Tuesday, November 30, 2010

Beware of Politicians Who Do Not Understand Economics

The following quotation is attributed to Abraham Lincoln in the 1912 three-volume publication Industrial Development of Nations by George Boughton Curtiss. The story is also recounted in the book Free Trade, the Tariff and Reciprocity by Frank William Taussig.
“I do not know much about the tariff, but I know this much, when we buy manufactured goods abroad, we get the goods and the foreigner gets the money. When we buy manufactured goods at home, we get both the goods and the money.”

The quotation is a good example of a passage that sounds persuasive in a political speech, but has no merit when subjected to scrutiny and the application of basic economic principles. To see the fallacy of the protectionist sentiment, use the same logic on a personal level:
When I buy food and clothes from stores, I get the food and clothes and the store owners get the money. When I grow my own food and make my own clothes, I get the food and clothes and get to keep my money.
It is essentially an argument to never buy anything from anyone. But that is absurd. It ignores the economic concepts of specialization, trade, and opportunity cost. People and societies benefit when they devote their time and energy to goods and services they can produce at a relatively lower absolute or comparative cost than others. People then use the income from their specialized activities to purchase the things they are not able to produce as efficiently. Indeed, one of the primary sources of economic growth and prosperity is the willingness and ability to specialize and trade.

Modern politicians are equally guilty of populist appeals that lack economic credibility, such as claims that the primary source of economic growth is lower taxes and reduced regulation of business, or that tax cuts increase government revenues, or that significant reductions to the U.S. budget deficit and the U.S. public debt can be achieved without sacrifices in the form of higher taxes and reduced government benefits.

1 comment: