:42.340 --> 00:11:45.160 changing against each other, that's one more thing you got to keep track of. 109 00:11:45.160 --> 00:11:54.160 Just imagine the world used gold, and foreigners wanted to invest more in U.S. companies than we wanted to invest in foreign companies on net. 110 00:11:54.160 --> 00:12:00.160 Well, what would that mean? That would mean more gold was flowing in than flowing out in terms of investment. 111 00:12:00.160 --> 00:12:07.160 And so that means Americans, if they wanted to, could use that gold to buy more manufactured goods and services from the rest of the world. 112 00:12:07.160 --> 00:12:12.160 And that could happen year after year, and it's not that all of a sudden we would run out of gold one day. 113 00:12:12.160 --> 00:12:26.160 Forget for the moment that gold isn't the measure of your wealth anyway, but even if it were, it's not that you would all of a sudden run out of gold, it's just that, oh, on the manufactured and services side, your deficits were being counterbalanced by the fact that foreigners were investing more in your country. 114 00:12:26.160 --> 00:12:41.160 Okay, so the man on the street, if you said, do you think the U.S. should have a trade deficit or a surplus, he'd say, oh, a surplus, and then if you said, okay, and would you prefer that foreigners invested more capital in here or that on net capital was flowing out of our country, he'd say, oh, I want capital flowing in. 115 00:12:41.160 --> 00:12:43.160 The Theory of Money and Credit 116 00:13:11.160 --> 00:13:16.240 is that a lot of people think trade only helps the poorer countries, so that there's two 117 00:13:16.240 --> 00:13:21.560 countries trading, and I think most people would admit, okay, somebody's better off when 118 00:13:21.560 --> 00:13:26.440 people voluntarily trade things, but it's the poorer party, and that the rich country 119 00:13:26.440 --> 00:13:27.920 is somehow worse off. 120 00:13:27.920 --> 00:13:32.760 I think a good illustration of this viewpoint was when Pat Buchanan was, I think it was 121 00:13:32.760 --> 00:13:37.400 when he was running for president the first time, and I think it was when he was still 122 00:13:37.400 --> 00:13:39.400 on Crossfire 123 00:14:07.400 --> 00:14:12.400 I wouldn't because it would merge our economy with Mexico's and that would lower American living standards. 124 00:14:12.400 --> 00:14:15.400 So I really think he encapsulated there this fear people have. 125 00:14:15.400 --> 00:14:21.400 They think that having a wall between us, just an imaginary wall in terms of economic policy, 126 00:14:21.400 --> 00:14:27.400 between us and really poor countries somehow shields us from their poverty and it keeps us richer. 127 00:14:27.400 --> 00:14:35.400 There's an idea that there's a certain amount of heat in the world and we've got to keep it in if we mix with a really cold country that there's going to be a leveling out. 128 00:14:35.400 --> 00:14:53.400 and I think that's the mentality. Now there's, again, with the time I have I want to leave some time at the end for question and answer. I can't get into it too much but just a few ways to see why that's silly, just on an individual level. 129 00:14:53.400 --> 00:15:01.400 Can you imagine you're talking with your friend who's a lawyer and you say, hey, you want to go to Taco Bell? And he says, no, sorry, I can't go in there. 130 00:15:01.400 --> 00:15:11.400 Do you know what the average wage of the people in there is? Right now I make $180,000 a year. If I go in there, my salary might get cut in half. 131 00:15:11.400 --> 00:15:17.400 So we can see how that's silly, but how is that any different from, you know, 132 00:15:17.400 --> 00:15:23.400 Mexicans are poorer than we are if we trade with them, it's going to pull down our wages. 133 00:15:23.400 --> 00:15:29.400 Now I don't know this because I'm a good imperialist American that I have been to very few foreign countries. 134 00:15:29.400 --> 00:15:42.400 I haven't been abroad and I'm just curious, maybe some of you later on can enlighten me, is it the case that in truly poor countries, are they all ardent free traders? 135 00:15:42.400 --> 00:15:50.400 Do they have the same economic fallacies we do, but they think, since we're poor, why don't we screw all these rich countries by trading with them and suck some of their wealth? 