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Posts Tagged ‘Free Markets’

From a leftist perspective, making lots of money is not necessarily a bad thing. Rich Hollywood celebrities almost always get a free pass, especially if they embrace statist beliefs.

The crowd in Silicon Valley also is generally forgiven for being rich, perhaps because they donate to politicians like Bernie Sanders.

Folks on Wall Street, by contrast, apparently are the epitome of evil. Even when they support new regulations such as Dodd-Frank, that doesn’t put them in the good graces of today’s leftists. And if they run private equity funds that earn “carried interest,” that puts them in the arch-villain category.

But there are exceptions to all these rules. If you’re a gazillionaire from the entertainment industry, even if you’re a minority, you can get yourself in trouble for the ostensible crime of committing capitalism.

And that’s what is happening to Beyoncé. She is getting lots of bad press because she has a line of clothing and some of those clothes are being produced in Sri Lankan “sweatshops.”

To be sure, working 10 hours of day in a third-world clothing factory would be a horrible life for those of us lucky enough to live in advanced economies.

So we’re tempted to argue that “sweatshops” should be banned, but only because we don’t think about tradeoffs. Most important, what would happen to the Sri Lankan workers if they didn’t have this choice?

Writing for The Federalist, David Harsanyi points out that the attacks on Beyoncé are misguided.

Beyoncé is doing more to improve the lives of Sri Lankan workers than all fair-traders and finger-wagging journalists combined. …The Sun’s exposé claiming that workers at the singer’s new apparel company are nothing but “slaves” who earn 64 cents per hour so that Beyoncé’s can buy another yacht. …It’s a shame that people are still forced to live on such a pittance.

Yes, it’s a shame.

But you know what’s even worse than being a Sri Lankan worker in one of Beyoncé’s factories?

Being a Sri Lankan worker who doesn’t have one of those jobs.

A gross monthly average income of a Sri Lankan is around 8839 rupees. …For thousands of…fellow laborers, a Beyoncé job offers a higher salary.

In other words, as David explains, job creation and economic growth are the best way to boost living standards for the people of Sri Lanka, and that’s exactly what’s happening.

Beyoncé, who is running a business not a charity, is an inadvertent force of good. …salaries will rise and so will the quality of life. This competition will impel employers to increase productivity and, if Sri Lanka doesn’t revert to its old ways, the economy will grow.

By the way, that remark about not reverting to “its old ways” is not a throwaway line.

Sri Lanka does not have a free-market economy, but it’s also not nearly as statist as it used to be. So if the country wants continued growth, at the very least it needs to avoid backsliding. And what it really should do is further shrink government and liberalize the economy.

In the meantime, here’s a great video from Ben Powell about how “sweatshops” are good for workers.

By the way, Ben also has written about the history of so-called sweatshops in the United States. And the story is pretty much identical to Sri Lanka, with these factories being a route to upward advancement as America’s economy began to prosper.

As such, it would be a shame if we denied Sri Landkan workers the same route for economic growth.

P.S. Shifting to another topic, we have come bad news followed by good news from Down Under.

The Australian government, which ostensibly is right of center, proposed a new tax on migrant labor. But now that tax is being deferred, hopefully on a permanent basis.

Here are some of the details from a Reuters story.

The ruling conservative government, which is counting on the support of rural voters in the July 2 poll, will defer the tax increase and hold a review of labor force issues in rural and regional communities, Assistant Treasurer Kelly O’Dwyer said. Under the proposal, foreign travelers on working holiday visas would have paid tax of 32.5 percent on every dollar earned from July 1, when previously they paid no tax on income up to A$18,000 ($13,100), the same as locals. …Australia has encouraged backpackers to work on farms with special visas allowing them to stay for a second year if they do three months work in rural Australia.

Sigh, Seems like the Australian Liberal Party (which is a classical liberal party) should adopt the no-tax-hike pledge to avoid making this kind of unforced error.

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According to Economic Freedom of the World, there are five major factors that determine a nation’s economic performance.

Here’s the recipe for growth and prosperity.

  • Rule of law and property rights.
  • Small government.
  • Stable monetary policy.
  • Reasonable regulatory policy.
  • Free trade.

