American Consequences - January 2019

If You Hated Calculus In School

What We Learned From 2018

Free Trade: A Basic Human Right

I D E A S T H A T M A T T E R E D I T E D B Y P . J . O ’ R O U R K E AMERICAN CONSEQUENCES

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CONTENTS

JANUARY 2019 : ISSUE 18

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54

46

74

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Editor in Chief: P.J. O’Rourke Editorial Director: Carli Flippen Publisher: Steven Longenecker Assistant Managing Editors: AMERICAN CONSEQUENCES

42 The Case for Compensated Free Trade BY ROBERT SKIDELSKY 46 2019 Prep: Crypto Comeback? BY ERIC WADE 54 Prospects for U.S.-China Relations in 2019 BY KEVIN RUDD 60 What We Learned From 2018 BY BILL BONNER

4 Inside This Issue

BY STEVEN LONGENECKER

6 Letter From the Editor BY P.J. O'ROURKE

10 Ricardo's Law of

Comparative Advantage BY P.J. O'ROURKE

Chris Gaarde, Laura Greaver Creative Director: Erica Wood Contributing Editors: Bill Bonner, Ed Crane, Kevin Rudd, John Tamny, Buck Sexton, Robert J. Shiller, Brooks D. Simpson, Robert Skidelsky, Eric Wade Newswire Editors: Scott Garliss, John Gillin, Greg Diamond Contributing Cartoonist: Khalil Bendib Cartoon Director: Frank Stansberry General Manager: Jamison Miller Advertising: Sam DeCroes, Jared Kelly, Jill Peterson Editorial feedback: feedback@ americanconsequences.com

12 What Moved the Market

14 What Could Possibly Go Wrong?

16 From Our Inbox

66 The New Congress

BY BROOKS D. SIMPSON

20 If You Hated Calculus in School BY JOHN TAMNY

70 Trade Routes: Roads to Hell? BY P.J. O'ROURKE

26 Tariff Statistics

BY P.J. O'ROURKE

74 Silent Inflation

BY ROBERT J. SHILLER

28 America Was Built on Tariffs BY BUCK SEXTON 32 Free Trade: A Basic Human Right BY ED CRANE

78 Reviews of Business Best-Sellers BY THE BOOK GRUMP

82 Read This

COMPILED BYSTEVEN LONGENECKER AND P.J. O'ROURKE

36 The Bet

BY P.J. O'ROURKE

84 Featured Contributors

American Consequences 3

INSIDE THIS ISSUE

T rade wars and tariffs... imports and exports... NAFTA, WTO, TPP... There’s no doubt the Donald Trump presidency has turned international trade on its head, but who are the real “winners” in a trade war? Are trade deficits and low tariffs a bad thing? And is a trade war victory worth the potential economic costs? This month, we’re digging beneath the Trump-China headlines to take a closer look at what really happens when countries battle over free trade. Editor in Chief P.J. O’Rourke starts us off by getting into the real meaning – and necessity – of international trade... shares an important economic rule you’ve probably never heard of... and takes a look at a 10-year bet against the “end” of the world. Former CIA analyst Buck Sexton explains how our nation’s independence was born out of tariffs and trade limits... RealClearMarkets’ John Tamny and the CATO Institute’s Ed Crane make a case for trade deficits and free trade in the era of Trump...

Former Australian prime minister Kevin Rudd examines how the Trump-China conflict could play out in 2019, while analyst Eric Wade weighs the possibility of a crypto comeback... Nobel laureate Robert Shiller warns that ignoring inflation can skew our views of prosperity and value in the economy... Agora founder Bill Bonner looks back on how “Mr. Market” treated investors this past year... And our resident anonymous Book Grump reviews and rips the latest best-selling business books. We’ve uploaded a PDF suitable for printing to our archive page. And tell us what you think at feedback@ americanconsequences.com. Regards, Steven Longenecker Publisher, American Consequences

Free trade encompasses many excellent principles. How many excellent principles human beings encompass is another matter. P.J. O’Rourke

4

January 2019

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From Editor in Chief P.J. O’Rourke

“ THE REAL MEANING OF TRADE

A single human is almost incapable of making or doing anything without exchanging goods and services with other humans.

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January 2019

LETTER FROM THE EDITOR

I t’s “International Trade” that gets all the headlines. We think, in our imaginations, that we could do without it – drive Buicks, use old Motorola flip phones, and own one T-shirt made in America instead of two dozen made in Bangladesh. But the real meaning of trade is more basic than global commerce. Trade is so basic that we don’t think about it at all. Or, if we do think about it, the thinking gets hard. Trade is such a fundamental truth – like the fact that the universe exists at all – that our imaginations have trouble grasping it.

