Tuesday, February 26, 2008


Good news! The free trade horse is out of the barn and there is no way for Hill-Obama to put it back. The bad news is that they will severely damage the US economy if they are able to implement even a small portion of their protectionist ideas. The other good news is that even if elected, they will not be able to get much of what they have been proposing past the congress. There is political irony flowing in all directions.

You might recall that Abraham Lincoln, a republican, was "a champion of the people", the black slaves in particular. What you may not remember is that Lincoln was "the champion of big business" who said to heck with the prices paid by the little guy. When a government places a tariff (tax) on imported goods, the government raises the profits for that business but causes all the consumers to pay too much. Lincoln was the champion of equality who promoted inequality by his close ties with railroad barons and by his tax and spend policies.

In one of the all time biggest transfers of government wealth to the hands of the few, Lincoln slapped a 44% tariff on imported goods so that his administration could pay for the construction of privately owned railroads. History books are apt to mention the building of the transcontinental railroad as the crowing economic achievement of the Lincoln administration but the fact is that Lincoln was dead in 1862 many years before the railroad was completed and the "Golden Spike" driven in 1869 was only a publicity stunt. The spike was driven after the completion of the connection from Omaha Nebraska to Sacramento California, well short of the Pacific Ocean and very well short of the Atlantic.

The "gentleman" that made the most off the construction was Thomas Durant. The law passed by congress outlawed more than 10% ownership by any one person. Durant, who made his first fortune by smuggling cotton during the war, paid other people to hold shares for him in their names. He ultimately owned 50% of the Union Pacific. His list of tricks included putting oxbows into the routes because he was being paid by the government for each mile constructed. He also played dirty tricks to grab land that was then sold to the government at inflated prices. On other occasions, he let out false rumors of where the spur lines would go to give him a chance to buy shares in competing railroads that would ultimately receive the rights to these lines. In other words, Durant paid bureaucrats and congressmen to gain insider information. No one knows for sure how many congressmen looked the other way while Durant plied his corrupt trade but the Union Pacific went bankrupt a couple of times along the way.

Durant was not the only one who took advantage of the government. On more than one occasion, an eastern leg would purposely miss the connection to the western leg so that two tracks were built parallel to each other with the government stuck with the bill for both tracks. In another ploy, "agents" of railroads pretended to have the right of imminent domain to take land, it was sign it over for a little bit of money now or lose it in court with no compensation. By some accounts, Frank and Jesse James got into the train robbing business after their Mother was cheated out of the family farm. Another tragedy occurred when certain Indian Lands were taken. The Indians fought back but the railroads hired soldiers to kill tens of thousands of buffalo, demoralizing and starving the Indians. Still, the worst part of the story was the treatment of laborers. The US had just fought a war to free black slaves so it would not have been kosher to rely too much on "negro" labor. Since the work was hard and dangerous, other minorities were "recruited". The Irish and Mormon's were paid from $1 to $3 per day. The Chinese, many of whom were "Shanghaied" were lucky to receive 50 cents and a bowl of beans per day. To speed the tunneling through the mountains, a volatile compound called nitro-glycerin was introduced. No one knows how many Chinese were killed before the story was reported. From the governments point of view, the link-up of California to the east was worth whatever the cost, because a significant percentage of Californians wanted to succeed from the Union.

At any rate, Lincoln imposed the horrendous tax of 44% on all foreign goods for the purpose of building the transcontinental railroad. After the devastating war, the people needed to complete the long talked about "manifest destiny" of a United States from "sea to shining sea". As any student knows, new "taxes die hard" and we should know by now that any country that isolates itself from the rest of the world ultimately pays a dear price. By 1929, the size of tariffs had fallen from 44% to less than 8%. When the depression hit, big government republicans, Hawley and Smoot naturally thought that the problem could be solved by legislating a series of tariff increases. Uh Oh! this was exactly the wrong policy needed. Before the ink had dried on the final bill and well before the bill was signed into law, Canada and other nations retaliated. The bill was signed into law June 17, 1930 and a tough economic time was turned into The Great Depression.


Dwight Eisenhower was the first "champion of the people" versus the historically "big business republicans". Ike was not liked by "conservative" republicans because he continued the democratic "new deal" tax and spend policies. Even the reduction of war spending did not keep Ike from adding to the government deficit. He continued to expand "domestic programs". The construction of the Interstate Highway System was basically a "new deal, make work, project". The most economically sound part of his administration was his trade policy. Ike followed the Roosevelt and Truman lead and by 1956 the success of his trade policy forced many to repudiate the failed policies of the past.

