Pay More and Get Less; B. Dean Russell

Logically, you would expect each of us individually (and thus all of us Dr. Russell is Professor of Management, School of Business Administration, University of Wisconsin at La Crosse. 390 P. Dean Russe Pay More and Get Less collecti vely) to prefer to get mor goods and services for our mone: than we now get. But that's not th trade policy favored by our leaden Our national policy -enforced b: fines and imprisonment-is just th reverse of how everyone of us act when we have a choice. Astonishingly, we Americans co] lectively vote for leaders and law that compel us to pay more than w need to pay for many thousands c the products we buy. And we hav happily followed that procedure eve since Alexander Hamilton cOrJ vinced Thomas Jefferson and th other founding fathers that the ne, nation would be better off if all it citizens were compelled to pay mor for less. What Alexander Hamilton wante, was, of course, a favorable balanc PAY MORE AND GET LESS 391 of trade for the nation. He wanted laws that would increase the amount of products leaving our country and (by the use of various measures to restrict and to raise the price of im ports) decrease the amount of prod ucts coming in. This artificial scar city-i.e., fewer goods available within the nation because of in creased exports and decreased im ports-was endorsed by the very first United States Congress. And we professors of economics have gener ally been teaching that strange con cept in our classrooms ever since Alexander Hamilton spelled it out in his famous Report on Manufac tures in 1791. We honestly believe it is so, in much the same fashion as the doctors who treated George Washington believed that the dying president needed to be bled again when he really needed a transfusion of more blood to keep him alive.

Make-Work Schemes I think I first began to wonder about that almost universally ac cepted idea concerning favorable (and unfavorable) balances of trade when I was a soldier overseas. I knew that the civilians back home were work ing long hours to produce products of various kinds. Then they shipped large amounts of them overseas to us soldiers. We, in turn, worked long hours to destroy (in one way or an other) what they had produced. That procedure went on for several years. We Americans used ev ery possible incentive to increase production (the Gross National Product). Then we destroyed a large percentage of it! and produced it again. And everybody agreed that we had never had it So good. Everybody seemed better off than before. Everybody had a job. The economy was boo:ming. A lot of peo ple were becoming wealthy. Even my own pay had more than doubled. And for the first time in my life, I ac tually saved money. In addition to a steady job and niore pay, I also got free food, housing, medical care, clothing, and life insurance. And ap parently, most or this good fortune was based on a favorable balance of trade. A thousand times more goods and services were leaving our coun try than were coming in. Perhaps a million times more! It was perhaps the most favorable balance of trade ever recorded.

The logic of my old professor seemed sound indeed. He had taught us that a favorable balance of trade brings more jobs, more production, and more prospetity in general. And an unfavorable balance of trade de stroys jobs and! impoverishes the people. Therefore he (along with Alexander Hamilton) argued that the economic policy of our nation should be to have its people produce and ship out of the country more products than come in. If we want to prosper, he told us, we Americans as a group 392 THE FREEMAN July should (in the real terms of actual exchanges of goods and services) pay more and get less. In spite of what seemed to be ob viously true, however, I kept won dering if we could really become prosperous by shipping out more than comes in. Is it really true that the people of a nation are worse off be cause they get more goods and ser vices than they give? Doubts began to enter my mind.

But just at the moment those doubts became overwhelmingly nagging, the Marshall Plan came along. Again I observed another mass outpouring of goods and services from the United States going all over the world. And most of it was free to the people who got it. I saw us rebuild Germany and Japan and various other nations. This went on for many years. Policies Have Consequences We always had a favorable bal ance of trade. We shipped out hun dreds of billions of dollars worth of American products, raw materials, and labor-and got little or nothing in return. And as had been predicted by myoId professor, prosperity con tinued right on here at home. Ev erybody was working. The conven tional statistics on employment, production, and trade indicated clearly that we were more prosper ous than we had ever been. The economy was booming. And with minor ups and downs, it continued to boom year after year.

Then one day, the charade stopped. The nations with the unfavorable balances of trade (i.e., those that got the goods and services we produced) had become prosperous. And the na tion with the most favorable balance of trade the world had ever known (i.e., the United States that had produced the goods and shipped them out of the country) was in trouble. Reality displaced the mirage that had enticed us for long. I finally understood that myoId economics professor (and Alexander Hamilton) had been wrong all along., An unfa vorable balance of trade is not nec essarily bad. On the contrary, if one must choose, it is the preferred ar rangement. Without exception, ev ery consumer (everyone) is better off if he has more, not less. To use the ultimate simplification, observe that people with many goods and ser vices have more goods and services than do people with fewer goods and services-and where the goods and services come from is not necessar ily relevant to prosperity over a sig nificant period of time.

