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Thread: Trade Deficits, Peter Schiff, and protectionism

  1. #1

    Trade Deficits, Peter Schiff, and protectionism

    http://mises.org/story/2531

    Trade Deficits and Collectivism

    Daily Article by Robert P. Murphy | Posted on 3/26/2007

    Lately I've written several articles (1, 2, and 3) warning Austro-libertarians of a dangerous trend. I am concerned that many bona fide Rothbardians are so disgusted with fiat money and fractional reserve banking systems that they endorse criticisms of these institutions even when they are based on faulty economics. In particular, much of the handwringing over the large current account deficits in recent years would, if valid, be just as applicable to deficits arising in a purely free market.

    Even if the reader believes that the recent US trade deficits are a reflection of insane government policies, surely we can agree that the arguments railing against them should take these distortions into account, so as not to reinforce false prejudices that are all too common.

    To give a specific example of what I'm trying to avoid: Pat Buchanan initially opposed NAFTA for the same reasons that many Austrian economists did, namely, that it wasn't really a free trade agreement at all, and that it was another step in the dangerous trend of giving supranational bodies authority over US citizens. But eventually Buchanan's rhetoric turned into old-fashioned populist protectionism. He explicitly declared on Crossfire that he would oppose even a true free trade pact because it would merge "our" economy with Mexico's.

    It is with this in mind that I now turn to a recent critique of the trade situation.

    SCHIFF: ALL CAPITAL SALES ARE BAD

    The author is Peter Schiff, one of the harshest critics of the trade deficits. As always, Schiff's piece is catchy and intuitive. Titled, "Selling Our Cows to Buy Milk," it warns of the connection between deficits and two Australian firms' bids for US aluminum giant Alcoa:

    By running huge trade deficits, Americans are literally selling cows to buy milk. Alcoa is just the latest heifer headed for the auction block. In other words, because we do not trade enough domestically manufactured consumer goods for those we import, we are making up the difference with our assets instead. To the extent that foreigners are tiring of buying more Treasuries and mortgage-backed securities, they are casting their eyes on industrial assets. Last year's trade deficit alone provided foreigners with enough dollars to buy twenty Alcoa's.

    Even at this point, I must be entirely pedantic and point out that it is not intrinsically stupid to "sell cows to buy milk." We can easily imagine scenarios where this would be perfectly sensible, especially if a particular farm's need for milk varied drastically from week to week. Just to give an example of what I mean, suppose a rancher is hosting a huge wedding feast for his daughter. Surely the rancher (or the caterer acting on his behalf) would have to buy more milk for the event than the cows might yield in the days before the feast, or at least than would be practical to store.

    Now if we tried to pinpoint how the rancher paid for this milk, the answer could very well be, "From the sale of cows that month." Voila! This hypothetical rancher thus sold cows to buy milk. What an idiot! And what's more, he probably sold cows to pay for the burgers and steaks at the reception, too. Come to think of it, he also sold chickens to buy the dozens of eggs for the omelets… He should read up on zoology next time.

    Of course my example of a wedding feast is contrived, but the general principle remains: one might quite reasonably sell an asset rather than hold on to the flow of benefits it confers. Of course the fact that someone is "forced" to do so because of tough financial circumstances might mean the sale indicates distress. Even so, one shouldn't condemn selling per se.

    Indeed, if we use other examples that perfectly fit Schiff's rhetoric, his arguments would be patently absurd. Suppose, instead of the cow, Schiff had chosen an apartment complex. Then instead of remarking, "Americans are literally selling cows to buy milk," he would have equivalently said, "Americans are literally selling apartments to get money." In other words, the owner of an apartment is entitled to a stream of rental payments, and he can either hang on to the apartment and enjoy the stream indefinitely, or he can sell the apartment for a big payment in one fell swoop.

    It's the same with the cows. The rancher can hold on to the cow, and enjoy a flow of milk, or he can sell the cow for a bunch of money, which can be exchanged for a certain (much larger) stock of milk in the present. If it's necessarily stupid for anyone to sell a cow to buy milk, then it's also stupid to ever sell income-yielding assets, such as apartment units or even bonds. But to say, "That's like selling bonds to get money!" doesn't sound nearly as earthy (and hence "real world") as Schiff's analogy with the cows.

    FIAT CURRENCY IS BAD … SOMETIMES

    Yet it gets worse. Schiff employs an inconsistency that I mentioned in a previous article, to wit: paper dollars are only bad when it fits the argument; otherwise they are good. See for yourself:

    Many Americas do not see the downside of such a transfer. In fact, they might even see it as a benefit, as shares of Alcoa would likely rise sharply. However, in exchange for losing one of the world's preeminent mining companies to Australia, Americans would only be compensated by the return of their paper dollars. Future profits that would have been earned by Americans will now be earned by Australians instead.

    Do you see the inconsistency? The money received from the sale of Alcoa doesn't really count as a benefit, because after all it's just a bunch of worthless fiat currency. In contrast, the future profits that are being forfeited are apparently something to write an article about. How does Schiff think Alcoa paid its investors? Would those profits have been distributed as ounces of aluminum?

