Pat Buchanans Economics Research Paper THE Essay

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THE FALLACIES OF PAT BUCHANAN & # 8217 ; S ECONOMICS Pat Buchanan is presently runing to go the Republican representative in the following U.S.Presidential election - Pat Buchanans Economics Research Paper THE Essay introduction. He is credited with striking a chord amongst the chief watercourse, bluish neckband sectorof the state. This is because he has based his economic platform on common myths about free trade andhow it is the cause of the economic jobs in the U.S. His subject is that layoffs and the shutting ofAmerican workss are the consequence of foreign companies and states taking advantage of easy entree intoU.S. markets which, in his sentiment, is non being reciprocated abroad. This is how he accounts for thecurrent trade shortage that the U.S. is running with states like Japan. Pat & # 8217 ; s economic platformregarding trade policy can be summarized as follows: * Impose a 10 % duty on Nipponese imports and a 20 % duty on Chinese imports. This wouldgenerate, in his sentiment, $ 20 billion in authorities gross and cut down the trade shortage which could bereinvested into the American economic system and assist make revenue enhancement cuts for little concerns. * Impose a societal duty on Third World manufactured goods to protect U.S. workers & # 8217 ; pay rates fromthe foreign labourers who are paid a fraction of what their U.S. opposite numbers earn. He besides resents thatforeign companies do non hold to adhere to the rigorous environmental, safety, and wellness criterions thatAmerican houses do yet acquire free entree to the U.S. market via GATT and NAFTA.It is apparent that Pat Buchanan believes that trade shortages and trade with Third World states are atthe bosom of what he perceives to be America & # 8217 ; s economic jobs. He feels that through duties theburden of income revenue enhancements paid by U.S. workers and little concerns can be shifted onto consumers whopurchase foreign goods. His implicit in sentiment about his trade restrictive policies is, & # 8220 ; This is ourland ; America is our state ; the U.S. our market. We decide who enters here and who does not. & # 8221 ; The footing of international trade is that their are additions to be had from partaking in it. This was provenby David Ricardo, an economic expert in the early nineteenth century, who introduced the construct of comparativeadvantage. His theory stated that a state & # 8217 ; s & # 8220 ; absolute advantage ( overall productiveness differencesbetween states ) should be reflected in differences in income, whereas comparative advantage ( fluctuations in productiveness differences by sector ) will find the form of international trade. & # 8221 ; A common misconception about free trade is that it is based on absolute advantage. Comparative advantagealways is applicable when applied to international trade so it stands to ground that there will ever begains from trade. The being of low rewards in a state is non by itself a ground for the U.S. to feartrading with them. For one thing, rewards by and large reflect the productiveness degrees of workers. If lowwages meant low costs so universe trade would be dominated by Th! ird World states and the U.S. would ne’er export. The fact is that differences in engineering causelabor productiveness discrepancies between states which affects unit labour costs. A house will be given to hiremore workers until the value of the merchandise that the last worker produces is equal to the cost of thatworker. In the less developed states low productiveness, as a consequence of low degrees of engineering, isreflected in rewards. The important step to find which sectors a state has a comparativeadvantage is non rewards, but unit labour costs. A state can hold a comparative advantage in a sectoreven if it is more inefficient than any other state. This is because comparative advantage is basednot on who is the best, but instead on where a state & # 8217 ; s & # 8220 ; border of high quality is greater, or its marginof lower status smaller & # 8221 ; . Equally long as a hapless state specializes in sectors where it is the leastinefficient compared to a rich state so it will derive from trade. The Ricardian Model, based on differences in labour productiveness, is best explained utilizing a simplesituation based on the undermentioned premises: two states, one called Wealthy, the other Poor ; twogoods, denims and gym shoes ; and labour is the lone factor of production. Both states have 40 hours oflabor available but Wealthy has more advanced engineering which gives it an absolute advantage in theproduction of both goods. These states will profit from trade because pre-trade comparative pricesdiffer. For this illustration assume that gym shoes and denims are traded in universe equilibrium on a 1 for 1basis and that there are changeless returns to scale. Amount of labour JEANS SNEAKERS JEANS/SNEAKERSWEALTHY hours required to 1 2 1/2POOR produce one unit 5 2.5 2 In analysing the production possibility frontiers of each state it