This great publication is the first thing I check when I want to see whether a country leans in the direction of markets or whether it is burdened by a lot of statism. And it allows for meaningful comparisons between nations since it relies on global data sources.

But not all economic variables have good data sources that allow apples-to-apples comparisons. It’s very difficult to measure the degree to which various governments interfere with the price system by imposing controls (either minimum or maximum price limits).

Identifying the degree of cronyism in an economy also is a challenge since there are not reliable numbers for the degree to which politicians in various nations provide favors for particular firms or sectors.

So I was very interested when I saw that the Economist has put together a ranking that shows the degree to which a nation’s billionaires either earn their wealth via markets or cheat their way to wealth via cronyism.

It obviously doesn’t cover nearly as many nations as Economic Freedom of the World, but perhaps the folks at the Economist have come up with a methodology that eventually will allow a specific measure of cronyism in the future.

The article explains how the rankings were derived.

…for the past 20 years, from Malaysia to Mexico, crony capitalists—individuals who earn their riches thanks to their chumminess with government—have had a golden era. Worldwide, the worth of billionaires in crony industries soared by 385% between 2004 and 2014, to $2 trillion. The Economist’s crony-capitalism index tries to measure the extent of this graft for a number of important countries. Industries that have a lot of interaction with the state are vulnerable to crony capitalism (a full list of industries is provided in the table below). These activities are often legal but always unfair (Donald Trump, a casino and property tycoon, earns the 104th spot in our individual crony ranking). …Germany is cleanest, where just a sliver of the country’s billionaires derives their wealth from crony sectors. Russia fares worst in our index: wealth from the country’s crony sectors amounts to 18% of its GDP.

I’m glad to have these new numbers, but I’m not completely sold on the methodology used by the Economist.

Is all banking and finance really cronyism? That seems a bit of a stretch. While there are some indications that Warren Buffett is now a cronyist, I’m not aware of any evidence suggesting he used government connections to become rich in the first place.

And what about energy and chemicals? That description may apply to some rich people in the U.S. and elsewhere, but there are plenty of examples (the Koch brothers) of billionaires in this sector that have earned their wealth.

And speaking of wealth, why did the article compare wealth (which is a stock) and GDP (which is a flow)? I realize the Economist needed some sort of benchmark, but they chose an approach that has dubious methodological value.

All that being said, I suspect that the countries near the top of that list have a genuine problem with cronyism and the ones near the bottom do a better job of letting market forces operate.

So congratulations to Germany and South Korea and boos for Russia and Malaysia.

And a bit of applause for the United States. We have some egregious forms of cronyism that benefit the undeserving rich, but most American billionaires apparently earn their money.

Now let’s zoom out and look at the historical case against cronyism with this superb video from Prager University.

The bottom line is that scams like Solyndra are the modern version of what many railroads did in the 1800s.

I didn’t realize, though, that Uncle Sam also squandered money trying to invent the airplane.

P.S. You can enjoy other great videos from Prager University by clicking here, here, here, here, here, and here.

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From an economic perspective, too much government spending is harmful to economic performance because politicians and bureaucrats don’t have very good incentives to spend money wisely.

More specifically, labor and capital will be misallocated because people in government generally are guided by political motivations.

By contrast, there’s a bottom-line incentive in the private sector to use resources wisely. This generates the most prosperity for society because the only way to earn income in a free market is to produce goods and services that other people value.

That’s sort of a macro perspective.

From a micro perspective, when government allocates money, you can only make yourself better off by taking from others. In a market economy, you make yourself better off by serving others.

In other words,enlightened self interest (you can even call it “greed” if you prefer) is channeled productively in a free market system, as Adam Smith observed several hundred years ago.

Now let’s look at a visual perspective, as illustrated by this image I saw on Reddit‘s libertarian page.

Whoever put this together was quite clever to highlight the fact that people in the private sector generally buy in the top-left quadrant while people in government generally buy in the bottom-right quadrant.

And if you want to see the late Milton Friedman discuss this concept, here’s a video for your viewing pleasure.

I’ll simply add a few observations. One of the reasons I often compare market-oriented nations and government-oriented nations is to highlight how countries are more likely to become prosperous when most resources are allocated by private decisions rather than political decisions.

In other words, South Korea out-performs North Korea because its economy is largely driven by decisions in quadrant 1.

