Not giving credit where credit is due

Just received this note so thought I would say something about the question asked. And until I remove this sentence you are reading now, think of this post as work in progress until I have put the right words in the right order. Here is the note:

I enjoy reading your contributions to Catallaxy on a regular basis. I can’t say I know a lot about economics, but I especially like hearing you arguments to current economic theory. Rational debate is a powerful tool.

Recently, I was at work and a conversation around the lunch room turned to America politics.

Most of my work colleagues are “Never Trumpers”, but when I pointed out the American economy was currently doing very well, with record high stocks and decade low unemployment, one of my colleagues said something thatade me questions Donald Trump’s success. The comment was…

“The current economic success in American has nothing to do with Donald Trump. It wouldn’t matter who was President at the moment. The economy just goes through natural peaks and troughs in a capitalist society.”..

Knowing that the President has now been in place 12 months, and knowing that the Republicans still have not released their tax plan, is the above statement true?

Nothing like magical thinking to make you believe in the tooth fairy.

The parlous state that Obama left the American economy in will require an astonishing amount of luck combined with a great deal of very well constructed policy to move past. You do know that in the entire eight years Obama was president, the US economy on not a singe occasion achieved a growth rate as high as 3%. Trump has now achieved it twice, with more to come. Obama even inherited the recovery phase following the GFC which is almost invariably an economy’s period of strongest growth since part of what happens is the recovery of ground lost during the recession. Instead, low growth and stagnant employment. There is not an economic story to tell to his credit, even with interest rates at near zero and public spending at an all-time high, which in standard economic theory are a good thing.

The political business cycle works like this. The left elects a typically economically ignorant numbskull who thinks markets don’t matter and public spending plus charisma are all that is required. The result is economic damage that goes on until finally enough of the socialists in our midst finally decide to get rid of these incompetents and bring in someone who knows what they are doing. Very old story. Whitlam in the 1970s, Rudd-Gillard in the 2000s, Jimmy Carter giving way to Reagan, Labour followed by Thatcher etc. The return to market principles lasts just long enough before another adventure in socialist central direction, which is why we can never rid ourselves of bad policy. But most of the time, socialist wreck things followed by conservatives who fix things up. Your mate is one of those who cannot bear to recognise that non-market policies never work. Had Hillary been elected, the certainty is that no recovery of any kind would have been visible. Ignorance of the necessities of market-based policies is the rule, and only deep deep pain for a large number of people finally get them to turn around. Venezuelans may just be there now, but the entire country invited the problems it has and the cure, if they ever get around to one, will be short-lived because the world is filled with people who believe strong economies are like good weather, just part of the nature of things, and into every economy a bit of rain must fall, etc etc. You won’t convince him, but at least you can see it for yourself.

So let me get into a bit about foreign trade and protection. Let me take you to Joan Robinson, Keynes’s most devoted follower, but not everything she says is wrong. Such as this, wher her point is that free markets are good for world trade, if good at all, but can harm individual economies quite substantially:

The case for Free Trade was basically the same thing as the general case for the individualistic pursuit of profit, though, starting from Ricardo’s theory of comparative costs, it was dressed up in a different form. It exhibited an equilibrium position in which competition leads to the maximum utility in the world as a whole being produced from given resources.

But, to appeal to the politicians and the voters, the good of the world as a whole was too thin. The argument that protection could benefit one country only at the expense of the rest would not do; the public might have answered: ‘If it is going to benefit us, lead us to it. Nor was it sufficient to prove, in a hard-headed classical style, that Free Trade would benefit the United Kingdom. It had to be shown that, under it, each and every country would be better off, so that it could be preached round the world with a good conscience. Protectionists are represented as being mere lobbyists for particular interests. A tariff might benefit one trade, but it was bound to do more harm to the rest of the economy than good to those protected.

If is true enough that the demand for a tariff more often comes from a lobby than anywhere else, but it is not true that no good national arguments can ever be found for protection. . . .

Even so, after all the interesting problems had been ruled out, the case for Free Trade as a benefit to each nation could not be made out. The weak spot in the analysis was in overlooking the implications of the assumption of universal perfect competition. It is obvious enough that any one group of sellers can normally do better for themselves collectively by agreeing to keep up prices than by competing individualistically. They do less business, but at a higher profit per unit. Similarly any one nation, within the conditions of the equilibrium model, may be better off with a smaller volume of trade at higher prices of exports in terms of imports than at the Free-Trade position.

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