The meaning of trade is that a single human is almost incapable of making or doing anything without exchanging goods and services with other humans. Robinson Crusoe would have come a cropper if not for the shipwreck from which to “import” goods and his man Friday to perform the minimum-wage services. The Swiss Family Robinson would have been the Dead Family Robinson if they hadn’t had a big family full of people swapping their various skills, abilities, and knowledge. It took the greatest thinker about economics ever, Adam Smith, to discover the real meaning of trade. And even he only touched on it in his discourse about what we would call specialization. Specialization is a vital part of trade, but not its essence. In The Wealth of Nations , Book I, Chapter 1, “Of the Division of Labor,” Smith says: To take an example from a very trifling manufacture, the trade of a pin-maker; a workman not educated to this business nor acquainted with the use of the machinery employed in it could scarce, perhaps, with his utmost industry, make one pin in a day. What Smith was getting at is actually stated more clearly in an early draft of TheWealth of Nations :

...if all the parts of a pin were to be made by one man, if the same person was to dig the metal out of the mine, separate it from the ore, forge it, split it into small rods, then spin these rods into wire, and last of all make that wire into pins, a man perhaps could with his utmost industry scarce make a pin in a year. In the book and accompanying PBS documentary Free To Choose , Milton and Rose Friedman used the example of a pencil. They cited a wonderful 1958 pamphlet, I, Pencil – My Family Tree , written for the Foundation for Economic Education by its president Leonard E. Read. The story is told by the pencil itself and begins, “Simple? Yet, not a single person on the face of this earth knows how to make me .” To make a pencil you’d have to go to a graphite deposit in India, Brazil, or China and get a job as a miner and then get jobs as a railroad engineer, stevedore, and ship captain to bring the graphite back. After that you’d need to become a chemical engineer to turn the graphite into pencil lead, a lumberjack to cut the cedar trees, and a carpenter to shape the pencil casing. You’d have to learn how to make yellow paint, how to spray it on, and how to make a paint sprayer. You’d have to go

CLICK HERE TO READ THEWEB VERSION

American Consequences 7

LETTER FROM THE EDITOR

The difference between the thousands, if not millions, of dollars in materials and labor that it would cost you to make a pencil and the fact that a pencil costs 19 cents – that’s the real meaning of trade. “

daughter’s hair plenty of times. I’ll give it a try for practice. The power cord is coated with plastic. You can make plastic at home on the stovetop using common household materials. (I Googled it.) The laptop has a socket, I’ll stick one of the Williams-Sonoma stuff in there. And a power brick is just a plug, right? I’ll stick the other end into the baseboard outlet... The number of people it takes to make my laptop power cord is not what convinces me of the real meaning of trade. What convinces me is the number of people it takes to find my laptop power cord – which is everybody . I’ve got the whole house and the entire office looking for it. And considering the way everybody is feeling about me at the moment... My wife is furious because I ruined her favorite omelet pan. My daughter went to school looking like Rapunzel had hired a hairdresser on crack. When I searched the web for “home-made plastic” I misspelled it and Homeland Security thinks I was trying to make plastique explosives and now I’m on a terrorist watch list. The cleaning lady wants to kill me because of the mess in the kitchen. (Turns out making plastic on the stovetop can cause explosions too.) And my co-workers, due perhaps to all the ceiling sprinklers going off after I started the electrical fire... Therefore, I’m about to go out and personally engage in trade. I need to buy a new laptop power cord. $32.95! Geez! And all that money going straight to China! No wonder it’s “International Trade” that gets all the headlines.

back to being a miner to get the ore to make the metal for the thingy that holds the eraser and build a smelter, a rolling plant, and a machine-tool factory to produce equipment to crimp the thingy in place. You’d also have to grow a rubber tree in your backyard. And a pencil sells for 19 cents. The difference between the thousands, if not millions, of dollars in materials and labor that it would cost you to make a pencil and the fact that a pencil costs 19 cents – that’s the real meaning of trade. (Copies of I, Pencil are still available from F.E.E. for $4.95 – a perfect gift for any economic ignoramus you happen to know.) My own example of “trade truth” would be the power cord for my laptop. This dumb and droopy little contraption presents only a few of the manufacturing problems entailed in pins and pencils. The wire core is copper, but I should be able to smack some Williams- Sonoma cookware into what’s needed using tin snips and a claw hammer. The copper wire is braided. I’ve watched my wife braid my

