In our recent review of 2016, we expressed concern that the return of a Republican majority in both houses and hold over the White House would only mean the end of the GOP’s limited government ideology that saw a resurgence under the Obama administration. Our fears, it seems, were well placed. In returning from their recess, the Republican House under Paul Ryan’s guidance has made short work of increasing the federal deficit and national debt and is now angling to pass a Ryan-endorsed ‘border adjustment’ that is both morally wrong and economically indefensible. To Donald Trump’s credit, for all of his anti-trade screeds, he seems to be opposing it as “too complicated” and likely a “bad deal.” Nonetheless, as the president-elect’s pragmatism seems to be momentarily getting the better of his economic nationalism, the Congressional GOP is moving forward with the plan. That they are is tragic, as the “adjustment” not only violates the freedom of trade that is the right of every American and the businesses that they own; it is an effort to fight the forces of historical progress and human development themselves.
That, I admit, is a bold claim, so I’ll support it momentarily. First, however, a quick review of what the “border adjustment” that they propose actually is. Campaign year rhetoric aside, it is blessedly rather difficult to unilaterally raise tariffs for a member of the World Trade Organization such as the United States without risking retaliation. Should the U.S. explicitly impose the regime of draconian punishments for any and every company that dares to do business overseas or tries to import goods from abroad, it would see tariffs correspondingly raised on American goods abroad (see this recent article on the decades-long Chicken War to see how such tit-for-tat can get out of hand).
So what is a meddling, anti-market, pull-peddling, lobbyist-bound, mercantilist politician to do? In the case of the current GOP majority, they have decided to instead make all inputs into production that are imported from abroad no longer tax deductible. In the same way that your office supplies or business lunches are tax deductible as a business expense, so are the material goods that go into manufacturing final products. That means that American manufacturers get to write off the rubber, metals, plastics, electronics, fabrics, and other raw materials that they purchase from abroad in order to manufacture consumer products in the U.S.. This is a huge boon for American manufacturers of consumer goods that reduces their cost of operation and, by extension, the prices of the products that they produce.
Under the newly proposed GOP plan, those inputs to production would only be eligible for write-offs if they were being bought from an American manufacturer. Now, it is safe to assume that with transaction costs being greater for doing business with a company around the world than they would be for trading with a company a few states away, if businesses buy their materials from overseas, they did so because they could acquire them more cheaply or in some correspondingly better quality as to make such costs worthwhile. In a competitive market, if their competitors can do the same, they will have to pass at least some of those savings on to the consumers. So the GOP’s plan is to destroy this advantage, force American manufacturers to buy their goods more expensively at whatever price American raw materials producers demand, increase the price of consumer products, and proclaim victory for having saved a comparatively very small number of jobs by transferring wealth from countless consumers to a small minority of workers in raw materials production.
If it is not yet clear, this is not only unjust but also economically destructive and an implicit version of the wealth redistribution that the GOP claimed to detest when they heard it on the lips of Barack Obama. I’ll go one step further, though, and argue that it is inimical to historical progress and the long term economic development of the United States. One frequently hears derisive comments from the anti-trade crowd as to how absurd the notion is of a “service economy,” as opposed to one based on the production of hard, raw materials, durable consumption goods, and heavy machinery. All economic theory be damned, there is something in that constellation of early-to-mid-twentieth-century goods that they believe makes for a healthy and inclusive economy. Regardless of the fact that the flight of workers from the manufacturing sector to the service sector was driven by higher wages and more comfortable work environments in the service sector, they want everyone back to work in assembly lines beneath a sign that enumerates how many days it has been since the last severe injury. (Everyone else, anyways; people never seem to want those jobs themselves when making this argument.)
Nonetheless, the perception remains popular that some time in the late nineteen-sixties and nineteen-seventies a transition away from the model of factory and mining towns meant an end to American greatness and pre-eminence. This sentiment is much of what animates Trumpism. The secret, they believe, lies in returning to old modes of production that were pushed out by free trade and technology. It is true that there has been a transition away from such work—on that they are correct. However, it is as wrong to believe that this process is new as it is to believe that it is destructive. Americans shifted away from manufacturing work and investment in manufacturing shifted resources abroad once Americans’ wages were being bid up by outside options to a point that made it more profitable to shift production overseas. With some notable exceptions of small manufacturing towns, this was a beneficial development for most people involved, and in the long run it will mean dramatically greater wealth for future generations. However, this process did not start in the mid-to-late-1900’s. This is the fundamental nature of economic development, and it dates to early in American history.
In 1930, A. Ross Eckler published an article in The Review of Economics and Statistics called “Occupational Changes in the United States, 1850-1920.” In it, Eckler paints a quantitatively intruguing but also elegant picture of America’s development over that period. “[A]s the industrial complexity of a country increases, many changes take place in its occupational distribution. Entirely new industries and lines of work come into being, while those which were once flourishing pass away entirely. Even those occupations which have retained the same name for a long period are subject to change, so that the workman of 1920 may perform vastly different tasks from those of a similarly designated workman of 1850.” And certainly of 2017, we might add. Most intriguing, however, are the accompanying charts he includes.
This chart, despite its last date being ninety-seven years ago, tells us a great deal about the absurdity of a “border adjustment” today. In the lower panel, though service, trade, and transportation are all small sectors by comparison, the percentage of American workers in this sector is already rising over this seventy year period. Manufacturing employment is increasing also, as it would continue to do long thereafter. Turn your attention to “primary production,” however. The share of the American workforce in that sector (composed of miners, fishermen, lumbermen, quarrymen, and workers in “extractive industries”) peaked in 1870 and began a steep fifty-year (at least) decline. Since the American Civil War, American workers’ comparative advantage has not been in the extraction and processing of raw materials. According to the anti-trade, pro-raw-materials-production crowd, this reallocation from primary production to manufacturing and services should have been met with a fall in prosperity. After all, if wealth and economic power are a direct function of how much of your economy is comprised of early-stage production, then the shift from primary production to manufacuring should have likewise caused some impoverishment! So, did it? Not even a little bit.
As you can see from this table drawn from Stanley Lebergott’s 1960 article, “Wage Trends, 1800-1900,” from 1850 to 1899, the wages of men in farm labor increased by 35%, whereas wages for non-farm labor increased 57%. In cotton manufacturing, 56%. In wool manufacturing, 71%. In iron manufacturing, 109%. For women, wages from manufacturing in cotton increased 100% and 104% in cotton and wool manufacturing by 1889, then declined slightly to a 93% and 94% increase, respectively. American workers’ well being skyrocketed, and under the Second Industrial Revolution America flourished.
Here before us, we see the trends of history. We see the natural trajectory of an economy entering a new age with, despite stagnation and economic mismanagement by central banks and governments everywhere, prosperity and comfort still on the rise. It is this progress, this prosperity, and this comfort that meddling GOP politicians seek to destroy through their ‘border adjustment’ and other economically destructive, anti-trade policies in order to curry for themselves the favor of a few lobbyists and a mass of voters who do not understand basic economics. The reality, however, is that they will destroy Americans’ wealth, devalue their paychecks, and resist the natural course of economic development at a time when Americans crave recovery and relief from a decade of the other guys’ political meddling. The GOP would do well to listen to its own words from a few years ago; to remember the value of free markets, limited government, and fiscal responsibility; and to remember that, whether trading across borders or across the street, taxes and tariffs will only make us poorer.