A Benjamin Cole post
For people of a certain generation, the brilliant, cunning, yet curiously tone-deaf and self-destructive Richard Nixon, U.S. President (1969-1974), is a bottomless well of interesting stories.
Remembered by a dwindling few is that Sunday of August 15, 1971 when Richard Nixon slapped on a 10% tariff, or import surcharge, on nearly all goods entering the United States. Hard as it is to believe today, Nixon also instituted nationwide wage-and-price controls, and took the U.S. dollar off of gold.
And you think Don Trump talks tough? Nixon walked the walk.
Indeed, just a little bit of Camp David weekend work for Nixon, who took to the airwaves that summer evening to tell the American public, “If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.”
Not only is Trump a piker, but he could take lessons from Nixon how to frame an argument.
BTW, top-blogger Scott Sumner will be especially appalled at this: The Dow Jones Industrial Average rose 33 points the next day on Monday, August 16, its biggest daily gain in history—history!—up to that point, and the New York Times editorialized, “We unhesitatingly applaud the boldness with which the President has moved.”
Balance Of Payments
There were always many reasons fair and foul for every Nixonian policy, and the “Nixon Shock” was no different. Nixon wanted to get re-elected, and was going for short-term gains. Playing to the crowd was routine. (I will leave it to Scott Sumner to explain why Wall Street loved trade tariffs.)
But there was also a prominent economic theory of the time that chronic trade deficits impoverished a nation, even if free trade was a good idea. A nation running perennial trade red-ink, and consequent mounting debts to foreigners, would eventually face serous and sustained currency devaluation, meaning citizens could afford less on global markets.
Put bluntly, after the debt-reckoning, instead of traveling overseas and living like kings, Americans would stay home and clean hotel rooms for rich international visitors.
Indeed, it remains a curious feature of modern-day U.S. macroeconomics that federal domestic borrowing to run the national budget is roundly jeered, but trade-induced mounting debts to foreign powers are touted as a positive.
To be sure, the U.S. Federal Reserve seems to be able to print money to monetize debts, national and offshore, though that is hardly a popular sentiment in many circles. For now, I heartily recommend this solution, btw.
But the free-traders say worry not, that the offshore holders of trillions of trade-gained U.S. dollars must invest in the U.S., and that is a valid observation too—but if foreigners “invest” in the U.S. by buying bonds, it just means nationals owe foreigners money to maturity, or 30 years on long-term U.S. Treasuries. If foreigners buy dividend stocks, or property, then nationals owe them dividends or rents in perpetuity.
Americans may be cleaning toilets yet for offshore wealthies. The Chinese own the Waldorf, btw.
Sometimes you will read that that no one anymore bakes their own bread, fixes their own car, and slaughters pigs. So the software programmer trades his services for those goods and services, and everyone benefits. International free trade is like that, and everyone benefits.
But there is still an uneasy feeling.
Are U.S. citizens trading software programming to afford bread, auto repairs and pig-meat cutlets—but also mortgaging the house?
Only to the tune of $500 billion to $700 billion a year, the amount of recent U.S. trade deficits.
The free traders obscure that part of the analogy.
David Glasner blogged recently that free trade is perhaps the most gloried totem in all of macroeconomics.
Still, the advantages of free trade are theoretical, and the world is full of huge structural impediments and institutional imperfections.
Not only that, if free traders were truthful, they would concede that the U.S. economy is taking on mounting debts held offshore.
If you think pointy-headed academia is becoming hostile to non-PC ideas, then try telling modern-day macroeconomists that free trade as conducted today might not be great for the United States, that there may be immediate and also long-run consequences worth exploring.
Now that is a non-PC topic.
PS. Unfortunately, from an intellectual perspective the Nixon experiment with 10% tariffs was short-lived, only four months. After the tariff experiment, the real U.S. GDP expanded by 5.3% in 1972, followed by 5.8% in 1974, so if tariffs were harmful, it may not show up in the data. In fact, the GDP data looks great, but then perhaps without the tariffs the growth rate would have been higher.
PPS. It does seem free traders cite theory when theory works, and then structural impediments, when that works. For example, the U.S. dollar is a reserve currency, so the US can pay off foreign debts by printing money. That is a structural impediment, or institutional imperfection, that works in U.S. favor, often cited by free traders.