8

January 2019

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COMPARATIVE RICARDO’S LAW OF

T rade is based on the but first described by 18th-century philosopher Adam Smith. Division of labor is common sense. Most economic principles are common sense. There is, however, one aspect of division of labor that requires a little uncommon sense to understand. Former White House Director of Economic Policy Todd Buchholz, in his excellent book New Ideas from Dead Economists (which has been cited more than once in this magazine) says, "An insolent natural scientist once asked a famous economist to name one economic rule that isn't either obvious or unimportant. The reply was, 'Ricardo's Law of Comparative Advantage.'" The English economist David Ricardo (1772-1823) postulated this: If you can do X better than you can do Z, and there's a second person who can do Z better than he can do X, but who can also do both X and Z better than you can, then an economy should n ot encourage that second person to do both things. You and he (and society as a whole) will benefit more if you each do what you do best. economic principle of division of labor, practiced since forever

JOHN GRISHAM AND JUSTIN BIEBER EACH SPEND EQUAL TIME WRITING AND COMPOSING Thrillers Songs BS Production John Grisham 50 + 25 = 75 Justin Bieber .5 + 2.5 = 3 TOTAL BS = 78 Let's stipulate, for the sake of example, that one legal thriller is equal to one pop song as a Benefit to Society, or "BS". (One thriller or one song = one unit of BS.) John Grisham is a better writer than Justin Bieber. (I suppose Bieber can read and write.) John Grisham is also (assuming he plays the comb and wax paper, or something) a better musician than Justin Bieber. Say John Grisham is 100 times the writer that Justin Bieber is, and say he is 10 times the musician. Then say that John Grisham can write 100 legal thrillers in a year (I bet he can) or compose 50 songs. Using simple arithmetic, this would mean that Justin Bieber could write either one thriller or compose five songs in the same period. If John Grisham spends 50% of his time scribbling predictable plots and 50% of his

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January 2019

ADVANTAGE

40% of his productivity by splitting his time between literature and the lively arts, while John Grisham loses only 25% of his productivity. Bieber has the "comparative advantage" in making music because it will cost him more if he doesn't stick to what he does best.) David Ricardo applied the Law of Comparative Advantage to questions of foreign trade. China makes better Bluetooth earphones than Canada does, and China may produce better pop music than Canada. (I haven't worked up the nerve to ask Alexa and find out. Although I'd say the Chicoms are going to have a hard time topping Neil Young.) But anyway, because of comparative advantage, both nations profit by buying their earphones from Alibaba and letting Justin Bieber tour China. And Canada definitely has the advantage if he stays there. (Alas, the Chinese – who are not so hip on free-market economic principles as they think they are – have banned Justin Bieber from performing in their country.)

JOHN GRISHAM SPENDS ALL HIS TIME BASHING THE LAPTOP AND JUSTIN BIEBER SPENDS ALL HIS TIME CATERWAULING Thrillers Songs BS Production John Grisham 100 + 0 = 100 Justin Bieber 0 + 5 = 5 TOTAL BS = 105 time blowing into a kazoo, the result will be 50 thrillers and 25 songs, for a total of 75 BS units. If Justin Bieber spends 50% of his time annoying Microsoft Word and 50% of his time making noise in a recording studio, the result will be one half-completed thriller and 2.5 songs, for a total of three BS units. The grand total Benefit to Society from both men will be 78 BS. But if John Grisham spends 100% of his time inventing dumb adventures for two- dimensional characters and Justin Bieber spends 100% of his time calling cats to the tune of a drum set falling down a flight of stairs, the result will be 100 thrillers and five songs, for a grand total Benefit to Society of 105 units. (And just to make things slightly more complex, note that Justin Bieber loses

- P. J. O’Rourke

American Consequences 11

THE BIGGEST STORIES THAT MATTERED FOR THE MARKET LAST MONTH

WHAT MOVED THE MARKET

For real- time market updates from some of Wall Street’s most plugged- in analysts, CLICK

ONE OF THEWORST MONTHS SINCE THE GREAT DEPRESSION... December 2018 was a miserable month for global equities. The S&P 500 was off as much as 12.5% and the index closed out the year down 6%. Volatility was also high, leading to a 660-point drop on Christmas Eve followed by a 1,080-point surge on December 26. The November election results were not fully felt in the markets until about mid- December. The fact that the House was going to flip Democratic was not a surprise, but the timing could not have been worse. The U.S. was well into a chaotic economic cycle and global growth was slowing. Some hoped that a divided congress would make it easier to compromise on must-pass stimulus and budget bills, but the government shutdown and Mexican border wall impasse shattered that notion. Investors in late 2018 were overwhelmed by prolonged economic turmoil and political battles. There was no movement on China trade and tariff talks... Chinese imports trickled in, retail sales collapsed, and the government clamped down on the shadow banking sector. The White House trade team was mixed in their message, and investors continued to pound Chinese shares. As a result, global technology stocks suffered, particularly the FAANG trade (Facebook, Apple, Amazon, Netflix, and Google) and Apple’s supply chain.

Across the Atlantic, Brexit concerns roiled the UK and EU markets. UK Prime Minister Theresa May survived one no confidence vote in mid-December, but a January 15 Brexit vote ended in disaster, and a second no confidence vote is being discussed. Italy continued to wrestle with its budget deficit plan, causing local interest rates to spike. And France saw month-long protests over its gasoline tax. Overall, Europe’s manufacturing sector and exports were impacted the most. Other big concerns were the plunge in oil prices, the outsized sell-off in small cap stocks, and that corporate debt had soared to its highest level in modern history. The crude sell-off was a function continued conflict with Iran, higher U.S. output levels, and the global growth skid. Small caps faltered because of higher labor and material costs and a leveling out of the previous year’s tax cut benefits. Meanwhile, ballooning corporate debt looms as companies begin to refinance in the face of rising rates. It was a perfect storm for the worst monthly loss since the Great Depression. Investors fear that a recession is already taking hold in Europe and that the spillover will cause the same problems in China and emerging markets. And despite continued growth in the U.S. economy, the effects of uncertainties like the U.S. government shutdown and the Brexit- EU conflict have bled beyond their borders.

HERE to get instant

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January 2019

EDITORS John Gillin Greg Diamond Scott Garliss

GLOBAL CENTRAL BANKSWEIGH IN...

that “risks have been tilted to the downside on the whole amid heightening uncertainties and a prevailing view that such a situation will be protracted.” The European Central Bank (ECB) agreed with the BoJ’s outlook when ECB chief Mario Draghi stated that the ECB was prepared to fight an unexpected economic slowdown, despite Draghi’s belief in the unlikelihood of a 2019 eurozone recession. China was also worried about the growth picture. People’s Bank of China (PBOC) policy director, Sun Guofeng, told reporters the bank would be “more forward-looking, flexible, and targeted.” He stated that PBOC monetary policy will remain prudent and that the bank stands ready to tighten or ease policy as needed. It appears that the Fed and other central banks are getting the message. If the S&P 500 and global markets

In the U.S., markets were caught off guard (again) by the Federal Reserve. Chairman Jerome Powell continued his hawkish message that the economy was strong and that rate hikes would continue. This garnered the ire President Donald Trump, who accused the Fed of driving market volatility and curbing future growth. After raising the federal funds rate another quarter of a percent at the December meeting, Powell said rates were now just below neutral and future hikes would be more data dependent. Unfortunately, this was not enough to placate the skeptics and rate-hike fears were a catalyst for the massive sell-off seen throughout the month. What began with the Fed’s policy announcement in mid-December has permeated global central bank commentary ever since.... Overall, the banks are inclined to ease policy and become more

accommodative rather than move in a policy tightening direction. In December, the Bank of Japan (BoJ) expressed concern over the deteriorating global growth outlook, noting

are going to continue to rally, the markets need to get a sense that policy makers will back away or let-up on policy tightening measures. For now, central banks appear to be on board.

It was a perfect storm for the worst monthly loss since the Great Depression, and investors fear a recession is already taking hold...

American Consequences 13

WHAT COULD POSSIBLY GO WRONG?

Financial follies and disaster in the making

and then some. To cover these upfront expenses, many farmers take out loans through the FSA. According to the USDA, the FSA distributed more than $5 billion in loans last fiscal year through about 35,000 payments. In addition to these loans, the impasse in Washington has also shuttered programs that target beginning and socially disadvantaged farmers as a way of boosting a group whose average age is about 58 and trending higher. Add in existing trade- war retaliatory tariffs on the industry and it’s easy to see why farmers are concerned. Merely a few more weeks of shutdown could severely limit a farmer’s ability to produce crops this growing season... a pain that would not only be felt in the heartland, but also in the checkout line of your local supermarket.

The shutdown hits the heartland...