    To avoid misunderstanding, let me again emphasize: of course I agree with Schiff (and other Austrians) that the world would be much better off on a gold standard. Yet it takes a lot more work to go from that truism to the conclusion that selling companies is somehow bad.

    COLLECTIVISM

    Austro-libertarians should also be wary of the collectivism inherent in Schiff's (and other anti-trade deficit) articles. Unless you are a shareholder of Alcoa, what do you care who owns it? Why does it matter if those "future profits" are earned by Australians instead of Americans?

    And if — as Schiff seems to concede — the individual shareholders are better off from the move, why isn't it a good thing for "Americans" as a whole? If we're going to think in terms of collectives, then it seems to me that something that makes a certain portion of Americans richer (namely shareholders in Alcoa) and doesn't affect other Americans one way or the other, ends up making "America" richer.

    Before closing, let me address two counterobjections. One is quite naïve and asks, "Yes the shareholders are richer, but you're overlooking the forfeited future profits that Schiff mentioned!" Well, "America" wouldn't have earned those future profits, the original shareholders would have. So if they individually decide that the buy-out offer is more attractive than retaining ownership (and future dividends), I don't think Peter Schiff or I are qualified to second guess them.

    A second objection is that I'm ignoring the "loss" of the company itself. Schiff himself apparently believes this when he writes:

    Founded in Pittsburg in 1886, Alcoa is now the world's leading producer and manager of aluminum, employing more than 120,000 employees in 44 countries. Every day Alcoa mines 86,300 tons of bauxite and 27,300 tons of coal, refines 41,000 tons of alumina, smelts 9,575 tons of aluminum, recycles 2,300 tons of aluminum, manufactures 8,810 tons of aluminum products, produces 166 million closures for beverage and food containers, assembles wire harnesses for 20,400 vehicles, generates 96,000 MWH of electricity, and purchases $27 million in goods and services. The sale of Alcoa would be a great loss to the American industrial landscape.

    Now why would the two Australian mining firms be offering $40 billion bids for Alcoa? Would it be to fire all 120,000 people and shut down operations? Would they decide to stop generating electricity? Of course not.[1] They want to buy it because they think they can run it more profitably than the current owners, and that's why they can afford to offer more to current shareholders than the pre-bid stock price. How does it hurt Americans if operations are transferred into the hands of people who believe they can churn more profit out of them?

    And as a final comment, if the sale does go through I hope Schiff can at least take heart that many of those 120,000 employees are undoubtedly spread around 44 countries. The outsourcing Alcoa obviously isn't very patriotic in the first place — otherwise it would have kept those jobs here at home! — so its loss won't be as
    traumatic.

    Robert Murphy is the author of The Politically Incorrect Guide to Capitalism. He also wrote The Study Guide to Man, Economy, and State and is the headmaster of the Mises Classroom. Send him mail. See his articles. Comment on the blog.
    This isn't exactly new, but I just found it interesting to see some constructive criticism on Schiff. Was reading a bunch of Robet Murphy's articles today, and their pretty good.

    Here is another about Peter Schiff on trade defecits: Perpetual Trade Deficits Can Be Good

    Admittedly its a new concept to me that trade deficits are not inherently problematic.



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  3. #2
    I don't think he understands why we don't like trade deficits. I am unsure as to Schiff's reasoning, but mine is because we are stealing from future generations by doing so. You cannot maintain a trade deficit forever. What we are doing is selling the cow to buy twice its value in milk, then borrowing to cover the difference, putting the next cow up as collateral. Eventually we will run out of cows and lose our source of income. In the free market system, eventually the system will balance and every country will run a perfectly balanced trade balance, but that will take forever. In the meantime, we should build up wealth by exporting productive materials and importing money.
    http://www.ronpaul2012.com/
    Quote Originally Posted by GK Chesterton
    It is often supposed that when people stop believing in God, they believe in nothing. Alas, it is worse than that. When they stop believing in God, they believe in anything.
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  4. #3
    The Mises article (which I didn't finish because I was getting annoyed) seems to have a lot of holes.

    If Manhattan did secede would it still use American dollars? Assuming they did there would be no problem. The money Manhattan would use to "import" cars, electronics, and other goods could be easily spent by the rest of America without having to go to Manhattan. If Manhattan created their own currency they would have to rely on the services they offered (legal, financial, etc.) and tourism to stay afloat. The argument for Michigan seceding would be pretty much the same: if they didn't frequently visit America or have faith in the stability of their currency they wouldn't do a lot of business with America.

    What if the Austo-libertarians create their own island Utopia? I would agree that early on the island would have to run trade deficits to get their manufacturing started, but the fact that their currency would be very stable (backed by gold) would make foreign countries more likely to do business with them. This is currently America's situation: we buy goods from other countries and they hold onto our currency because they believe it to be a good store of value. If foreigners lose confidence in the dollar we're mega-screwed.
    "My pride in my country is inversely proportional to Michelle Obama's pride in her country."
    - Me



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