Let Them Eat Cake–But Only If It Is Baked Locally

by Burt on October 4, 2010

The rediscovery of the Constitution and of the value of free markets is possibly the most exciting political trend of the last two years. But there is a cockroach in the cream: Americans are, as the Wall Street Journal put it today, “sour on trade.” Fully 53 percent of Americans, according to the WSJ/NBC poll, believe that free-trade agreements have hurt the U. S. Only 32 percent believed that in 1999.

Of course, current trade agreements could stand improvement, but such a trend toward protectionism is alarming. And the Democrats are trying to score points with protectionist rhetoric in the current election campaigns with the cry that corporations are “shipping jobs overseas.”

Three points are in order. First, growing corporations often expand to new markets overseas. Ray Kroc, for example, the CEO of McDonalds, put at least one of his hamburger joints in almost every county seat on the map. Then he took the profits and went to Europe and all continents except Antarctica. That was a natural process of growth. Thus, overseas expansion can be a fruitful part of corporate expansion and helpful to American corporations.

Second, the U. S. corporate income tax is 35 percent, and if the Bush tax cuts are not renewed, the dividend and capital gains taxes will both go up in 2011. That makes the U. S. a less tax-friendly country than almost anywhere else except Japan. European countries typically have corporate taxes of 15 to 20 percent, and money naturally flows to places where it is easy and profitable to invest. Back in the 1920s, the U. S. slashed taxes across the board and attracted capital from all over the world. After World War II, the U. S. cut corporate tax rates from 90 to 37 percent. Investment skyrocketed and that helped the U. S. banish any trace of a Great Depression for more than two generations. Those are the two models we need to emulate.

Third, hostility to free trade inevitably leads to tariffs, and rising tariffs leads to stagnation. One of Adam Smith’s great insights in 1776 was that countries that did lots of trading were becoming more prosperous than self-sufficient countries that seemingly had high productivity and much gold. The U. S. saw the disaster of high tariffs when we passed the highest tariff in U. S. history, the Smoot-Hawley Tariff, in 1930. By sharply increasing the tariff on Swiss watches, for example, the U. S. was making watches more expensive for Americans to buy. Also, the Swiss then quit buying U. S. cars, typewriters, and manufactured goods. The retaliation from Europeans to our Smoot-Hawley Tariff shut off our export market, and thus caused our farm economy to crash. With our farmers having no foreign outlet for crops, FDR intervened by paying farmers not to produce. That move then caused higher taxes and further intervention, all of which extended the Great Depression throughout the 1930s. In other words, one bad interventionist move often causes another, and the U. S. economy and the taxpayer are the major victims.

Economic education is important. Countries that encourage free trade are more prosperous than those countries that try to be self-sufficient. I’m ready to trade my baseball cards with any Englishman with a good Margaret Thatcher card in fine condition.

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