By now you’ve likely read more than a few shutdown horror stories. From trash and flooded toilets at national parks to longer security lines at airports, the shutdown’s effects are being felt well beyond the beltway... and as far away as America’s heartland. This week the U.S. Department of Agriculture announced a three-day stopgap to assist farmers with “urgent business” – things like tax filings and servicing existing loans. The measure provides much-needed relief for some farmers, but will not address the billion- dollar question on the minds of others... “Will we get paid?” The hang-up here involves the USDA’s Farm Service Agency, or FSA. Farming is an expensive and somewhat unpredictable business. Your typical farmer spends a lot of money up front (for things like seeds, equipment, and land) with the expectation that his/her crop yield will cover these costs

Closer to recession?...

When news of the government shutdown hit in late December, many expected it to

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January 2019

play out as other recent shutdowns had... A back and forth between Congress and the president, a failed agreement or two, and then partial or full government funding. Shutdown threats are nothing new, and often they’re just that – threats. But as the current shutdown approaches its 30th day, even Wall Street is starting to worry. The concern is that the shutdown fight could convince investors and consumers that the government will spend all of 2019 in conflict, and that uncertainty could hinder investments or consumer spending... especially in the case of nearly 1 million furloughed federal workers. Another factor are pre-shutdown fears of slowed growth due to prolonged trade battles and a leveling-out of the 2017 tax cut’s economic benefits. Recessions are generally triggered by unexpected shocks to the economy... like the late-1990s dot-com crash or the 2008 housing bubble. A prolonged shutdown has the potential to trigger similar, unforeseen large- scale events... As we go to press, furloughed federal employees have only missed a single paycheck. If the shutdown were to end before their next payday, January 25, analysts believe the impact to the economy would be minimal. But as workers go longer without pay, the damage is harder to repair. Consumer debt is at record highs, and missed payments as well as high-interest loans to cover those payments, will only make things worse. For the moment, Wall Street is finding optimism in strong corporate earnings and

a Fed that’s willing to pull back on interest rate hikes should the economy weaken in 2019. And although the markets have been volatile, analysts don’t see the shutdown as a contributing factor. For now, the consensus on Wall Street is that, “this is fine.” The economy is slowing but still strong, and the government will sort itself out before the damage becomes irreparable... We hope they’re right. In what some consider to be a dig at Facebook and Google, Apple CEO Tim Cook is making a case for consumer privacy protection on a national scale. In a recent article for TIME, Cook writes: “In 2019, it’s time to stand up for the right to privacy — yours, mine, all of ours... That’s why I and others are calling on the U.S. Congress to pass comprehensive federal privacy legislation — a landmark package of reforms that protect and empower the consumer.” Cook’s “package of reforms” includes establishing a federal data-broker clearinghouse, where consumers can view and track all transactions involving their personal data, as well as being able to delete personal data, on demand, freely and easily. While we agree that consumers should have a right to privacy and that transparency in how our personal data is used and sold is vital... We’re not so sure the federal government is the right agency for the job. (We’re looking at you in particular, IRS.) Apple ‘thinks different’...

American Consequences 15

FROM OUR INBOX

Re: Our Newest Readers Weigh In Let me get this right off from the start... The ONLY reason I started reading these newsletters is P.J... Bar none, the funniest and most no-holds-barred writer around today. But I keep reading it to be just as entertained as informed. Good job! I remember during the Obama years how economic projections came out every month, then had to be revised downward the next month. It hasn’t changed all that much, but I’ve gotten to the point where I will believe my ex-spouse before I believe these eggheaded prognosticators: the truth factor seems to be the same between the two. – David W. P.J. O’Rourke comment: David, thank you for the kind words. I’d go all modest and humble on you, but there’s a name for people who say they don’t like praise – liars. The name is the same for government economic prognosticators, whatever party they belong to. It’s their job to lie. I wonder what they put on their job applications? Maybe, “Been telling whoppers since I was old enough to say my diaper didn’t stink.” I hope Beto is not your son. As I remember it you have two daughters – good for you. My niece is getting a little better with her iPhone now that she is 21. She didn’t even get carded on her birthday. I had to grow a mustache as nobody would sell me beer. – Craig R.

