Great, Depression!

[Vuk]

Not a single recession goes by without a person shouting 'Lets do mercantilism!!!'

It does not work Vuk. Tried and tested. I would suggest a good macroeconomics book so you can see why.

Spoiler Alert, click show to read: 

Really? When has history showed it not to work? All this time I thought that history has shown the leftist policies of government regulation such as the New Deal not to work. It did not help us at all.

Some points though:

stop all foreign aid ---> Which means less purchasing power in international markets...ergo larger trade deficit for the US and fall in production. So heaps of unsold goods in the local market and more closed local businesses. (I wont even mention the political side and about what will happen to US tied pariah states like Israel, Iraq and Afghanistan if the buck stops)

Spoiler Alert, click show to read: 

I admit to faulty wording on that point. States that we need to be strong for military and political reasons would still be sent aid, but aid going to countries like Dafur and Somalia where it is just captured and used by the enemy anyway is not helping world purchasing power AT ALL.

allow the market to regulate itself ---> That means that the banking and insurance system will collapse. No savings, no pension funds, no medical insurance. AIG only holds a huge chunk of the world's liability contracts. Now, until the market regulates itself, firms would have to pay for their own liability so if let's say a worker gets permanently disabled a firm will have to come up with 3-4 millions needed for lifetime care. For most small firms this means bankruptcy...

...so immediately local firms will get another hit.

Also, if the system is not supported and provided with liquidity, firms will have a hard time finding cash when needed and will collapse when their outward cashflow peaks.

Also it is a bit naive to think that markets will regulate themselves. Economic theory has progressed since Adam Smith. Some markets like the medical sector are by nature failed markets and cannot self regulate. Also the current collapse was to a certain extent caused by lack of regulation (banks were allowed to give 0% deposit and also high risk mortgages putting an extreme inflationary pressure to the housing market that led to its eventual collapse.

Spoiler Alert, click show to read: 

Just because Adam Smith is not of this generationg does not mean that he is wrong.

enforce US standards to imports from other countries, quit taxing businesses for producing in the US, and start taxing them for operating factories and offices overseas, etc. --->

You practically propose an exit from the WTO. There are agreements in place that prohibit such action and for good reason.


Such actions will effectively cause a collapse of trade between the US and the world.

If you give local businesses preferential treatment then the other countries will do so so the net outcome will be taxpayers' money waster and a zero net effect. What is the point of reducing tax for local businesses if your potential market target places an import tariff on US products in retaliation?


Also you have to take comparative advantage into account. A country cannot produce everything and be efficient. By restricting trade in an effort to boost local business you end up restricting production efficiency and as a consequence you cause a drop in wages (since lower productivity leads de facto to lower possible compensation for your labour).

In short, by enforcing the protectionist policies you propose:

a) You would force other countries to follow suit causing a zero net effect. Your trade level would be greatly diminished.

b) You would hinder your local firms ability to export because you would get tariffs on the way.

c) By neglecting comparative advantage you would cause a collapse in wage rates by causing lower productivity.

d) By taxing overseas production you will cause problems to that country's economy. They will probably react by nationalizing or restricting FDI to the US. Even if that does not happen, there is a good reason why firms produce overseas, HIGHER PRODUCTIVITY (due to location, lower wages, skilled labour or other reasons). By taxing you will eventually ensure that said firms will produce less efficiently and consequently be out marketed by foreign firms.

There is a reason free trade is promoted. It is an instinctive reaction to resort to protectionism when times are hard, but it is not really the best solution.

Spoiler Alert, click show to read: 

You are wrong, I am not talking about putting any type of tax or tarriff on goods from another country, just making sure that American companies produce in America. I am talking about taxing the outsourcing of jobs, not the goods coming in. And if we stopped punishing them for producing in the US, they would have very little/no reason to outsource jobs anyway.

It is all good and nice to propose such 'solutions' but you need to consider how interconnected the world market is and also the fact that other countries will not stay idle.

Spoiler Alert, click show to read: 

Other countries responding in like will not hurt our market at all. Let them, it would be good for them, and by their economies improving, we would have a larger market for our goods.

My two cents

My two cents.

[LittleGrizzly]

Really? When has history showed it not to work?

We practised mercantilism for a long time before Adam Smiths free market philosphy was taken on fairly extensively by the powers... his treatise came out around about the time of the american war of independence so not long after that...

[Vuk]

Really? When has history showed it not to work?

We practised mercantilism for a long time before Adam Smiths free market philosphy was taken on fairly extensively by the powers... his treatise came out around about the time of the american war of independence so not long after that...

So? Adam Smith was right about 99% of what he said. If we would have followed his philosophy throughout his history, there would have been no great depression, and we would by now have achieved a state of living that we would probably find hard to believe today.