Just like Chile out-performs Argentina and Argentina out-performs Venezuela for the same reason.

P.S. This video on profit, narrated by Walter Williams, is a good addition to the insight of Smith and Friedman.

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I’m a proud advocate and defender of capitalism for the simple reason that it is a system that is consistent with human freedom while also producing mass prosperity that was unimaginable for much of human history.

Jurisdictions that embrace capitalism enjoy great progress while nations that veer in the other direction suffer economic decline, as vividly demonstrated by comparisons such as the relative performance of Hong Kong and Argentina.

And, for what it’s worth, the Princess of the Levant even says capitalism is “a sexy word.”

But not everybody agrees.

A column by Greg Sargent in the Washington Post has some very depressing poll numbers.

…the Harvard Institute of Politics has released a new poll of young voters… One key finding in the poll, which surveyed over 3,000 people from ages 18-29, is that these young people see a robust role for government in guaranteeing a right to a basic standard of living, and majorities of them see a large or moderate federal role in regulating the economy and access to health care and higher education. …A narrow majority of respondents in Harvard’s poll said they did not support capitalism.

Writing for Mic, Marie Solis looks at these recent poll numbers and wonders if the real issue is whether “capitalism” is simply an unpalatable word.

A new Harvard University survey found 51% of the participants between the ages 18 and 29 said they do not support capitalism. …The university’s results echo recent findings from Republican pollster Frank Luntz, who surveyed 1,000 Americans between the ages of 18 and 26 and found that 58% of respondents believed socialism to be the “more compassionate” political system when compared to capitalism. …the results may be more indicative of a shifting connotation for the word “capitalism” itself. “The word ‘capitalism’ doesn’t mean what it used to,” he said. “You don’t hear people on the right defending their economic policies using that word anymore.”

Not so fast. I still use “that word.”

But should I? James Pethokoukis of the American Enterprise Institute is sympathetic to the notion that there’s a perception problem. He speculates that the real problem is that capitalism now has a negative connotation.

America’s millennials are hardly some fifth column of communist sympathizers. Nor are they idiots. But they are at least a bit skeptical of “capitalism.” …Yet, oddly, many of those same capitalism skeptics also hold views similar to those of any Ayn Rand-loving free marketeer. For example: Less than a third believe government should play a large role in regulating the economy, reducing income inequality, or stimulating economic growth. Likewise, just a third said they supported socialism.

I fear Pethokoukis is being too optimistic in his reading of the polling data. When you review the questions in the poll and add together those who want a “large” role for government with those who favor a “moderate” role for government, they overwhelm the advocates of laissez-faire who say government should play “little to no role.”

Though maybe I’m just being a pessimist since the folks who want a “moderate” role may think the government today already is playing a “large” role and therefore would want to reduce the size and scope of Washington (though the fact that many people actually blame deregulation for the financial crisis, notwithstanding all the evidence to the contrary, makes me think that would be a Pollyannish interpretation of the polling data).

In any event, let’s return to the issue of whether capitalism is akin to a toxic brand.

Maybe one problem here is the word “capitalism” and what it evokes in the aftermath of the Great Recession and Wall Street bailout. Maybe “capitalism” really isn’t the right word for the free enterprise system, the deep magic that has made America the richest, most powerful nation on Earth. Indeed, wherever and whenever there’s been a bit of economic freedom, amazing things have happened — from Europe in the 1800s to China and India in the late 20th century. …Maybe millennials aren’t capitalists as much as they are “innovists” or “innovationists.” They believe the same dynamic economic system that created those amazing panes of internet-connected glass in their pockets will also create a better world.

It galls me that young people blame capitalism for the financial crisis. Have they ever heard of the Federal Reserve? Or Fannie Mae and Freddie Mac?

Blaming capitalism for the recent mess is like blaming the Red Cross for tornadoes. Sounds like millennials don’t know the difference between capitalism and cronyism.

But I’m digressing again. Time to get back to the central topic. Elizabeth Nolan Brown weighs in with a column for Reason.

…this new poll finds young people torn between “capitalism” and “socialism,” with perhaps little—or, to be more charitable, an ahistorical—understanding of what either means.

I definitely agree with her than millennials are confused about what these terms mean.

But grousing about their lack of knowledge doesn’t solve the problem. But maybe we can make progress if we learn why young people think the way they do.