136 00:15:50.400 --> 00:15:56.400 I don't know, my guess is probably since they're poor and backward that they have bad economic ideas 137 00:15:56.400 --> 00:15:58.400 and they're probably afraid of free trade as well. 138 00:15:58.400 --> 00:16:07.400 And you could get into it, just to give you a hint as to, okay, we can see the absurdity in the view, but what actually is wrong with it? 139 00:16:07.400 --> 00:16:18.400 It's that it's not just low wages, for example. It's not that, oh, the reason, you know, if we trade with, if we allow Mexican firms to send us products 140 00:16:18.400 --> 00:16:22.400 Since they can pay their workers so little, therefore our wages all have to sink. 141 00:16:22.400 --> 00:16:25.400 It's not just the pure wage level, it's also the productivity. 142 00:16:25.400 --> 00:16:32.900 And so if our workers are twice as productive as an average Mexican worker, let's say in some particular occupation, 143 00:16:32.900 --> 00:16:35.400 well then it doesn't mean that we have to therefore get paid the same. 144 00:16:35.400 --> 00:16:41.400 That means we can get paid twice as much, the U.S. worker, as that worker, in order to remain competitive. 145 00:16:41.400 --> 00:16:46.400 So it's precisely because U.S. productivity is high that our wages are higher. 146 00:16:46.400 --> 00:16:56.400 Okay, moving along, the fourth fallacy or myth that I want to talk about is probably, it's related to what I was just mentioning, and that's that free trade destroys jobs. 147 00:16:56.400 --> 00:17:02.400 All right, so this is probably the single biggest objection people had, the single biggest fear. 148 00:17:02.400 --> 00:17:07.320 fallacy or myth that I want to talk about is probably it's related to what I 149 00:17:07.320 --> 00:17:11.960 was just mentioning and that's that free trade destroys jobs alright so this is 150 00:17:11.960 --> 00:17:15.920 probably the single biggest objection people had the single biggest fear and 151 00:17:15.920 --> 00:17:21.120 again economists have just spent so much time trying to show all the different 152 00:17:21.120 --> 00:17:24.920 reasons that this mentality is wrong I'll just summarize some of the more 153 00:17:24.920 --> 00:17:30.520 popular arguments so again an easy way to do it is to just use a reductio ad 154 00:17:30.520 --> 00:17:35.200 absurdum and just say okay well let's put it on the individual level. Does it 155 00:17:35.200 --> 00:17:38.940 help you know suppose you you said in your family say okay in our family we're 156 00:17:38.940 --> 00:17:43.240 gonna have protectionism we're gonna create jobs here in our household and so 157 00:17:43.240 --> 00:17:46.900 you know you thought you were gonna get your oil changed no you're not have your 158 00:17:46.900 --> 00:17:51.720 sister do it you know because she needs employment okay and then you know you 159 00:17:51.720 --> 00:17:54.660 thought you're gonna run to the supermarket and we're gonna reduce our 160 00:17:54.660 --> 00:17:58.060 cash balances have a trade deficit with the grocery store I don't think so why 161 00:17:58.060 --> 00:18:03.060 Don't you grow tomatoes in the backyard? Why don't we do it here at home and boost jobs for the family? 162 00:18:03.060 --> 00:18:09.060 Don't go buy a dress. Make it here. If you think about it in the household level, of course that's crazy. 163 00:18:09.060 --> 00:18:15.060 You'd just be reduced to utter poverty, but you'd be employed. You'd be really busy. 164 00:18:15.060 --> 00:18:21.060 There would be no shortage of work. You could find work. So you wouldn't be unemployed. That would be good. 165 00:18:21.060 --> 00:18:51.060 Okay, so you see the point there. And then you could expand it. It wouldn't be as absurd to do it, you know, to have people say, okay, what about our state, right? What if Alabama had high tariff barriers, because we don't want to lose jobs to Texas, things like that. And people say, yeah, okay. And, but then for some reason, once we draw that boundary around the US, all of a sudden, it seems different. And part of it, I think, is just pure, I hate to use the term racism, or I don't know what you call it, xenophobia, just because that's such a loaded term, and people throw it around a lot. But I 166 00:18:51.060 --> 00:18:57.060 I think a lot of it really is I don't mind losing jobs to somebody in Texas, but I don't want to lose a job to a Mexican. 