Pay More and Get Less
JULY 01, 1982 by R DEAN RUSSELL
Dr. Russell is Professor of Management, School of Business Administration, University of Wisconsin at La Crosse.
My old economics professor was absolutely sure that a favorable balance of trade is good; and thus, of course, an unfavorable balance of trade is bad. He told us students that the trade arrangement of “more goods and services going out of a nation than coming in” is called favor able because that’s what it is.
While I accepted that conclusion at the time, I’m now convinced that (if we must choose) an unfavorable balance of trade is the best arrangement. That is, the people of a nation are better off if more goods and services are coming into the country than are going out. Here’s why.
Logically, you would expect each of us individually (and thus all of us collectively) to prefer to get more goods and services for our money than we now get. But that’s not the trade policy favored by our leaders. Our national policy—enforced by fines and imprisonment—is just the reverse of how every one of us acts when we have a choice.
Astonishingly, we Americans collectively vote for leaders and laws that compel us to pay more than we need to pay for many thousands of the products we buy. And we have happily followed that procedure ever since Alexander Hamilton convinced Thomas Jefferson and the other founding fathers that the new nation would be better off if all its citizens were compelled to pay more for less.
What Alexander Hamilton wanted was, of course, a favorable balance 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 imports) decrease the amount of products coming in. This artificial scarcity—i.e., fewer goods available within the nation because of increased exports and decreased imports—was endorsed by the very first United States Congress. And we professors of economics have generally been teaching that strange concept in our classrooms ever since Alexander Hamilton spelled it out in his famous Report on Manufactures 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.
I think I first began to wonder about that almost universally accepted idea concerning favorable (and unfavorable) balances of trade when I was a soldier overseas. I knew that the civilians back home were working 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 another) what they had produced.
That procedure went on for several years. We Americans used every 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 booming. A lot of people were becoming wealthy. Even my own pay had more than doubled. And for the first time in my life, I actually saved money. In addition to a steady job and more pay, I also got free food, housing, medical care, clothing, and life insurance. And apparently, most of this good fortune was based on a favorable balance of trade. A thousand times more goods and services were leaving our country 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 prosperity in general. And an unfavorable balance of trade destroys 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 should (in the real terms of actual exchanges of goods and services) pay more and get less.
In spite of what seemed to be obviously true, however, I kept wondering 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 because they get more goods and services 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 balance of trade. We shipped out hundreds 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 my old professor, prosperity continued right on here at home. Everybody was working. The conventional statistics on employment, production, and trade indicated clearly that we were more prosperous 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 nation 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 my old economics professor (and Alexander Hamilton) had been wrong all along. An unfavorable balance of trade is not necessarily bad. On the contrary, if one must choose, it is the preferred arrangement. Without exception, every consumer (everyone) is better off if he has more, not less. To use the ultimate simplification, observe that people with many goods and services have more goods and services than do people with fewer goods and services—and where the goods and services come from is not necessarily relevant to prosperity over a significant 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 unbelievable error of confusing the work with the product. I thought it was the jobs, rather than the products, that created prosperity. Under our 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 services 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 resulted in double-digit inflation and an economy in shambles. It became increasingly obvious that our apparent prosperity had been based on a consumption of our capital, a decrease in our irreplaceable resources, 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 dependable correlation between balances of trade and employment. And the search for it is often like the similar search for a relationship between machines and loss of jobs, i.e., it appears to be governed more by emotion than science. During our long years of favorable trade balances, we sometimes had much unemployment. And sometimes we had labor scarcities. I have found this same situation in Argentina and various other countries. And the unfavorable balances of trade in Europe sometimes seemed to have a negative correlation with employment, i.e., the larger the inflow of goods and services from abroad, the more jobs at home in Europe.
One permanent 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 car was done by foreigners, not American workers. At the same time, however, jobs in general in the United States may be high or low. And restrictions against imports in an effort to induce us to buy domestic (instead of foreign) cars could cause us to buy fewer cars in general, rather than more American cars. There simply is no reliable correlation between national employment levels and national balances of trade, either positive or negative. You can find many examples to “prove” whichever viewpoint appeals to you.
Another relationship in this general area that no one can deny is this: When we individuals voluntarily 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 wouldn’t voluntarily buy it. That’s proof positive. The person who disagrees is necessarily implying that he knows what’s best for 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 balance 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 writers, 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 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 un-developed.