…words—especially big, emotionally-laden words describing controversial or complicated concepts—connote different things to different people. When pollsters probe young people further about socialism and capitalism, they tend to find that respondents don’t have clear concepts of these economic philosophies. To many millennials, “socialism” doesn’t mean a government-managed economy but something like what we have now, only with more subsidized health care, student-loan forgiveness, and mandatory paid parental leave. …”Capitalism,” meanwhile, doesn’t simply mean private, for-profit enterprise. …Capitalism is Big Banks, Wall Street, “income inequality,” greed. It’s wealthy sociopaths screwing over the little guy, Bernie Madoff, and horrifying sweatshops in China. …However incomplete or caricatured, these are the narratives of capitalism that millennials have grown up with.

She basically comes to the same conclusion as Pethokoukis.

We certainly need to consider whether and how the word can be reclaimed, or if we’re better served talking about the “market economy,” “private enterprise,” “free trade,” or “entrepreneurship.” Millennials love the word entrepreneur… Unlike anti-capitalists of yore, young people today don’t seem to see a tension between turning a profit and living righteously. …As John Della Volpe, polling director at Harvard, puts it, millennials aren’t “rejecting the concept” of capitalism. “The way in which capitalism is practiced, in the minds of young people—that’s what they’re rejecting.”

Indeed, she shares some 2014 polling data that shows there is 2-1 support for free markets, which is significantly better than the level of support for capitalism.

This analysis is persuasive. If we can convince more people to support good policy by talking about “free markets” rather than “capitalism,” then I have no objection to using a more effective phrase or word.

For what it’s worth, opponents of economic liberty such as Karl Marx were among the first to use the term “capitalist” and they obviously meant it as a slur. Which is another reasons why advocates of economic liberty shouldn’t feel obliged to use that word.

That being said, I’m not sure whether using a different word or phrase will make a big difference. I remember when Social Security reform was a big issue between 1995-2005. Proponents were repeatedly told that “private” and “privatization” were words to avoid, so we all dutifully said we were for “personal retirement accounts.”

Which was fine, but it didn’t stop leftists from using “privatization.” Moreover, polling data showed considerable support for the idea, notwithstanding demagoguery from advocates of the status quo.

Now that we’ve discussed whether “capitalism” is a bad word, let’s shift gears and look at whether “liberal” should be a good word.

Professor Daniel Klein says the word has been hijacked by statists.

Here I make a plea, addressed to conservatives and libertarians, regarding the word liberal: please do not describe leftists, progressives, social democrats, or Democrats as “liberal.” …Words have deep-seated cognates and connotations; they have character and history. …The term liberal has always had an abundance of positive connotations: generous, open-minded, tolerant, big-hearted. …to oppose “liberals” almost seems tantamount to opposing modern, open civilization.

And “liberal” originally was linked to economic liberty and free markets.

The inception of liberal as a political term should be credited to the Scottish historian William Robertson, who published a book in 1769 that uses the term repeatedly to mean principles of liberty and commercial freedom. Adam Smith…used the term repeatedly in a signal way to refer to the sort of policy he advocated, a system that gives a strong presumption to individual liberty, and hence commercial and market freedom. …The principles of Adam Smith spread throughout Europe, as did the name he used for them, “liberal.” …so “liberal” political movements were born.

But then the statists began to call themselves liberals.

At the end of the nineteenth century, and thereafter, there came a dramatic shift. Collectivism or statism was on the rise. …Especially during the period 1880 to 1940, there came great changes in the meanings of words, changes in semantics. …people started using words in new ways, and often even announced and emphasized the newness of their usage and meaning. …the statists arrogated the term liberal to themselves… The literature of the so-called New Liberals declaimed openly against individual liberty and in favor of state collectivism and socialistic reform.

Interestingly, the bastardization of “liberal” has primarily occurred in the United States and Canada.

…when we step outside North America, we see that, by and large, liberal still means liberal…read and listen to European Parliament member Daniel Hannan, who often uses liberal proudly in its original sense, and who never calls leftists “liberal,” or to read the journal of the Institute of Economic Affairs (London)—Economic Affairs: A Journal of Liberal Political Economy. …In Prague, for example, the leading freedom-oriented organization is called the Liberal Institute. Where liberal still means liberal, such as in Europe and Latin America, leftists have no reluctance in calling their imaginary bogeyman “neoliberalism.”