becomes evident that Wealthy canproduce merely 1/2 a brace of gym shoes in an hr. However, in that same hr, they could do one brace ofjeans and trade with Poor for one brace of gym shoes. Therefore, they will derive from trade with their lesstechnologically advanced spouse by specialising in the production of denims. Poor can do 1/5 of a pairof denims in an hr or bring forth 1/2.5 of a brace of gym shoes which can be traded for 1/2.5 of brace of jeanson the universe market. Therefore, through trade both states are utilizing their labour twice every bit efficientlythan when they had closed economic systems. This consequences in additions being realized from trade. The U.S. signed NAFTA and became merchandising spouses with Mexico much to the humiliation of Pat Buchanan. Hisopinion, and it is a common one, is that U.S. companies will relocate to Mexico where rewards and employeebenefits are a fraction of what American workers earn and environmental ordinances are rather slack. It isfor this ground that he feels it is impossible to vie with Third World states and a duty must beimposed on them for their societal unfairnesss. Buchanan should be inquiring himself what causes Americanfirms to relocate in Third World states and is it truly a job worth turn toing. From ahumanitarian position it is refering that some states are pulling companies due to the deficiency ofregulation in their fabrication industry. It is non an appealing idea to believe that a state & # 8217 ; scomparative advantage is sweatshop labour and unregulated pollution. However, it is a misconception tothink that trade is merely good if both states receive! high rewards. Whether these companies relocate because of low rewards or higher productiveness is irrelevant.The world is that it is cheaper for America in footings of its ain labour to merchandise for these goods thanproduce them. The root of the low-skilled occupation migration job lies in the fact that America has a extremely skilledlabor force. Most politicians and economic experts would state that this is an enviable place to be inbecause the planetary economic system has a scarceness of skilled labour. This translates into high rewards since thereis more demand than supply in the universe for high-skilled labour. However, some sectors of the Americaneconomy are based on labour intensive, low-skilled labour. In the U.S. there is a comparative deficit oflow-skilled workers so they receive a comparatively higher pay than the universe pay for low-skilled labor.It is hence more efficient for companies who use low-skilled labour to travel their operations tocountries that have an copiousness so that they can cut down their labour cost per unit. Labor productivityis the existent ground behind why houses are relocating. Buchanan should acknowledge that by seeking to preservejobs that Third World states can execute more expeditiously, he is! really weakening the really state he is seeking to beef up. Every state has a comparative advantage in bring forthing certain goods. If a Third World state has acomparative advantage in certain labour intensive industries due to their low rewards so America shouldnot concentrate their attempts in these sectors. It is of import to take into history the productiveness offoreign workers when analysing pay rate disagreements between states. The Ricardian theoretical account has shownthat there is a correlativity between labour productiveness and comparative advantage. All states havelimited resources which limits the sum that they can bring forth. Therefore, the U.S. must make up one’s mind whereto apportion its factors of production and it faces a tradeoff in that when it produces more of one goodit will bring forth less of others. In taking which goods to bring forth the U.S. will hold to take intoconsideration what its merchandises can be traded for on international markets. This consequences in themchoosing to bring forth goods that have a comparatively high value in universe March! kets and abandoning the production of goods that accordingly have a comparatively low trading value. TheU.S. should be specialising in the production of goods whose comparative monetary value exceeds the chance costforegone by non bring forthing alternate goods. It is presently carry throughing this by allowing varioussectors of its economic system, like the fabric industry, migrate to Third World states like Mexico. Therelative labour productiveness between the U.S. and Mexico across industries will take to them specializingin the production of different goods. A state like the U.S. has an absolute advantage in production ofall goods and yet the Ricardian theoretical account proves that it still additions from trade because of comparativeadvantage. It is neither efficient nor economical for the U.S. to seek and protect industries that can bedone comparatively less expensively in other states. It is cheaper for the U.S. in relation to its laborforce to bring forth high value goods and trade for lower valu! vitamin E goods than to seek and bring forth them both. The free market will steer private endeavor towardindustries where the returns are higher and with higher returns comes higher rewards. Concentrating on industries that produce goods with a comparatively high trading value allows persons to

