Wednesday, April 22, 2009

Another Radical Proposal Coming: Hello Protectionism!

I’ve got to give it to Obama and his administration on one point, with them there’s never a shortage of news and radical new proposals. The barrage occurs on a daily basis at break-neck speed.

Today’s news came from a statement from Tim Geithner. He is quoted as saying “We must set ourselves on a path so that one country, or group of countries, does not consume in excess while another set of countries produces in excess.”

First of all the statement is not quite right. What does it mean to "consume in excess". What he's getting at is the trade deficit we have. Second, even if we do have a trade deficit, that's not necessarily a bad thing because it reflects brisk demands for a wide array of goods for the import nation's consumers. It keeps the overall price level down as well. What he's probably referring to is nations such as China, Japan, and others who have an export driven approach to economic growth.

Anyway, with that statement Geithner is now attacking the very core concept of free trade and the time-tested theory of comparative advantage first advanced almost 200 hundreds years ago by the great economist David Ricardo. The theory was generally accepted and embraced when I was in graduate school. Seems another timeless lesson contributing to the growth of nations and the people's economic welfare is about to be thrown off the boat as we enter in the new utopia.

The benefit of free trade is that it allows one nation to produce goods and items in which it has a comparative advantage over another nation. Overall, it allows a nation’s citizens to obtain items more cheaply than would be the case under a closed system. This expands choices, general welfare, allows more people to be employed, and allows people to purchase more of the goods they freely choose to purchase. This theory has been espoused for so long because it is so clearly beneficial to the nation and to the world. That’s not to say there aren’t specific losers in such a scenario. There are, such as manufacturing in America. But overall, it is undeniably beneficial by almost every objective measure. The winners far outweigh the losers. Unfortunately, the losers from free trade have such clout in the Obama administration that it doesn’t matter.

This is significant. I see this as a veiled indication that America is about to go protectionist and usher in a new era of reduced world trade. Only time will tell.

So this is the change that millions of Americans voted for. America is getting what we deserve as a result of electing this man. But it sure sucks if you’re one of the growing numbers of Americans who needs a new job.

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