P.J. O’Rourke comment: Craig, I’m still trying to grow one – and I’m going to dye it brown so that I do get carded to show that I’m eligible for the senior discount. (As it is, they give it to me without a second glance.) My eldest daughter is 21 too and still deep into “phone face,” but your report about your niece gives me hope for eventual recovery. And I do have a son besides the two girls, but he’s a freshman in high school, and I doubt he could have gotten down to Texas, started calling himself “Beto,” and run for office without his school reporting him truant. Also, my son asked for a shotgun for Christmas, so I’m pretty sure he’s not a liberal Democrat. (Santa brought him a nice 28-gauge side-by-side.) Re: “What have you done since the market dropped?” I have a little over one-third of my portfolio in cash. While I do have a few speculative stocks, much of my holdings are in safer preferred stocks. I have made money shorting both oil and the market with leveraged ETFs. Oil just kept going lower longer than I originally thought it would! – Jim B. Our financial advisor has stayed the course. I have peace of mind. Merry Christmas! – Judy B. I stayed in [the market] all year long... I have a lot of “sleep well at night” (SWAN) stocks that have snowballed. I love crashes, but I stay in all the time. – Stephen C.

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January 2019

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I have stayed the course hoping to ride the wave of prosperity in the end. – Jim M. Steven Longenecker comment: Sounds like you’ve each got the right asset mix for your personal situation. We’re glad you’re all sleeping well at night. I was concerned [in October] and I put 8% trailing stops on most of my holdings. Glad that I did. I do not mind being in cash right now. I figure I get to pick up some great stocks at a discount once the smoke clears. – Tom S. Steven Longenecker comment: No word on whether the smoke has truly cleared, but we hope you were watching for a few “stocks on sale” right before Christmas, Tom. I’m in retirement. [In preparation for a bear market], I shifted funds into a CD ladder sufficient for cash flow. Everything else stayed put. – D.S. Steven Longenecker comment: Makes sense to me, D.S. And it sure helps now that CDs are finally paying something worth buying at upward of 2.5%-3%. I’m hoping the market continues to drop through 12/31/18. The snap shot of your IRA portfolio determines how much you must withdraw for your 2019 required minimum distribution (RMD) if you are 70+. I had to take too much in 2018 (my 2nd year into RMD-land) and I want my investments to last me into very old age. Being forced to

take large amounts early worries me that my investments will dwindle down when I am older and need more money for health care and the cost of living increases. – Joan O. Chris Gaarde comment: For readers not as versed in IRA lingo, the “required minimum distribution” is a mandatory withdrawal from your IRA set by the IRS under certain circumstances. So the more money in your account, the more you’re required to take out at the end of the year. We wrote to Joan to inquire how her year had turned out and she responded that she got exactly what she was hoping for... an end-of-year dip (lowering the value of her IRA and in turn, her RMD amount) followed by a post-2018 market upswing. I think you foolish roosters crowed a little early about the stock market performing well. The last time I looked things were in the toilet and about to get much worse. IMPEACH TRUMP NOW! – Robert K. Steven Longenecker comment: You sure about that Robert? We don’t know the future... but you wrote us right as the market bottomed. Since then, the S&P 500 Index is up nearly 10%. And of course, the market is still up about 20% from when President Donald Trump was elected in November 2016. Please don’t let your politics – whether on the right or the left – get in the way of investing. It rarely works.

American Consequences 17

FROM OUR INBOX

those tax dollars were actually kept in the individuals’ hands. (Understanding of course we need some level of military might.) Just a thought experiment. – Judy Y. P.J. O’Rourke comment: Judy, that is a thought experiment worth experimenting with! In fact, I’m going to swipe your idea for a future issue of American Consequences . I’d like to know the answer myself. It’s a complicated thought experiment of course – a shift in military spending would mean a shift in foreign policy, as well as a shift in domestic policy. But that just makes the question you’re asking even more interesting. Thank you! If the politicians would leave their sticky little hands off of Social Security “investments” (not entitlements!) as they were originally supposed to do, a lot of those of us who are now retired would be in much better condition. To have workers and their employers contribute to a fund that was supposed to grow untouched by governmental bureaucracies was a good idea, until politicians just could not stand the idea of seeing such an overwhelming pot of money just sitting there for the pilfering. Congress has NEVER paid back ANY OF THE MONIES it essentially STOLE from American workers – if it had, this conversation would not be happening! What charitable organizations or individuals MIGHT do is not a concrete theory, much less something anyone would count on as being a reliable gauge of how seniors, the disabled, and the destitute would survive...

Re: Our Holiday ‘White Elephant’ Issue Santa did not bring me the John Deere tractor I was looking forward to. I wasn’t actually planning to do anything with it, except occasionally drive it around the neighborhood here in central FL, and once in a while pull down some old, dead oak trees. But he did bring an obscene amount of chocolate, thereby totally busting my diet! – Donald W. P.J. O’Rourke comment: My full sympathy, Donald! What Santa brought me was a membership in the “Meat of the Month Club” – not exactly what the doctor ordered, but the steaks are delicious. Meanwhile, I’ll let you in on my own tractor secret – buy a used Kubota for about half the price and spray paint it “John Deere green.” Re: A ‘Thought Experiment’ on Entitlements Getting rid of entitlement programs sounds all well and good, sure enough. I hereby request of Mr. O’Rourke another thought experiment. What would happen if we truly got our military spending under control – including all the vet benefits, discretionary funding, 100+ bases worldwide, the pollution and rebuilding, etc. I realize war is a huge profit center for investors but just for fun I’d like to understand how much the entitlements that for-profit military industries actually cost U.S. citizens and what could happen if

We need heroes! Not a blanket implosion

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January 2019

the system. I believe this is a good idea. However, it’s not without its drawbacks. The rewards for Social Security recipients would (probably) be great, but the risks would (possibly) be great as well. The long-term growth rate of the American economy has been excellent. But that excellence could be destroyed by the same sticky-little-handed politicians who’ve got their fingers in the Social Security till. Many people with far greater knowledge of economics than I have also think privatizing Social Security is a good idea. These people were particularly influential during the George W. Bush administration. But they – and President Bush – discovered that there was a very considerable popular political resistance to the concept. If you want to change the way Social Security works, you’re going to have to start by changing the way voters’ minds work. You decry the way wealth is distributed in our society – and not without reason. To compare what a Kardashian is paid with what a high school math teacher is paid is to stare into the abyss of evil. But is this the worst kind of evil possible? In order to radically change the way wealth is distributed in our (more or less) free market society we would have to grant enormous power to our political system. You yourself point out how grasping and greedy our politicians are already. Do you think they would become less grasping and greedy if they had control of all of America’s money (instead of just much too much of it)? If a tiger eats a baby every day of the year until Ash Wednesday, do you expect the tiger will give up baby-eating for Lent?

of our social safety nets. Other countries get it right. What is our problem in the most successful, (?) wealthy country in the world that far too much of the money floats to the top, like cream, while the “milk” (the ordinary people) continue to hold that cream up and support their ridiculously, absurdly wealthy lifestyles? In truth, anyone can only spend so much money, and then it becomes a ridiculous test of what ludicrous purchase they can make to “out-do” one of their peers – you know, like yachts that cost more than any home most of us will never even see, ostrich leather jackets, etc., and so on. Those same people bitch about taxes, when in fact, they will probably never miss that money. They already have so much there is no way they can possibly spend it all in their lifetime. We’ve all heard it – “Money is the root of all evil.” And the people who passed that bit of information along were so right. Too much of it changes everything that matters and solves absolutely nothing in the hands of too few. – Margo A. P.J. O’Rourke comment: Margo, as a friend of Adam Smith’s remarked after an evening of conversation with the great man, “You have said a book.” And to reply to you in detail would be a book-length undertaking. You bring up a number of fascinating – and difficult – points. Let me respond to just two of them: Social Security accounts and wealth distribution. The only way to keep the “sticky little hands” of politicians off Social Security is to privatize

American Consequences 19

TRADE MATH 101

YOU KNOW EVERYTHING THERE IS TO KNOW ABOUT TRADE

By John Tamny

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January 2019

he nightmares are all the same. I wake up at some ungodly hour after dreaming about a looming final exam. Math was my worst subject, so the test will invariably cover numerical concepts never understood in classes sparsely attended. Some hate to have their sleep interrupted, fearing that there will be no more. In my case a sleepless night is better than the agony of a cruel dream that just won’t die. And the odd thing is, the last time I attended school was during the Clinton administration.

Night terrors related to classes that once highlighted my ineptitude seem a good jumping off point for a discussion of trade – and the accounting abstractions that witless economists have invented to express trade balances. The most disagreeable aspects of school explain the endless brilliance of free trade better than any stack of economics textbooks. Free trade allows us to do what we enjoy doing – instead of what we’re assigned to do – and what we have to do. Free trade makes going to work feel more like going to school and only taking the classes we love. In my case, I strutted into high school and college classes covering politics and economic policy, but I seemed to shrink a foot (and enough IQ points to drop into double digits) as I reluctantly darkened the doors of classes that had anything to do with math and science. Back then, the act of attending class had a

