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Robert Barro: Ryan and the
Fundamental Economic Debate
by Robert Barro, The Wall Street Journal
(Aug 15, 2012)
It's time to get back to
first principles. A general increase in socialistic policies tends to
lower economic growth.
New York, NY
-- The level of economic commentary during the
presidential campaign has not been high. Democrats have accused Mitt Romney
of the crime of shipping jobs abroad while at Bain Capital, and Mr. Romney
has responded by denying the charge. No one takes the economically
appropriate position for a job outsourcer: "Yes, I shipped some jobs abroad
to save money, and this choice was correct not only for my company but also
for the U.S. economy."
Outsourcing is essentially
the same as importing a good from a foreign country. In the former, a
company buys foreign labor services. In the latter, a company buys the good
that embodies foreign inputs, particularly labor services. So, it makes no
sense to be a free trader with respect to imports and exports of goods while
opposing outsourcing. Opposing either is protectionism.
The central issue is why
free trade is attractive. Suppose a Chinese company learns how to
manufacture a computer at a cost below that for U.S. companies. In that
case, the U.S. economy comes out ahead by importing the computer and
shifting its labor and other inputs to producing other things—some of which
will be sold to China. It's true that shifts in the composition of
international trade will make specific companies and workers worse off, but
free trade will benefit the overall economy.
An important part of the
argument is that the resources previously used to manufacture computers in
the U.S. will typically not remain idle after a shift to importing computers
from China. Instead, the profit-oriented market will find (via Adam Smith's
"invisible hand") productive alternative uses for these resources, thus
contributing to growth.
What about industrial
policies in the forms of subsidies or bailouts for chosen companies and
industries? In a case like Solyndra, the California-based solar technology
company that received $535 million in guaranteed federal loans before going
bankrupt, it's easy to see that the policy was a failure. Then there's the
Chevy Volt, which stays alive with government subsidies, but at a cost to
taxpayers far too large to make sense.
General Motors as a whole is
more interesting, because the post-intervention company is employing lots of
people, producing lots of cars, and even reporting positive profits. But
these results do not prove that intervention was desirable.
If GM had disappeared, its
former workers and other inputs would not have sat around doing nothing.
Another company—be it Toyota, Honda or Ford—would likely have taken over its
operations, expanding production in the U.S. As a matter of economic theory,
the overall economy—though perhaps not parts of Michigan and Ohio—would have
done better if the market had been allowed to reallocate GM's labor and
We must also factor in the
cost of the bailout to taxpayers, recently estimated by the U.S. Treasury at
more than $25 billion, and the long-term economic harm from government
partially repudiating the rights of GM's bondholders. More generally, the
theoretical arguments are supported empirically by the tendency for
countries to perform better economically when they rely more on free markets
and less on socialism.
From this standpoint, it was
scary to hear President Obama's recent assessment of the GM bailout, in
which he declared it a success and vowed to apply this policy broadly to
U.S. manufacturing. This promise of expanded socialism is, to paraphrase the
great 20th-century economist and philosopher Friedrich Hayek, the Obama Road
Drawing correct policy
implications is hard because one naturally focuses on the jobs and
production that are directly saved or lost when the government bails out GM
or when Chinese imports expand. In contrast, it is impossible to detail
where U.S. jobs and production would have been created or destroyed if GM
had been allowed to fail or if trade with China were curtailed.
What is feasible is to look
at the overall impact of a set of policies. For example, a general increase
in socialistic policies tends to lower economic growth. And, more
specifically, the Obama administration's weakening of individual incentives
to work and produce by its sharp expansion of transfer payments can be
reasonably viewed as retarding the U.S. economic recovery since the end of
the recession in 2009.
With the addition of
conservative thinker and budget expert Rep. Paul Ryan to the Republican
presidential ticket, we can hope that the economic dialogue will become more
serious. And perhaps this added substance will extend beyond the important
issue of long-term fiscal reform to encompass the enduring but still crucial
debate about socialism versus capitalism.
Mr. Barro is a professor
of economics at Harvard and a senior fellow at Stanford University's Hoover
– FM Duck
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