Sunday, October 10, 2010

Chapter 5 of Toomey's Road to Prosperity

Partial review of The Road to Prosperity: How to Grow Our Economy and Revive the American Dream, by Patrick J. Toomey and Nachama Soloveichik. NY: Wiley, 2009.

A few years ago I wrote a lengthy multi-part review of Rick Santorum’s book. I’d like to do something similar for Toomey’s Road to Prosperity. Each post will discuss one or more chapters of the book with a post at the end with a linked list of all the entries and some final thoughts.

Chapter 5 is "Free Trade Facilitates Economic Growth (pp. 99- 120)

The chapter starts off comparing trade across state and community lines to trade across national boundaries. Toomey is in favor of trade restrictions with totalitarian regimes but otherwise favors free trade. He points out that countries do not tradie with each other. "People who happen to live in different countries do" (99). He also states:

International trade is a win-win situation in which both buyers and sellers benefit. If this were not the case, the trade would not occur (100)
While this makes sense it does not take into account multinational corporations who move jobs from one country to another in search of cheaper labor and less strenuous (or non-existent) environmental regulations. That is not one business trading with another or even one country trading with another. That is one company doing business with itself.

In further discussion of international trade he explains the comparative advantage theory. Basically if two companies can produce the same thing but one can do it cheaper, that company should specialize in that product and the other company should concentrate on the other product.

Moving on to trade deficits Toomey posits (based on the works of some economists) that the only reason we need to export goods is to have access to imported goods. When we buy goods from overseas we spend dollars overseas. He writes:
Foreigners can sell them [dollars] to someone who wants dollars, which will ultimately be used to purchase American goods and services, or they can invest those dollars in American assets. (105)

One good or service foreigners can purchase are U.S. bonds, essentially lending our government money. This confuses me as I thought we wanted to avoid being overly indebted to other countries, especially those who may not have our best interests at heart.

Toomey picks up that theme by discussing out trade imbalance with China. He says the Chinese are taking a greater trade risk by investing so heavily in U.S. government bonds than we are as the Chinese will take a loss if our currency is devalued. There is no mention of the possibility of political pressure or of human rights.

Another economic theory that Toomey supports is that during times of trade deficits we have faster economic growth. He includes charts and graphs from an economist at the Cato Institute to provide numerical proof.

The only exception he agrees with, and then only in rare cases, is defense. We would not want our defense systems to be held hostage by a foreign company that is the sole supplier of a particular component or part used in a critical item of our military hardware. Otherwise, if private industry or venture capitalists do not think an industry or company is worth investing in, then neither should the government.

When other countries subsidize their own industries and undercut American firms, this is not a problem but a boon to the U.S., according to Toomey. American consumers and corporate buyers get a windfall, goods and services and reduced prices. What about workers displaced when American firms are at a disadvantage in trade?
This is a very real problem for those individual auto workers [the example given] and their families, and, as a society, we should have a serious discussion about the public policy options for healing them deal with this problem. (113)

So, apparently he has no solution in mind, just that we should talk about options. He doesn't outline what those options might be. He does, however, state that there are no net job losses caused by foreign subsidies, since, as mentioned above, the dollars we spend buying foreign goods are re-invested in the U.S. at a later date, creating, in his view, a similar number of jobs elsewhere. He writes: (113)
Unfortunately, these job gains are dispersed across the entire economy and are not easily discernible. It is impossible to attribute particular new jobs to consumers' savings on subsidized imports.

He mentions the political difficulties in persuading people of this. I myself remain unconvinced.

He then returns to his theme that foreign subsidies provide less expensive goods to American consumers and that when foreign countries put tariffs on American goods we should not retaliate as that would only raise prices and hurt American consumers. In his view the U.S. should be a leader in the elimination of all tariffs and quotas.

The next section is on manufacturing in America. Toomey says that we have not lost manufacturing jobs -- the U.S.was number one in the world in total manufacturing in 2007. What has declined, he says, is the percentage of American jobs that are in manufacturing. In part this is due to innovation and automation. We think more manufacturing jobs are lost than really are because of industrial turnover -- some industries die out as others start up.

To assuage those who think low paid foreign workers are being taken advantage of, Toomey points out that their situation would be even worse if American firms did not hire them. He says " trade is the greatest anti-poverty program there is" (119). He says we should be happy about increasing the standard of living for these workers.

At the end of the chapter he does throw in a caveat -- there are "practical limits" to trade deficits we just don't know what those limits are. In summing up his support for free trade he says "It is always a good idea to be skeptical when our government seeks to impose limits on personal freedom" (120).

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