Over the years, a couple of good trade steps forward were always followed by at least one step backward. Along the way, big unions joined big business to fight for exorbitant profits and wages by "protected businesses", this, all at the expense of consumers who were forced to overpay for the goods and services offered by these "protected industries". In modern times, there have been three presidents who deserve the most credit for championing the cause of lower prices for the people. They were John F. Kennedy, Ronald Regan and Bill Clinton. The president, who was at the right place at the right time and who did the most for the people was Bill Clinton. During his term, in 1994 NAFTA and in 1995 the WTO came into being. NAFTA gets the most press but all members of the WTO are automatically granted most favored nation trade status with all other members.


As Paul Harvey would say, "Here is the rest of the story".

Moises Naim gives us a clue to the rest of the story in "Foreign Policy Magazine", where he reports that from 1983 to 2003, sixty-six percent of all tariff reductions were unilateral! In 1992 when the European Union lifted barriers to internal trade of goods and labor, the US was left with little option but to come up with our own expanded trading alliances. But, the root of the story goes back further. It is no coincidence that free trade agreements started happening after the Reagan tax cuts of 1981 and after the privatization of industry by Margaret Thatcher in England. Today, people worry about the weak dollar but are they willing to reduce corporate taxes? Why not?


The old business story is to make a good product and the world will beat a path to your door. This can and will happen in the country that allows free trade. The entrepreneur in a free country will be able to buy the raw materials he needs at the lowest price and he will be able to get the highest price available when he sells his finished products. In the event that another country imposes a tax on his raw materials or his finished goods, he will do fewer transactions with that country. The big mistake would be to retaliate for imposing the tax with counter taxes. The country that imposes the tax is the country that reduces its trade activity. Since it only makes sense to do profitable trades, the country that reduces its trade activity is the country that reduces its profits and ultimately its wealth.

With 66% of all tariff reductions from 1983 to 2003 being unilateral reductions, it is clear that world leaders have come to understand the truth of free trade, which is that the country that is harmed by tariffs is the country that applies them. In 2006, we enjoyed a world wide booming economy. The weighted average GDP growth in 2006 was better than 4%! This strong showing could not have been possible without trade. In 2006, global merchandise trade grew at the annual rate of 15%!

The horse is out of the barn and any country who would try to put it back would harm themselves. Trade is win-win or zero! A couple of weeks ago, Chavez of Venezuela made himself a laughing stock by threatened to suspend oil trade with the USA. Anyone with a lick of sense understands that trade is a two way street. We want to buy oil from Chavez and he wants to sell it to us. If he were to choose not to sell his oil, his country would be bankrupted in a few weeks.


It was almost 100 years to the day between the imposition of 44% tariffs by Lincoln and the passage of Kennedy's 1962 free trade policy. One might conclude that we learned our lesson from history. However, today, Hillary and Obama are running as protectionist and our congress still practices outrageous practices similar to those that made Thomas Durant a very wealthy man. Today, 5% of the congressional districts collect more than 50% of the total farm subsides paid!

Polls of economist show that 87.5% to 91% believe free trade benefits America. Polls of voters show that 60 to 65% believe that free trade hurts America. Among democrats, 80 to 85% of voters believe free trade hurts America. As a result, Hillary and Obama make misleading statements about trade. They have both expressed their belief in free trade but when campaigning in a state like Ohio that has lost manufacturing jobs, they both demagogue NAFTA. Since NAFTA was passed, the USA has added 27.5 million net new jobs. In the 15 years before and after NAFTA, about 3 million manufacturing jobs were lost. The fact is that industrial robots have permanently eliminated about 6 million jobs over the past 30 years.


People naturally like to remember the "good old days". In the 1950's the average Mom was a "stay at home" Mom. Boomer's like to remember how nice it was for Mom to be home before and after school. My wife and I went the extra mile to make this happen for our own kids during the 1980's and 90's. The problem is that we had to work as hard as the Mom's of old. The average Mom in the 1950's worked in the home 52 hours per week and spent a lot more time in "volunteer" activities, such as keeping the nursery at Church on Sunday. Men, in the 50's, worked two and three jobs, their regular jobs and their "home" job. Many a home owner was a jack of all trades. My Dad was one who never stopped working. He maintained a tractor, raised a big vegetable garden, maintained the house and the list goes on and on. We used the same black and white TV for 25 years because he was an expert TV repairman. In addition to being an auto mechanic, he was a paint and body man too. He would come home after dark from a long day working on an anti-ballistic missile system only to start up his next home project.

When Hill-Obama talk about the decline of the middle class, they are playing to the crowd. The best measure of standard of living is the measure of ones time. How much work time does it take to buy a radio today relative to 10 years ago? Today, people think that they are more busy than ever before but the reality is that people do more of the things they "want to do" today. They drive their kids to the soccer match because they want to. The great majority of the people of the 50's were busy "earning a living". Most did not consider going rock climbing, golfing, biking or first Saturday Night Bridge.


The market is climbing the "wall of worry". Each day it seems like there is bad news in the morning and higher stock prices in the afternoon. All the while, my confidence grows that our country will not be steered into the left hand ditch. The good common sense and accumulated knowledge of the American people will prevail!