I can vouch for that. I’m often accused of being a “liberal” or “neo-liberal” when speaking overseas. It took a while to get used to it, but now I smile and say “yup, that’s me.”

And I’ll sometimes use “classical liberal” and “libertarian” interchangeably when speaking in the United States. But given the way the meaning of the word has changed over time, I don’t think it would make sense to the average person if I referred to myself as “liberal.”

That being said, I fully agree with Professor Klein that we shouldn’t let leftists get away with using that term to describe themselves. I prefer to describe them as “statists.”

P.S. Tom Sowell has a more controversial, but technically accurate, term to describe modern leftists.

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Since Pope Francis is very critical of capitalism, I suppose it’s fitting that he had a special meeting with America’s crazy-Uncle-in-the-attic, Bernie Sanders.

With my sixth-grade sense of humor, I confess that my initial instinct (perhaps motivated by the famous line from Animal House about “a wimp and a blimp“) was to write about “the Pope and the dope,” but I’m going to be somewhat mature and instead share some excerpts from a very good column by Charles Lane, an editorial writer for the Washington Post.

Here’s some of what he wrote before Senator Sanders’ departure.

Democratic socialist presidential candidate Sen. Bernie Sanders (I-Vt.) will depart soon for the Vatican… In keeping with Pope Francis’s call for a “moral economy,” Sanders has said he’ll discuss “how we address the massive levels of wealth and income inequality that exist around the world, how we deal with unemployment, how we deal with poverty and how we create an economy that works for all people rather than the few.”

While inequality should be a non-issue (assuming income is earned honestly), it is very desirable to reduce poverty and boost wealth for the less fortunate. As such, Lane suggests that the Vermont Senator read some of the research from World Bank economist Branko Milanovic.

…real income went up between 70 percent and 80 percent for those around the world who were already earning at or near the global median, including some 200 million Chinese, 90 million Indians and 30 million people each in Indonesia, Egypt and Brazil. Those in the bottom third of the global income distribution registered real income gains between 40 percent and 70 percent, Milanovic reports. The share of the world’s population living on $1.25 or less per day — what the World Bank defines as “absolute poverty” — fell from 44 percent to 23 percent.

And here are the most important passages.

Was all this progress because of big government? Nope, people were lifted out of poverty because the power of government was reduced.

Did this historic progress, with its overwhelmingly beneficial consequences for millions of the world’s humblest inhabitants, occur because everyone finally adopted “democratic socialism”? …To the contrary: The big story after 1988 is the collapse of communism and the spread of market institutions, albeit imperfect ones, to India, China and Latin America. This was a process mightily abetted by freer flows of international trade and private capital… The extension of capitalism fueled economic growth, which Milanovic correctly calls “the most powerful tool for reducing global poverty and inequality.” And he’s no supply-sider, but instead a left-leaning critic of modern economic orthodoxy — as his new book, “Global Inequality,” makes clear.

The final sentence is worth highlighting. Mr. Milanovic is not a libertarian firebrand. And since Charles Lane is an editorial writer at the Washington Post, it’s safe to assume that he isn’t an advocate of small government either.

For what it’s worth, they’re probably both supporters of something akin to the Nordic Model, which allows for a large welfare state and high tax rates, but otherwise is very sympathetic to free markets (i.e., open trade, light regulation, stable money, strong property rights, etc).

In other words, if we created a scale or a spectrum, there would be a big difference between the crazy left and the rational left. And the socialists and totalitarians would be in their own category.

The flags of the Nordic nations represent the rational left. I’ve put the Greek flag next to Bernie Sanders to represent the crazy left.

I actually had a hard time coming up with an example of a genuine socialist (i.e., government ownership of the means of production) who wasn’t also a totalitarian, but eventually settled on Clement Attlee, the United Kingdom’s misguided post-WWII Prime Minister who nationalized industries.

And Hitler and Stalin obviously are representatives of the totalitarian left.

I’ve placed Obama and Clinton on the spectrum based on what I think they actually believe, not what they say. So even though Hillary and Bernie are singing from the same nutty song sheet, I suspect she’s exaggerating her leftism and he’s downplaying his.

P.S. Returning to our original focus about which policies actually help the poor, Bono also understands that there’s no substitute for free markets.

P.P.S. My goal, of course, is to help rational leftists understand that free markets are just one ingredient in the recipe for prosperity. We also should have small government.

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I don’t care whether it’s called socialism, fascism, or communism, statism is evil and destructive. And going partway down that path with “democratic socialism” may avoid brutality, but the end result is still economic misery.

In hopes of getting this point across, I utilize everything from humor to theoretical analysis.

But my favorite approach, based on decades of experience with one-on-one meetings, public speeches, and private briefings, is to share cross-country comparisons. Such real-world evidence seems to be most persuasive.

So it’s time to add to that collection.

Let’s go back to 2011, when Catherine Rampell was with the New York Times and she wrote a column about a book by World Bank economist Branko Milanovic. She focuses on a powerful visual.

My favorite part of the book was this graph…on the vertical axis, you can see where any given ventile from any country falls when compared to the entire population of the world. …take a look at America. Notice how the entire line for the United States resides in the top portion of the graph? That’s because the entire country is relatively rich. In fact, America’s bottom ventile is still richer than most of the world: That is, the typical person in the bottom 5 percent of the American income distribution is still richer than 68 percent of the world’s inhabitants. …America’s poorest are, as a group, about as rich as India’s richest.

Here’s the graph that grabbed her attention.

I agree with everything Ms. Rampell wrote about that graph, but let me expand the focus by explaining why this is yet another piece of evidence for the proposition that policy makers should focus on growth rather than (in)equality.

From a leftist perspective, the ideal line for such a graph is horizontal because that represents complete income equality. And they naturally think that statist policies are more likely to produce an outcome closer to that redistributionist ideal (hence, their support for politicians such as Obama, Clinton, and Sanders).

But the graph shows why they are so wrong to support ever-larger government.

For instance, ponder the question of which nation produces better outcomes for poor people? Obviously, per-capita output for all income levels is higher in the United States, but the gap is especially huge for those with low incomes.

There doubtlessly are many reasons for the output gap in the chart, but one logical explanation is that the overall burden of government is much lower in the United States (#16 in the economic freedom rankings) than in China (#111), India (#114), and Brazil (#118).

By the way, some people may say it’s unfair to compare the United States with nations from the developing world. But the entire point of this comparison is that these other countries aren’t part of the “first world” in part because their economic policies are characterized by statism rather than capitalism.

But for those who want comparisons among developed nations, I’ve reviewed evidence from the United States and Europe on many occasions and the results always show that the relatively more market-friendly policies in the United States produce higher levels of prosperity than the more statist policies of Europe.

And if you want a more apples-to-apples comparison involving one of the most successful European nations, consider this chart showing the relative prosperity of different income levels in the United States and Sweden.

The bottom line is that it’s very difficult to find any evidence to suggest that any group of people enjoys more prosperity in a nation with a larger burden of government.

Which is why I’m still waiting for a leftist to successfully respond to my two-question challenge (and they actually only need to give an answer to one of the questions).

Another good way of determining whether markets work better than statism is to see how fast nations grow over time.

James Pethokoukis of the American Enterprise Institute shares a chart from Max Roser showing long-run changes in per-capita economic output for South Korea and Venezuela.

The amazing takeaway is that Venezuela was about three times richer than South Korea about fifty years ago, but now that ratio is almost reversed.

This is an amazing ratification of the all-important principle that sustained differences in growth have an enormous impact on a nation’s long-run prosperity.

And it shows that nations from the developing world can experience “convergence” and join the first world if they adopt good policies.

They don’t even need great policies. The key is simply to keep the burden of government at modest levels so the private sector has room to grow.

P.S. For those wondering about my juvenile title, I probably watched Homeward Bound: The Incredible Journey over 100 times when my kids were young and I’m borrowing a very appropriate line from that film.

P.P.S. For those who want more information about South Korean growth, check out this comparison of that country with its northern neighbor.

P.P.P.S. And for those who want to learn more about Venezuela’s lack of growth, see how that country compares to Chile and Argentina.