167 00:18:57.060 --> 00:19:03.060 That would really annoy me, but it's okay if I'm unemployed because of a guy in Florida. That doesn't bother me as much. 168 00:19:03.060 --> 00:19:11.060 So I think it's not so much the inconsistency in the economics. I think it's more the value system that it's okay. 169 00:19:11.060 --> 00:19:18.060 It's just like when you see the news from Iraq and it's like a hundred people died and an American got his arm hurt. 170 00:19:18.060 --> 00:19:27.900 Oh man, that was a bad day, you know, but, okay, I should probably move on. 171 00:19:27.900 --> 00:19:33.020 Another way of seeing, okay, another, of another popular, very famous illustration of this 172 00:19:33.020 --> 00:19:39.980 idea of how silly it is to worry about free trade destroying jobs, Bastiat had a really 173 00:19:39.980 --> 00:19:46.340 famous article or a piece called The Petition of the Candlemakers, and here, just for those 174 00:19:46.340 --> 00:20:16.340 to those of you who haven't heard it, it was a satirical piece, and he was pretending that he was representing the candle makers, the people who made candles in France, and he was writing to the French legislature, I imagine, and was saying that we had this unfair competition from this unscrupulous adversary that we can't possibly compete against, it's namely the sun, and so what we propose is that you make it illegal for people to have their blinds open during the day, that if everyone had to shut the shutters and so forth and keep things dark, 175 00:20:46.340 --> 00:21:16.340 in terms of domestically produced light. That would be dumb, and by the same token then, if the Japanese are willing to sell us really cheap cars and it would cost us more to make the same thing here of comparable quality, it would be just as silly, well not as silly, but it would be somewhat silly to turn down that because of their natural advantages, or it would be silly, you technically could probably grow oranges in Alaska, you could have greenhouses and so on, but they'd be very expensive. So instead of doing that, people living in Alaska 176 00:21:16.340 --> 00:21:18.340 The Theory of Money and Credit 177 00:21:46.340 --> 00:21:54.340 Friedman said, okay, that's one way to look at it, but look, there's actually two technologies for creating cars. 178 00:21:54.340 --> 00:22:01.340 One is you have people show up at plants in Detroit, they have steel and rubber come in and all these other things and they churn out cars. 179 00:22:01.340 --> 00:22:10.340 That's one technology we have. Another technology is you have farmers in Iowa and other states, they grow corn and other types of goods like that. 180 00:22:10.340 --> 00:22:20.340 They put it on a boat, they send it over to Japan, a little time passes, and then the boat comes back and those crops have turned into cars, and then we get them that way. 181 00:22:20.340 --> 00:22:28.340 And so from a technological point of view, from an economic point of view, we know that's not really what's happening, it's not that they're physically turning into it, it's that they're being traded for, 182 00:22:28.340 --> 00:22:38.340 but from a technological point of view, suppose that really were what happened, suppose there was something magical over that literally turned the rice into cars or the corn into cars, 183 00:22:38.340 --> 00:22:40.340 The Theory of Money and Credit 184 00:23:08.340 --> 00:23:13.340 It's tricky with fiat currencies, so it's easier if you think about it in terms of gold. 185 00:23:13.340 --> 00:23:18.340 If we're all on a gold standard, it wouldn't change the issue, it's just easier to think about it. 186 00:23:18.340 --> 00:23:24.340 And we put up high tariff barriers so that American consumers can send less gold to foreign producers. 187 00:23:24.340 --> 00:23:29.340 Well, then that means they have less gold to then spend on the products of American exporters. 188 00:23:29.340 --> 00:23:36.340 Another way economists like to talk about it is that ultimately the way a country pays for its imports is through exports. 189 00:23:36.340 --> 00:23:44.340 The rest of the world, why are they sending us all these goodies? Why are they sending us TVs and cars and so forth? 190 00:23:44.340 --> 00:23:50.340 It's ultimately because we're sending something to them in return. It's not just because they're stupid. 191 00:23:50.340 --> 00:23:56.340 Whether it's they're getting equity in American firms or whether they're getting other products and services, 192 00:23:56.340 --> 00:24:01.340 ultimately the reason these foreigners are sending us products is that we must be sending them something. 193 00:24:01.340 --> 00:24:08.340 to artificially hamper how many products they can send us, then that interferes with the business of American exporters. 194 00:24:08.340 --> 00:24:12.340 Okay, and then finally, the last thing, and then I'll, there's a few minutes for question and answer. 195 00:24:12.340 --> 00:24:16.340 The last one I'll talk about is that free trade creates jobs, right? 196 00:24:16.340 --> 00:24:20.340 So here I'll take a little dig at the pro-free trade crowd. 