ECONOMICS: “Things Seen and Things Not Seen”

The Title of this essay comes from economist Frederic Bastiat, a French Liberal in the generation after Adam Smith.  He took simple economic subjects and made economic lessons of them in easily digestible content.  The subject of one of his essays was about the above title.. 

One of President Trump’s signature initiatives was to obtain trade relief from China and to stop China from stealing US technology of American companies doing business in China; another was to rebalance more favorably the balance of trade between the U.S. and various countries,  and finally, to bring back to the U.S. manufacturing that had been offshored over the previous decade.  He expected to increase jobs in the U.S. economy.  To accomplish all these, he raised tariffs on goods imported by the U.S; among them raw materials and important components for finished products in the U.S.  This was hailed as crazy!  Almost all economists agree that raising tariffs hurts the country raising them by passing the cost of the tariff onto finished products locally made.  That in fact turned out to the case; it was a “seen event.”  In addition, it also caused countries the U.S. trades with to retaliate and raise tariffs on products sold abroad; another “seen event” that predictably followed.  

The situation in the U.S. when the above actions took place was as follows.  Businesses were offshoring U.S. jobs overseas and business leaders were “cautious” about what might follow.   Companies were retaining lots of cash, both in U.S. and foreign banks so as not to add a cash problem to the others.  The overseas cash was stagnant because of tax laws.  The U.S. taxes earnings from outside of the United States only if repatriated; thus the money shows up on the business’ balance sheet, but it costs about forty percent to use it in the U.S.  American businesses had $2.5 trillion of cash in overseas subsidiaries. On top of the tariff uncertainties, President Trump initiated income tax reforms, both personal and business, eased business regulations from a starting point in excess of $2.0 trillion dollars of cost per year (about the same as annual healthcare costs).  Following the tax cuts, a modest number of new plants were opened in the U.S., mostly as a political response by a few companies. There probably were some unannounced accommodations by China regarding technology theft; but only known to the companies themselves.  Most important was the unseen increase in business enthusiasm.  America became a place where business could thrive!  It gave entrepreneur executives a reason to “grow the market.”  These were both vital factors that multiplied job growth, reduced unemployment and in fact brought back into the employment market those who believed their skills were no longer valuable.   

Eight years of the Obama administration took us out of the Great Recession, but for most people, the median household income was literally flat for the duration at an eight-year average of $57,590.  Unemployment was still high at 6.9% in 2016.  What happened in the next four years was that median household income rose to a four-year average of $65,771 and unemployment dropped to 3.7% afterward.  

Now is an appropriate time to introduce one of Bastiat’s essays on the parable of the broken window.  Bastiat did not use rioters disguised as protestors to cause broken glass, but the result is nevertheless the same.  It is often said, “It is an ill wind that blows nobody good.”  What would become of the glass makers and glaziers if panes of glass were not broken?  The glazier replaces the glass for six hundred dollars and blesses the rioters. It is a good thing to cause money to circulate.  The glazier and the glassmaker will each take their share and do something useful for somebody else.  Even if they put their money in a bank, the banker will pay interest to depositors and lend more to customers.  Bastiat says, “Stop right there; your theory is confined only to that which is seen!” Unseen is that the shopkeeper no longer has six hundred dollars, and he too would have done something useful with it, but it is no more, the same as the original window pane.  The wealth of the country is not even, it has lost six hundred dollars of wealth for no good reason.  This, says Bastiat, “Unhappily, regulates the greater part of our economic institutions (he means the government, which is often what Bastiat’s essays skewer.)                                                                                     August 31, 2020