maximise their net incomes, and this is accordingly reflected in their pay rate. This is the seconda

rgument against protectionism, especially in low wage, low-skill sectors of industry where Third Worldcountries are attracting U.S. companies. The Stolper-Samuelson theory states that trade affects relativeprices and that the real return to the factor used intensively in the production of a good (labor) willincrease accordingly and the return of the other factor which is used scarcely will decrease. Accordingto this model trade has a significant impact on income distribution within the countries involved. Thiscan be seen in the U.S. where the low skill, low wage jobs are being lost to Third World countries whohave an abundance of these workers. At the same time the U.S. has an abundance of high-skill, high-wagejobs and this is resulting in a serious gap between the up!per and lower classes of American society. Pat Buchanan has gained favor with the lower classes because he wants to apply tariffs to Third Worldcountries and try and protect American jobs from being relocated to other countries. There are seriouslong term ramifications to a country who holds onto industries that are no longer competitive in theglobal economy. It is a painful process when layoffs occur and jobs move south of the border where mostThird World countries are situated but it is necessary for the further development of the AmericanEconomy. Imports and foreign competition have taken a lot of jobs from U.S. workers but this economicchange is also creating millions of jobs at the same time. These new jobs are in small businesses, notthe highly visible sectors of the economy like steel mills or auto plants. None-the-less they are wherethe future lies and they offer higher wages and require new skills. Trade has shifted industry from theassembly lines into complex products with specialized designs a!nd relatively short life cycles which require skilled workers. Through importing, competition hasincreased and this “forces firms to be more productive, and that desperate drive for productivity makesthe entire economy more dynamic.” . A dynamic economy has lower inflation due to intense competition andgives consumers more variety to choose from in stores. Furthermore, since low-wage workers spend ahigher percentage of their income at the store than the high-wage workers they see a greater proportionof their earnings being saved as less is going towards necessities like food. Buchanan should focus hisattention on the real problem at hand which is the retraining of those workers who currently findthemselves in low skill jobs. The Stolper Samuelson effect has shown that low skilled labor is earningless while statistics show that skilled labor wages have risen. The next logical move is to try andclose the gap by retraining workers for the demands required of them i!n today’s work environmentAmerica’s current account deficit with Japan has received a lot of press coverage and been the subject ofpolitical debate in numerous congressional elections. The general conception that the lay person is toldthrough the media and politicians is that by running this current account deficit it costs Americans jobsand indebts them to foreign nations. Pat Buchanan stated in a speech, “our merchandise trade deficit is a $166 billion. As this vast transfer of U.S. wealth and technology was taking place….our share of world GDP had fallen …..and the real income of Americans who work with their hands, tools and machines has fallen 20 percent , in 20 years.” However, without questioning the source of Buchanan’s statistics, it is important to review hisunderlying premise. The current account deficit that the U.S. is currently running is the reason for theblue collar workers’ problems. Furthermore, he has stated that the gains from trading with thesecountries are minimal. Why should it matter where America’s imports are being made as long as it is relatively cheaper in termsof factors of production for foreigners to make them.? Buchanan is concerned that Japan is notpracticing fair trade and this is reflected in the trade deficit the U.S. currently has with them. YetJapan is a member of GATT and as such is subject to the same rules of trade as the U.S. Furthermore,they have never asked the U.S. for voluntary export restraints and did not complain when it was asked ofthem. However, while visible trade barriers are in line with other developed countries Japan is accusedof abusing the use of non-tariff or intangible trade barriers. It is perceived as difficult to exportmanufactured goods to Japan due to their “product standards and testing procedures, the wholesale andresale distribution systems, and government procurement.” A common them in the U.S. is that the current account deficit signifies that exports are being restrictedas a result of non-tariff trade barriers in other countries much like the aforementioned Japan