Isolationism not the answer

Says Donald Luskin from NRO:

Isolationist Ignorance in Action
Watch Lou Dobbs ascend to the pinnacle of protectionist prevarication.

By Donald Luskin

The advocates of free trade have on their side over 200 years of settled science in economics, going all the way back to Adam Smith. The advocates of protectionism have Lou Dobbs.

With his nightly harangues on CNN and through his books, Lou Dobbs has become the public face of today’s dangerous movement toward economic isolationism. That movement has become all the more dangerous since the Democratic party took control of Congress. Beholden to Big Labor, the Democrats have no choice but to cater to that powerful lobby’s fears of a dynamic globalized American economy.

Last month, when Dobbs testified before Congress, it was not just a case of preaching to the choir, or even the blind leading the stupid. It was vivid proof of Goethe’s famous dictum, “Nothing is more terrible than ignorance in action.”

Let’s take a look close look at Dobbs’s testimony. It was long on impressive-sounding claims based on apparently authoritative statistics. But virtually every seeming fact that Dobbs cited is flat wrong.

Dobbs said that free trade is costing America jobs. With the unemployment rate now at only 4.4 percent, it’s hard to see what he is complaining about. Nevertheless he stated that

Since the beginning of this new century, the United States has lost more than three million manufacturing jobs. Three million more jobs have been lost to cheap overseas labor markets …

That’s a total of six million jobs. According to the Department of Labor’s Bureau of Labor Statistics, there today are only 6.7 million unemployed people in the U.S. to begin with. So just what is Dobbs promising? That if we had pursued protectionist trade policies, we’d have six million more jobs — leaving only 700 thousand people unemployed? That would put the unemployment rate at less than one half of one percent — a tiny fraction of the lowest unemployment rate ever achieved in history.

Surely this sets a new high water mark for sheer absurdity in the long history of political promises to provide more jobs.

In his testimony, Dobbs also claimed that

The trade deficit has more than doubled since President George W. Bush took office. The U.S. trade deficit has been a drag on our economic growth in 18 of the 24 quarters of George W. Bush’s presidency.

Let’s first deal with the pandering and Bush-bashing inside what was supposed to be testimony about free trade. Everything Dobbs said applies to the Clinton years, only more so. The trade deficit grew more than seven-fold during Clinton’s presidency. And it was a so-called “drag on growth” in 25 out of 32 quarters, a ratio that’s worse than Bush’s.

Second, and more important, the argument that the trade deficit is a “drag on growth” at all makes no concrete economic sense. Yes, if we imagine that every penny spent on imports were instead spent on similar goods made in the U.S., then our gross domestic product would be higher, by definition. But what if there were a law saying U.S. consumers could no longer buy, for instance, German beer? Does that mean U.S. consumers would actually switch to American beer? The answer is not clear. And even if they did, given that today some consumers must prefer German beer to American beer when there is choice, it’s not evident that our growth would be any higher, as Dobbs predicted.

Dobbs also declared that

Salaries and wages now represent the lowest share of our national income than any time since 1929. Corporate profits have the largest share of our national income than at any time since 1950.

The claim about salaries and wages is so deceptive as to very nearly be a lie. Dobbs ignored the fact that for many of the years following 1929, companies paid only salaries and wages, and no fringe benefits such as pensions or health care. In the modern economy, fringe benefits are a significant portion of total compensation. Today, the income share of total worker compensation — wages and salaries plus benefits — is higher than in any year prior to 1967, and lands in about the middle of the narrow range in which it has since fluctuated.

Meanwhile, the claim about corporate profits is flat-out wrong. Corporate profits’ share of national income has been higher than it is today in 17 of the years since 1950.

Dobbs also argued that

The cumulative effect of more than three decades of trade deficits and mounting external debt has produced our first investment income deficit on record. This is the first time that Americans have earned less on investments abroad than foreigners earned on their investments in the United States since 1946, when the Commerce Department began keeping records.

Dobbs never said why this is bad, or why a difference between nations in investment flows should be referred to as a “deficit.” Is there any particular reason why it is virtuous for us to earn more from investing in foreign nations than the entire rest of the world earns by investing in us? Rather than being the result of trade policy, this could happen simply because investments in America perform better than investments elsewhere. And wouldn’t that be a good thing?

Be that as it may, Dobbs’s claim is statistically untrue. According to the Department of Commerce’s Bureau of Economic Analysis, in 2006 the U.S. earned $57 billion more from investing abroad than all other nations earned by investing here.

A cavalcade of error and statistical misrepresentation was the best the superstar of the protectionist movement could do. When it comes to the facts, Dobbs ought to consider a more liberal personal trade policy. If he wants the truth, he’ll have to import it from someplace else. He’s fresh out.