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John Cowperthwaite deserves a lot of credit for Hong Kong’s prosperity. As a British appointee, he took a hands-off policy and allowed the colony’s economy to thrive. He didn’t even want the government to collect statistics since that would give interventionists data that might be used to argue for interventionism.

I have mixed feelings about that approach. I constantly use statistics because they so often show that free markets and small government produce the best outcomes. I even use data to show that Hong Kong’s economy should be emulated.

On the other hand, there are some statistics that cause a lot of mischief.

I’ve argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the focus to GDI, the debate would more naturally focus on pro-growth policies to boost wages, small business income, and corporate profits rather than the misguided policies (such as Keynesian economics) that are enabled by a focus on GDP.

That being said, there’s a good argument that the worst government statistic is the “trade deficit.”

This is a very destructive piece of data because people instinctively assume a “deficit” is bad. Yet I have a trade deficit every year with my local grocery store. I’m always buying things from them and they never buy anything from me. Does that mean I’m a “loser”? Of course not. Voluntary exchange, by definition, means that both parties gain from any transaction. And this principle applies when voluntary exchange occurs across national borders.

Moreover, people oftentimes don’t realize that the necessary and automatic flip side of a “trade deficit” is a “capital surplus.” In other words, when foreign companies acquire dollars by selling to American consumers, they frequently decide that investing in the American economy is the best use of that money. And the huge amount of investment from overseas is a sign of comparative prosperity and vitality, not a sign of weakness.

And for any readers who nonetheless think protectionism might be a good idea, I challenge them to answer these eight questions.

I’m confident that both Donald Trump and Bernie Sanders wouldn’t be able to successfully answer any of them. Yet it appears they’ve gained some traction with voters by calling for protectionism.

That’s quite unfortunate. If the pro-trade policy consensus in America breaks down, that would create dangerous opportunities for politicians and bureaucrats to rig the game in favor of special interests while also imposing higher costs of taxpayers and consumers.

Let’s dig into the issue.

In a column for the Wall Street Journal, Mort Kondracke and Matthew Slaughter combine to produce a strong defense of trade.

…the four leading presidential candidates…oppose the U.S. ratifying the Trans-Pacific Partnership. All four demonize trade the same way. …Where is the leader with the courage to tell the truth? To say that trade made this nation great, and that trade barriers will destroy far more jobs than they can ever “save.” …America’s exporters and importers are among the country’s most dynamic companies, paying their workers about 15%-20% more than workers earn elsewhere in the economy. The overall gains are large. Trade and related activities—spurred by accords such as the North American Free Trade Agreement, or Nafta, have boosted annual U.S. income today by about 10 percentage points of GDP relative to what it would have been otherwise. This translates into an aggregate gain of about $1.8 trillion in 2015—thousands of dollars per U.S. household every year. …creative destruction—the movement of people and capital from weaker businesses to stronger ones and new opportunities—is how many of the gains from trade arise. …For generations, American presidents of both parties have spoken about the benefits of trade. “Economic isolation and political leadership are wholly incompatible,” warned John Kennedy. “A creative, competitive America is the answer to a changing world,” said Ronald Reagan. “We should always remember: protectionism is destructionism.”

By the way, I think Kondracke and Slaughter paint with too broad a brush. Both Cruz and Clinton are far less protectionist than Trump and Sanders. Though the authors are correct in noting that they’ve been reluctant (especially in the case of Clinton) to vigorously defend free trade.

The great legal scholar Richard Epstein (also my former debating partner) writes about the dangers of protectionism.

There are of course major difference between the insidious Trump and buffoonish Sanders. …Still, the real selling point of each boils down to one issue: In the indecorous language of the pollster, Pat Caddell, Americans feel “they have been screwed” by free trade. …free trade is in retreat as protectionism becomes the common thread across the both political parties. It is as though the economic unwisdom of the 1930 Smoot-Hawley Tariff Act is back.

Richard makes a very important point that politicians often support protectionism in an attempt to hide the damage they do with other misguided policies.

Free trade offers an uncompromising indictment of, and a powerful corrective for, America’s unsound economic policies. …the reason that local businesses outsource from the United States is the same reason why foreign businesses are reluctant to expand operations here. Our regulatory and labor environment is hostile to economic growth and there are no signs of that abating anytime soon. …the steady decline in freedom and productivity inside the United States has continued apace. Ironically, the strong likelihood that the next American president will expand protectionist practices will only make matters worse: firms, both foreign and domestic, are more reluctant to invest in the United States…free trade gives the federal government and the individual states strong incentives to clean up their act so that they can once again be attractive to foreign investment.