[Yoyoma1910]

Mercantilism was heavily dependent on he use of slavery to produce goods at affordable cost. It wouldn't be effective in an even reasonably humane economic model. The reality holds that some goods are going to be able to be produced more effectively in some nations and regions than others.


If you restrict the purchase of foreign goods, then the production of domestic goods dependent on those goods becomes less feasible.


Of course, sometimes it's a choice of quality over quantity. For instance, domestic vs. foreign crawfish. Even at a 180% tariff, imported tails from China and Turkey are ridiculously cheaper than domestic production. However, the product is notably inferior, partially due to packaging restrictions which require that the flesh not be packed in fat.

[rasoforos]

I admit to faulty wording on that point. States that we need to be strong for military and political reasons would still be sent aid, but aid going to countries like Dafur and Somalia where it is just captured and used by the enemy anyway is not helping world purchasing power AT ALL.

This is a political and not an economic aspect of aid. Shall I assume that we now agree that stopping aid is not a good idea since we need to keep all those economies that will buy from us nice and strong?

Just because Adam Smith is not of this generationg does not mean that he is wrong.

Of course. The same way Aristotle was right in a lot of things about Biology and Physics and Democritus was right about the atom. Such men set up bases and things went a lot further since then. Just because Hippocrates was right about a lot of medical issues does not mean we should not use modern medical techniques for example.

There are as many opinions as there are economists (I should know since I am one) but if it was that easy and all markets could self regulate through Adam Smith's invisible hand then we would not need economic theory. Some markets, due to the nature of their products, information assymetry or other reasons are inherently prone to failure.

You are wrong, I am not talking about putting any type of tax or tarriff on goods from another country, just making sure that American companies produce in America. I am talking about taxing the outsourcing of jobs, not the goods coming in. And if we stopped punishing them for producing in the US, they would have very little/no reason to outsource jobs anyway.

You are making my point now. Let's say U.S firm 'A' has an overseas factory in county 'Yurop'. The moment you tax company 'A' for its overseas investment you will force it to downsize or close down that said investment. That will harm 'Yurop's' economy due to lower production and higher unemployment. Yurop will not of course stand idle but will retaliate. It can do this by putting tarrifs on US imports or even by doing the exact same thing the US did and force it's companies to downsize their investments in the US.

So what will the outcome be? Closed factories in the US and closed factories in 'Yurop' and lots of people jobless.

This is not the end though. Firm 'A' had a reason it was producing in 'Yurop'. Firms do not just get up and go abroad for no reason. Lets say that our product is cars and that firm A can find better skilled labour at cheaper prices and is also closer to its distribution centers and consequently can produce a car with a cost of 5.000 units while it would cost 6.000 units in the U.S. Now the moment you force it to produce localy through your taxation program you imediately reduce its overall competitiveness in the Global market. Suddenly firm 'A' sales drop in the global market because it cannot produce as cheaply as it's competitors. It might be competitive localy but the local market is not enough of course and chances are that it's costs will increase even localy (because some parts will need to be imported anyway and they will be subject to punitive tariffs that you or 'Yurop' imposed).

As for them having little or no reason to outsource jobs. The alternative would be to either produce everything locally or to purchase all your goods from foreign companies. There is a simple argument against it. Let us first simplify the economy into having one resource 'labour' and two products 'bananas' and 'computers'. Let's say that the US has 10 units of labour and that each unit can produce either 5 units bananas or 3 units of computers. Bananas cost 10 dollars per unit and computers 20 dollars in the world market. It is obvious that the U.S is better off using all its resources to produce computers since its Gross domestic product in this case is 10 units of labourX3 computersX20 dollars = 600 dollars. Then it can buy bananas from the world and it becomes obvious that it is much cheaper to do so than to produce localy since you would need 1 unit of labour to produce 50 dollars worth of bananas but, by producing computers and exporting them you can get 60 dollars worth of bananas per unit of labor. So if you force, through protective taxation, your economy to produce both goods and you had 8 workers to procuce computers and 2 to produce bananas in order to cover domestic demand then your GDP would be 8X60 + 2X50 = 580 dollars which is less than the 600 dollars you would produce through free trade. Congratulation, you effectively put your economy in recession!

So forcing your firms to produce localy is not a good idea. How about not letting them outsource? Well if you do allow free trade but no outsourcing then you will end up buying from foreign firms. You will do the foreign countries a great good at the expense of your own economy and they will give you a big big kiss. In simpler words, by letting your companies outsource you can tap into the economic potential of international resources. If you do not some other country will do anyway.

I strongly suggest you read about competitive advantage and why free trade is a positive sum game. A good book (or even wiki) can explain much better than me.