American Consequences 21

TRADE MATH 101

binary quality: thrilling when in my element, humbling when not. It’s also a reminder of the genius of free trade. Free trade means, in essence, that we have the whole world competing to take our math classes for us! With free trade, the world is competing to serve our needs easier, cheaper, and faster. Meanwhile we get the “good grades.” As cash and effort costs are lowered, the value of our paychecks grows. Having the world’s most talented people fighting for our business is wonderful, but it’s not the greatest thing about the freedom to import (without politicians taking their cut). The greatest thing is that we’re freed from having to do what we royally suck at doing. We have fewer and fewer sleepless nights and nightmare-filled slumbers, thanks to our work being more and more a reflection of our individual talents. Free trade is capitalism’s way of giving us a career-long exemption from the math class equivalent so that we can focus all our energies on the equivalent of PE or lunch. For me, this means taking public-policy classes for life. Imagine what school would have been like if you had been encouraged – in fact, required – to avoid any instruction that made you look bad, hate school, dread Sunday evenings, or all three. And for a sense of what life is like when allegedly caring politicians shield their citizens from the world’s plenty, just imagine going to a school where the only class taught is calculus... Forever .

(Of course, if you happen to love math, you’ll have to reverse everything I just said. Strike out “calculus” and substitute “civics.”) But, speaking of calculus, it’s interesting that our ancestors – largely illiterate and innumerate though they were – had a good understanding of that subject. They could accurately predict what the curve of their life would be. Only 200 years ago our ancestors lived in a world without rapid exchange of goods and services across regional and national boundaries. And our lives were inexorably mapped out. This was true even in rich countries like the United States. Despite America’s seeming plenty, most people didn’t spend much time contemplating what they would do when they grew up. They knew that once able, they would likely work from dawn to dusk, six days a week, on a farm. Crude technologies and primitive transportation systems limited mass production and curtailed our ability to exchange the goods and services we produced for the goods and services produced by others. Very few of us could avoid being limited to doing only what we had to do, and most of what we had to do was back-breaking and un-remunerative. Inability to trade meant that human effort was directed toward the production of food. It didn’t matter whether or not we enjoyed farming, it was just what we did, regardless of our actual or potential skills. The world’s inhabitants worked the fields out of necessity. Then came mechanized farm machinery and chemical fertilizers. Yes, this destroyed

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January 2019

– to import . If you’re a worker (at anything except subsistence agriculture), you’re an importer. The importing could be from across the street, or it could be from around the globe, but importing it is. And the more that we can import whatever we need and want, the more we can direct all our efforts to the kind of toil most commensurate with our skills. Imports are a signal that we’re working better. Imports are a sign that we’re improving .

hundreds of millions of farm jobs. But those workers weren’t forced onto the dole. They were freed from mindless labor that had little to do with their abilities. In concert with technology that liberated people from the fields, technology that enhanced global trade proliferated in the form of steamships and deep-water ports, trains and rail networks, trucks and highways, airplanes and airports. The world “shrank,” and global commerce exploded. The division of labor that is the basis of trade revealed itself in skills that had been smothered by the inability to exchange goods and services. Specialized individuals the world over were able to produce and be produced for. Work itself became more and more a reflection of workers’ unique talents, and productivity soared. When you’re free to buy things you can’t produce, you can focus on what you do best in order to pay for those things. And when you’re doing something that amplifies what’s unique about you, your productivity naturally rises. It’s no longer just “work.” Is it any wonder that free-trading countries are so prosperous? It shouldn’t be. In the parts of the world where individuals are most connected to the rest of the world, those individuals are most likely to be doing what individually lifts them up the most. “Free trade” is a rather humble phrase for the rather noble concept of people bettering themselves by doing their best in order that others may do the same. However, to understand free trade, it’s crucial to realize that the goal of working is to get

When you’re free to buy things you can’t produce, you can focus on what you do best in order to pay for those things.

Which brings us to the false notion of a “trade deficit.” It should be called a “trade benefit.” The supposed “deficit” is actually an indication that the workers in the country with the deficit are doing better work than the workers in the country with a trade surplus. Consider a depressed city like Baltimore. As people who’ve ridden the Amtrak train or watched The Wire know, Baltimore is in many ways a failed city with low productivity by any measure of “Gross Urban Product.” But enormous amounts of money flow into Baltimore in the form of government welfare and entitlement payments. Baltimore has a huge trade surplus. But imagine if Jeff Bezos had moved Amazon’s HQ2 to Baltimore. The city would have been “importing” billions of dollars of Amazon

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