My buddy Ross Kaminsky explains in the American Spectator that free trade is good because it is part of the competitive process that boosts living standards, particularly for the poor.

…in trade, as in any economic endeavor, there are losers in the short run. Capitalism is, after all, fundamentally a system of creative destruction. But if there is any area of agreement among economists of all political stripes…it is that free trade provides large net benefits to the societies that engage in it, even if other nations do not lower trade barriers to the same degree. Furthermore, the benefits of trade accrue in large measure to the lower economic echelons of society in an extension of Schumpeter’s profound observation that “the capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

And Ross echoes Richard Epstein’s point about the real problem being anti-growth policies that make America less competitive.

Trade is complex and like all complex things politicians will dumb it down in a way that benefits them, generally by lying to the public and creating a frothy anger against those “damn furiners” instead of pointing fingers at the true culprits: unions, regulators, and politicians of all stripes.

Ross and Richard are right. If politicians really want more jobs in America, they should be adopting policies to boost U.S. competitiveness.

And we don’t need giant steps. Yes, a flat tax would be great, but even incremental reforms such as a lower corporate tax rate or the right tax treatment of business investment would yield big dividends.

Let’s add a few more voices to the discussion.

In an editorial, the Wall Street Journal debunks Donald Trump’s protectionist tirade against China.

The real-estate developer recently added Japan to his most-wanted list of job killers… “They’re killing us. You know what we sell to Japan? Practically nothing.” Is $116 billion worth of annual goods and services exports to Japan practically nothing? Japan is the fourth largest U.S. export market in goods after Canada, Mexico and China. …The best way to boost American exports is to remove trade barriers with new trade agreements. U.S. farm producers would particularly benefit from the Trans-Pacific Partnership with Japan and 10 other countries. Japanese tariffs on beef would fall to 9% in the 16th year of the deal from 38.5% while the 20% tariff on ground pork would be eliminated in six years. Japan’s 21.3% levy on poultry and eggs would be abolished in six to 13 years.

Writing for the Washington Post, David Ignatius defends trade in general and trade agreements in particular.

…the revolt against free trade that has captured both parties could do the most long-term damage. …there’s strong evidence that trade has benefited the U.S. economy and created whole new industries in which the United States is dominant. That’s the essence of the “creative destruction” that makes a market economy so potent: It relentlessly pushes innovation and change. …The bipartisan protectionism of Trump and Sanders has focused its attacks on the Trans-Pacific Partnership… Robert Z. Lawrence and Tyler Moran estimate that between 2017 and 2026, when TPP would have its major impact, the costs to displaced workers would be 6 percent of the benefits to the economy — or an 18-to-1 benefit-to-cost ratio. …David Autor, David Dorn and Gordon Hanson…noted that the pact would promote trade in knowledge industries where the United States has a big advantage and that “killing the TPP would do little to bring factory work back to America.”

Ignatius also makes a very important observation that protectionists want us to be scared of nations that have much bigger problems than the United States.

Trump, the businessman, seems weirdly out of touch with real economic trends. He speaks of Japan as though it were an economic powerhouse, when it has actually suffered a two-decades-long slump; he describes a surging China, when the numbers show its growth is sagging.

Amen. Japan has huge problems and China still has quite a way to go before it becomes a developed nation.

Let’s close with some good news. Politicians may be engaging in anti-trade demagoguery, and there may be some voters that are motivated by hostility to voluntary exchange, but that doesn’t mean the protectionists have won.

Indeed, pro-trade sentiment has never been higher by some measures. Here’s some amazingly positive polling data from Gallup.

P.S. One final point. The growing burden of government spending and taxation since World War II have been very unfortunate, but the good news is that we have strong evidence that the economic damage of worsening fiscal policy has been offset by the economic gains from trade liberalization. It would be tragic to see that reversed.

P.P.S. Fans of Richard Epstein may enjoy this video of him reminiscing about Barack Obama’s undistinguished tenure at the University of Chicago Law School, as well as this video of him dismantling George Soros in a debate that took place at Cato.

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