case.Before analyzing the current account deficit it is important to clarify what it is composed of. Thecurrent account consists mainly of imports and exports of goods (visible trade balance), the flow of”services (such as transport and banking); interest or dividend payments to foreign investors (andreceipts on overseas investments);private transfers from workers…and official transfers (such asforeign aid).” When a country is running a current account deficit they are actually becoming indebtedto foreigners. Subsequently, the reasons for taking on this debt should be the main concern ofpoliticians like Buchanan, not the existence of the debt itself. If the U.S. was using this debt tofinance consumption rather than increasing production capabilities then there wou!ld indeed be cause for concern. The increase in ability to produce goods and services through investmentis what gives a country the capability to service and eventually pay off their debt. Another aspect ofthe current account is that it is affected by domestic fiscal policy. This is because the majority ofgovernment expenditure is on transfers and subsidies. Consumption spending of this sort can be dangerousbecause it does not help to generate the necessary resources to repay the debt. Tariffs on Japanese and Chinese goods will have numerous effects on the U.S. economy. The main goal willbe to raise the price received by domestic producers of that good and reduce imports . By raising theprices of imports, U.S. consumers will experience a consumer welfare loss. They will be paying more forgoods that they have incorporated into their lifestyle and will see a decrease in selection.Substituting domestic goods for foreign ones could result in a further loss by consumers if they receiveless value, variety, or substandard products for their money. Competition breeds competitiveness and ifBuchanan makes it harder for foreigners to gain access to the U.S. market then he is creating anuncompetitive environment. If a tariff were put into place it would raise the price of the applicablegoods in the U.S. and create an incentive for domestic producers to increase production. However,consumers will demand less and look for substitute goods. Imports will de!cline because Japan and China will have to lower their domestic prices which will lead to less producersand an increase in demand. The end result is that the U.S. current account deficit will decrease andmight even become a surplus. However, this is the most inefficient way to accomplish such a goal.Increasing savings or reducing the government deficit is the first-best policy to reduce the currentaccount deficit. Unambiguously the terms of trade gain will always be outweighed by the efficiency lossthat results from a tariff. Economies of scale cannot be achieved because tariffs fragment world marketsand attract too many firms to enter the protected industries as a result of reduced foreign competitionand increased profits. Buchanan feels that through tariffs (which he labels a foreign consumption tax)import substitution will stimulate growth in the American economy. The main problem with this mode ofthinking is that tariffs allow an industry to survive but the!y do not promote efficiency. If Buchanan feels that America needs jobs and has lost its dominant role inthe world economy he should focus on promoting exports. The very countries that he is condemning for thedownfall of the American economy all have followed “industrialization oriented primarily toward exportrather than domestic markets.” However, the solution that he should be looking at for the currentaccount deficit is staring himself in the mirror every morning. Politicians must act fiscallyresponsible and reduce government spending because it is the deficit that causes the problem. As thedeficit goes, so goes America’s current account balance. Pat Buchanan feels that protectionism is the answer to re-establishing the U.S. as the world’s dominantindustrial nation. Through analyzing his policies it becomes evident that though his vision is shared bymany his means of achieving it are economically fallible. If he implemented his policies he wouldaccomplish the very result which he is condemning. Buchanan’s economic platform is pandering to thenotions of ill-informed people. If we think of the U.S. as a boat, he is trying to patch a leak, and indoing so, has created two new ones. Lets just hope that level heads prevail and he is not elected or wemight just have to bail water to prevent the mighty U.S. from sinking. BIBLIOGRAPHY Buchanan, Pat, “An American Economy for Americans” Buchanan, Pat, “Time for Economic Nationalism” “In Praise of Free Trade”, Newsweek, July 12, 1993 King, Philip, International Economics and International Economic Policy: A Reader. Singapore: McGraw-Hill Book Co., 1990 “Not so absolutely fabulous”, The Economist, November 4, 1995 Paul Krugman and Maurice Obstfeld, International Economics. New York: HarperCollins College Publishers, 1994 The abuse of economics: Common economic fallacies, UK: The Economist, 1996

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