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A big concern among economists following President Donald Trump’s inaugural address is his apparent intention to follow through on possible trade restrictions. Last week’s rift between Trump and Mexican President Enrique Peña Nieto certainly did little to assuage these concerns. Many feel that trade restrictions would negate the more positive agenda items like tax and regulatory reform, as well as increases in infrastructure spending.

Wall Street Journal writer Jude Wanniski popularized the idea back in 1978 that the Smoot-Hawley Tariff of 1930 was a primary cause of the stock market crash of 1929 (the coalition to block it fell apart on the eve of the crash) and of the Great Depression. It was certainly not a good piece of legislation; its importance has often been exaggerated. Even free-trader Milton Friedman, when asked if the Smoot-Hawley Tariff caused the Great Depression, argued “No. I think the Smoot-Hawley Tariff was a bad law. I think it did harm. But the Smoot-Hawley Tariff by itself would not have made one-quarter of the labor force unemployed.”

Trade theory: It doesn’t take a whole lot of training in trade theory to know that unskilled or expensive labor will suffer in a country that opens up trade to countries with a big surplus of unskilled labor or less expensive labor (like Mexico and China). Less skilled labor (really workers in general) in industries whose goods aren’t traded internationally, like a plumber’s assistant, are less threatened than those in industries whose goods are traded internationally, like autos and machinery. That’s pretty much what we’ve seen here in the US. There are three ways to mitigate this (two positive and one negative), and I think we will see aspects of all three:

  • Reduce costs: The National Association of Manufacturers regularly points to excessive regulatory costs and compliance (e.g. labor, environmental, tax) as a reason for lack of competitiveness in US industries that compete globally. Some of these represent hard-fought gains for both workers and the environment, but there are probably some excesses as well. It is an area that is certainly worthy of review and is indeed under review.
  • Increase labor skills and mobility: A shortage of workers with the information technology (IT) related skill-sets that modern manufacturing requires, as well as the necessity of retraining workers for non-import competing jobs, are also cited as a prerequisite for mitigating the negative impacts of trade. That means spending more on education and job retraining programs. The track-record of federal “job corps” type educational programs isn’t exactly stellar, but IT advances in the field of education should lead to improvements here.
  • Restrict trade from other countries. One way to protect workers from the negative impacts of foreign competition is to keep foreign goods out, which is why it is called protectionism. This lessoning of competition tends to result in higher priced goods in the protected countries, and it leads to less efficient production by reducing the gains to specialization. That’s why economists tend to oppose trade restrictions.

Businessmen and politics: Another topic of current interest is the strength of business experience, but the dearth of political experience by members of Trump’s cabinet. Here’s how to think about it: Economics is about solving the “economic problem,” which Nobel Laureate Frederick von Hayek described not as how best to build a bridge, which is a technical or engineering problem, but whether or not to build a bridge at all given competing uses for the resources (which could be used to build toys, an aspirin factory, etc.). Decentralized markets tend to solve this economic problem of what to do, as distinct from the technical problem of how to do it, through the signals of profit and loss.

By contrast, in a non-market (i.e. communist) country you have, Hayek said, “the spectacle of a socialist economic order floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation [of profit and loss].”

That is important, because if enthusiasm for business experience in a political cabinet lies in the expectation of more intelligent centralized direction of economic activity, it is (based upon Hayek’s logic) misplaced enthusiasm. Even famed management theorist, Peter Drucker talked about how a successful businessman can be “wrong about everything else in the future economy or society, but that does not matter as long as they are approximately right in respect to their own business focus.” Yet many today express excitement over cabinet members with business experience because they will “have a better idea of what to do.” That’s the wrong reason to be excited.

The better case for business experience lies in the analogy of an elephant walking through the woods and stepping on ants without being aware of it. Here the elephant is the federal government, and the ants are individual businesses. The analogy has to do with the fact that government policy makers, rather than being part of some sinister plan to undermine capitalism, are really (or often) unaware of some of the burdens on business that might result from their policies. In this case appointing cabinet members with business experiences can indeed lead to more sensitivity regarding the impact of government policies on private businesses. It is in that sense that business experience can help to produce better policy.

Jim Kee

Jim Kee, Ph.D. joined South Texas Money Management at the beginning of 2009 and serves as president and chief economist. His expertise lies in combining top-down, macroeconomic insights with bottom-up...