I simply cannot now understand how, for so many years, I failed to detect that simple truth. Along with most Americans, I had made the un believable error ofconfusing the work with the product. I thought it was the jobs, rather than the products, that created prosperity. Under our 1982 PAY MORE AND GET LESS 393 policy of encouraging a favorable balance of trade, it is true that we increased both the number of jobs and the amount of goods and ser vices produced. We accomplished that seemingly desirable goal, however, by shipping out of the country large quantities of the goods and services produced by the increased jobs. The simple truism that we thereby had less (not more) didn't occur to me. We paid people to produce. Then we exported the production. That left us with fewer goods and more money. And that, in turn, eventually re sulted in double-digit inflation and an economy in shambles. It became increasingly obvious that our appar ent prosperity had been based on a consumption of our capital, a de crease in our irreplaceable re sources, and a prodigal waste of our scarce labor . We were eating the seed corn in an all-out effort to increase jobs.

Balances and Jobs In truth, however, there is no de pendable correlation between bal ances of trade and employment. And the search for it is often like the similar search for a relationship be tween machines and loss ofjobs, i.e., it appears to be governed more by emotion than science. During our long years of favorable trade bal ances, we sometimes had much un employment. And sometimes we had labor scarcities. I have found this same situation in Argentina and various other countries. And the un favorable balances of trade in Eu rope sometimes !seemed to have a negative correlation with employ ment, i.e., the larger the inflow of goods and servic¢s from abroad, the more jobs at home in Europe. One permanertt relationship that can be shown between employment and trade balances, however, is this: If an American buys a foreign car, it's true that the work of producing that foreign ca~ was done by for eigners, not Am~rican workers. At the same time, however, jobs in gen eral in the United States may be high or low. And restrictions against im ports in an effort to induce us to buy domestic (inste~d of foreign) cars could cause us to buy fewer cars in general, rather than more American cars. There simp~y is no reliable cor relation between national employ ment levels and national balances of trade, either positive or negative.

You can find ~any examples to "prove" whichever viewpoint ap peals to you. Another relationship in this gen eral area that no one can deny is this: When we individuals volunta rily buy an imported article, we get a better product-or a better price than would have been the case if we bought a domestic article. If this were not so, we woul~n't voluntarily buy it. That's proof positive. The person who disagrees is necessarily imply394 THE FREEMAN ing that he knows what's best for us all of us-even if it costs us more money. I say no. Finally (and the reason for this article), we are now blaming our present economic difficulties largely on the fact that we ourselves have been running an unfavorable bal ance of trade for several years now. As a nation (and in real terms), we are getting more than we are giving. The politicians, the editorial wri ters, the labor leaders and, most of all, our business leaders are now claiming that we are poor for this reason: Those crafty foreigners are literally flooding our country with Threats to Progress products and services-much of it free and almost all of it of excellent quality at low prices.

Everywhere I go, I hear people saying that we can have prosperity again if we do something to decrease the amount of products and services we have. They also say we must raise prices to bring back prosperity. They are advocating laws to force us to pay more and get less. There's no way that such a policy can bring prosperity. It is a delusion that will soon drop us into a new economic category-the developed nation that is becoming undevel oped. i IDEAS ON UBERTY THE so-called "benefits" of tariff protection are illusory-the only con sequence of the tariff being that the domestic owners and workers are competing with one another in an industry erected on a false base. The base is false and weak because it is supported by the threat of force force which directs individual spending-instead of by voluntary choices. The force is directed against consumers, the friends and neighbors of those who seek special privileges for themselves. But consumers do not respond kindly to force or threats of force. They have only so much buying power, and they cannot be forced to buy more of everything. Nor will they buy a commodity as freely as before ifits price is forced upward by a "protective" tariff. Thus, tariffs serve merely to put the whole economy on an artificial foundation instead of on a sound business foun dation. No one really gains-and nearly everyone loses-by this ar rangement. It stifles progress.

w. M. CURTISS, "Serving Consumers"