Perhaps the most frightening aspect of the current US presidential campaign – is the candidates’ level of ignorance about basic economics. Three of the five remaining candidates have made promises; or advanced policies on economic matters, that economists consider impossible.
The loudest and most blatant is offender is Republican Donald Trump; who is ironically enough a businessman. Trump’s most popular promise is that he will create large numbers of new jobs by restricting trade with China and Mexico. To acomplish those goals; Trump is promising a 45% tariff on all Chinese products and a 35% tariff on some Mexican goods.
There are several flaws with Trump’s premise beginning with the fact that under the US Constitution only Congress; and not the President, has the legal authority to regulate trade. All Trump could legally do on trade is to propose tariffs to Congress; under the Constitution, that body is not even obligated to return his phone calls.
The Flawed Arguments on Trade
Some other problems with Trump’s trade argument include:
The data shows that trade agreements do not create job loss. Studies by the Peterson Institute for International Economics found that job gains from the pending Trans-Pacific Trade Partnership would offset employment losses, the Associated Press reported.
Trump claims that China is hurting the US by undervaluing the Yuan. Economists think that the People’s Bank of China is actually trying to prop up the Yuan to raise its value.
American manufacturing is actually booming under the current trade regime. Data from the Federal Reserve’s Industrial Production and Capacity Report indicates that US production of durable goods hit a record high in 2015. American manufacturing output came within three percentage points of tying an all-time high set in 2007, in 2015.
Despite the high manufacturing output factory jobs only accounted for 8.7% of US employment.
Even though US production of durable goods is three times what it was in 1980 – America has lost around five million manufacturing jobs since 2000.
The available data indicates that Trump’s trade argument; which he shares with Democratic Presidential Candidate and US Senator Bernie Sanders (I-Vermont), has no basis in reality. “So-called ‘free trade’ policies hurt US workers every time we pass them,” Sanders wrote in an April 29, 2015, Guardian Op-Ed piece.
The high manufacturing output indicates that there are other causes to job losses that are being ignored. Yet the only suggestion that Trump can make is to impose high tariffs. Sanders’ offers no specific suggestions, but it sounds as if he would sympathetic to Trump’s tariff suggestions.
Poll results indicate that election counts might be the real motivation for this obsession with trade. More than half of all voters in Democratic and Republican primary elections in Michigan in March told pollsters that they believed free trade deals kill jobs, the Associated Press reported. Trump and Sanders both won their primary contests in Michigan.
The obsession with trade and tariffs should worry voters because many economists blame a trade war; trigged by the Smoot-Hawley Tariff Act of 1930, for some of the worst effects of the Great Depression. That law raised tariffs by 20%, even though 1,000 economists signed a petition against it.
One result of that law was that US trade with Europe fell by two thirds. Another was that US unemployment rose to a level of 24% by 1932 – meaning that one out of four Americans was out of work. Economic history shows us that tariffs actually cause unemployment.
An Even More Dangerous Idea from Ted Cruz
High tariffs are not the only potentially disastrous trade policy that Presidential candidates want to enact. Trump’s main rival for the Republican nomination, US Senator Ted Cruz (R-Texas); would like to return America to the gold standard.
Cruz’s thinking is that pegging the dollar to gold would make it more stable and prevent inflation. Anybody who has studied the gold market knows that this is not true. Between January 1980 and January 2001 an ounce of gold lost $1,712 worth of value; the all-time high gold price was around $2,066 an ounce in 1980 and the all-time low price was around $354 a troy ounce in 2001.
This means that a gold-backed dollar would have lost around 70% of its value in 20 years triggering high inflation. Data from the St. Louis Federal reserve indicates that the dollar would have lost 56% of its value between 2007 and 2013, if a gold standard had been in place. That would have led to hyperinflation and economic collapse.
It is not clear how serious Cruz is about the gold-standard, but it is apparent his economic knowledge is limited. Interestingly enough, Cruz’s wife; Heidi, is an investment manager at Goldman Sachs who served as an economic director for the US National Security Council during the George W. Bush Administration. Perhaps Ted should ask his wife’s advice on economic policies.
Americans should be thankful that the Constitution gives Congress and not the President the power to set economic policy. Many of those seeking the nation’s highest office seem to know nothing about economics.