Politics & Policy

Perplexing Protectionist Politicians

They just don't get it.

The Wall Street Journal offers some provocative editorials and equally provocative replies from individuals who have been “wronged” in the editorials. A recent response by Sen. Shirley K. Turner of the New Jersey state legislature gives us a whole new understanding of the risks of “outsourcing.”

In Turner’s letter to the editor, she states the following when describing the impact of outsourcing:

By sending those dollars abroad, we lose all economic benefit they could bestow upon New Jersey or the U.S. No income or sales taxes will be received from these wages. No goods or services will be purchased from local businesses from these wages. No mortgages will be paid from these wages.

Many years ago, when I taught at New Jersey’s Fairleigh Dickinson University, I attempted to introduce a little levity into my class on economics when the topic of the trade deficit came up. Having lived in Southern California for a number of years, I would describe this whole notion of dollars going overseas by telling the following story:

Early on Sunday morning I would go down to the pier in Long Beach and I would watch all those longshoremen loading pallets of dollar bills onto the ships that were destined for Japan. Obviously, the Japanese wanted dollars in exchange for their Toyotas, Hondas, and Sony products.

The students’ eyes would grow wider as they imagined how this money was leaving America and never returning.

I recalled this story as I read Turner’s remarks and came to realize that politicians — as opposed to doctors and accountants — don’t have to take any type of exam to qualify for elected office. That’s too bad, because the ignorance of the politician in matters that impact economic policy can cause a lot more damage than the surgeon’s knife or the accountant’s calculator.

As Leif Olsen, ex-economist for Citibank, pointed out in a Wall Street Journal editorial many years ago, money never leaves its country of origin. It’s only the ownership that changes. While there is some leakage to support black-market operations, Olsen’s perspective is correct in terms of Turner’s understanding of how dollars flow.

Think of it this way: People in Bangalore (the Silicon Valley of India) don’t spend dollars because their local currency is the rupee. If you can’t relate to rupees, try spending some yen or euros in your local WalMart. It ain’t gonna happen.

Foreigners get paid in local currency even though they are exporting their work output to the United States. Commercial banks exchange deposits around the world, and somewhere along the line, that worker in Bangalore gets paid in local currency. When a foreign entity decides to buy goods and services made in the U.S., that deposit reverts back to where it originated and the trade imbalance is corrected.

I suggest that New Jersey’s Sen. Turner either take a basic course in economics or have some of her younger staff members brush up on what is really happening when a U.S. consumer chooses to purchase foreign goods and services that are paid for in dollars. Just to keep your interest, senator, dollars have no intrinsic value — they represent a claim on U.S. resources. When a U.S. consumer acquires a Toyota in exchange for a promise to repay the Japanese worker by giving him an I.O.U. called the dollar, the dollar must be exchanged for some U.S.-made good or service. The only other choice is for the I.O.U. to go unexercised, giving the equivalent of the Toyota to the U.S. consumer for free. That’s unlikely, don’t you think?

Americans have learned the hard way that protectionism of the type that Turner is advocating only makes everyone worse off. Two politicians named Smoot and Hawley thought they could protect the American farmer by limiting the importation of farm goods from Europe. The success of this ill-advised venture was the steepening and lengthening of the 1930s depression.

Turner and her welfare constituents may find that fewer New Jersey taxpayers are willing to absorb yet another tax increase to pay for the higher costs of domestic labor. She may find out for certain the next time she is up for reelection.

– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and principal of Victoria Capital Management, Inc.

Recommended

The Latest