197 00:24:20.340 --> 00:24:25.340 That a lot of times, you know, you spend so much time saying how free trade doesn't destroy jobs, 198 00:24:25.340 --> 00:24:33.340 In the last couple of years, advocates of free trade will say, NAFTA from this date to this date created 600,000 new jobs. 199 00:24:33.340 --> 00:24:38.340 Free trade is the way to boost us to grow the economy, and they'll talk using this language. 200 00:24:38.340 --> 00:24:45.340 Strictly speaking, that's not quite accurate. Free trade really isn't about jobs per se, it's about real wages. 201 00:24:45.340 --> 00:24:51.340 As long as wages can float freely, anybody can get a job. 202 00:24:51.340 --> 00:25:21.340 Alright, it's not an issue about creating jobs, there's always something that an extra person can do, that if someone needs work it's not as if we're just going to be satiated and there's nothing that anybody can do, that no one can find work, there's always something you can do, so whether we have tariffs or perfectly free trade, everybody could be employed so long as wages are free to move, so that everyone can be hired who wants to work at the prevailing wage rate. So in that sense free trade really doesn't create jobs, it just means that jobs would tend to pay more because people will go to where they have to compare to the 203 00:25:21.340 --> 00:25:22.340 Advantage. 204 00:25:22.340 --> 00:25:26.140 All right, now there's a little caveat there to the extent that actually we don't have 205 00:25:26.140 --> 00:25:30.420 a perfectly free labor market, that there's social security, there's all these deadweight 206 00:25:30.420 --> 00:25:34.900 costs imposed, so that you actually have to have a minimum productivity before it's worthwhile 207 00:25:34.900 --> 00:25:36.620 for anybody to hire you. 208 00:25:36.620 --> 00:25:41.760 In that sense, if free trade raises everyone's productivity, more people get over that minimum 209 00:25:41.760 --> 00:25:46.020 bar, but I think a lot of free trade economists, that's not what they mean when they say, oh, 210 00:25:46.020 --> 00:25:47.020 free trade creates jobs. 211 00:25:47.020 --> 00:26:16.020 You were right when you said people from four countries might oppose free trade. I had a student from Egypt about 20 years ago tell me they could not afford free trade because they couldn't compete with the highly productive American workers. 212 00:26:17.020 --> 00:26:44.020 Do you comment on our growing deficit with China in terms of the massive amounts of dollars we're shipping over them, the massive amounts of goods they're shipping us with? Is it fair to say that one of us needs the other more than the other? 213 00:26:47.020 --> 00:26:53.460 question and again the it's hard to to talk about these things it makes the 214 00:26:53.460 --> 00:26:56.460 appearance that I'm saying oh everything's fine and there's not gonna 215 00:26:56.460 --> 00:27:00.700 be any problems and no it's entirely possible that the dollar could fall next 216 00:27:00.700 --> 00:27:04.240 week and that we could be thrown into a huge recession the the point I would 217 00:27:04.240 --> 00:27:07.900 emphasize though is if that does happen it's not because oh we had free trade 218 00:27:07.900 --> 00:27:12.140 and that led to all these imbalances as far as trying to go is yes my 219 00:27:12.140 --> 00:27:15.980 understanding and I don't claim to be an expert is that the Chinese government 220 00:27:15.980 --> 00:27:21.980 is certainly using non laissez-faire means to accumulate huge reserves of dollars that they're keeping 221 00:27:23.500 --> 00:27:29.260 their currency artificially cheap in terms of the international markets so that favors their 222 00:27:29.980 --> 00:27:36.940 exporters. So it's basically just the Chinese government is impoverishing its own people to 223 00:27:36.940 --> 00:27:44.220 favor certain exporters. Now it's not a good thing in terms of their own people but in the 224 00:27:44.220 --> 00:27:56.220 Is it hurting us? I don't think so, at least in the short term. If the Chinese government wants to just use its equivalent of tax dollars or slave labor to send us free goods, that doesn't make us poorer. 225 00:27:56.220 --> 00:28:07.220 If they're sending us stuff that's artificially cheap, again, we're getting presents. That's not actually hurting us, but to the extent that people become complacent and rely on that, that would be a bad thing. 226 00:28:07.220 --> 00:28:11.740 but again it's not something government policies are going to alter that's just 227 00:28:11.740 --> 00:28:15.620 we might as well get the cheap goods while we can and then just be aware that 228 00:28:15.620 --> 00:28:18.140 that situation might change pretty soon. 229 00:28:18.140 --> 00:28:20.140 Okay, thank you very much Bob.