THE FALLACIES OF PAT BUCHANAN'S ECONOMICS
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THE FALLACIES OF PAT BUCHANAN\'S ECONOMICS
Pat Buchanan is currently campaigning to become the Republican representative in the next U.S.
Presidential election. He is credited with striking a chord amongst the main stream, blue collar sector
of the country. This is because he has based his economic platform on common myths about free trade and
how it is the cause of the economic problems in the U.S. His theme is that layoffs and the closing of
American plants are the result of foreign companies and countries taking advantage of easy access into
U.S. markets which, in his opinion, is not being reciprocated abroad. This is how he accounts for the
current trade deficit that the U.S. is running with countries like Japan. Pat\'s economic platform
regarding trade policy can be summarized as follows:
* Impose a 10% tariff on Japanese imports and a 20% tariff on Chinese imports. This would
generate, in his opinion, $20 billion in government revenue and reduce the trade deficit which could be
reinvested into the American economy and help create tax cuts for small businesses.
* Impose a social tariff on Third World manufactured goods to protect U.S. workers\' wage rates from
the foreign laborers who are paid a fraction of what their U.S. counterparts earn. He also resents that
foreign companies do not have to adhere to the strict environmental, safety, and health standards that
American firms do yet get free access to the U.S. market via GATT and NAFTA.
It is evident that Pat Buchanan believes that trade deficits and trade with Third World countries are at
the heart of what he perceives to be America\'s economic problems. He feels that through tariffs the
burden of income taxes paid by U.S. workers and small businesses can be shifted onto consumers who
purchase foreign goods. His underlying sentiment about his trade restrictive policies is, "This is our
land; America is our country; the U.S. our market. We decide who enters here and who does not."
The basis of international trade is that their are gains to be had from partaking in it. This was proven
by David Ricardo, an economist in the early 19th century, who introduced the concept of comparative
advantage. His theory stated that a country\'s "absolute advantage (overall productivity differences
between countries) should be reflected in differences in income, whereas comparative advantage
(variations in productivity differences by sector) will determine the pattern of international trade."
A common misconception about free trade is that it is based on absolute advantage. Comparative advantage
always is applicable when applied to international trade so it stands to reason that there will always be
gains from trade. The existence of low wages in a country is not by itself a reason for the U.S. to fear
trading with them. For one thing, wages generally reflect the productivity levels of workers. If low
wages meant low costs then world trade would be dominated by Th!
ird World countries and the U.S. would never export. The fact is that differences in technology cause
labor productivity variances between countries which affects unit labor costs. A firm will tend to hire
more workers until the value of the product that the last worker produces is equal to the cost of that
worker. In the less developed countries low productivity, as a result of low levels of technology, is
reflected in wages. The significant measure to determine which sectors a country has a comparative
advantage is not wages, but unit labor costs. A country can have a comparative advantage in a sector
even if it is more inefficient than any other country. This is because comparative advantage is based
not on who is the best, but rather on where a country\'s "margin of superiority is greater, or its margin
of inferiority smaller". As long as a poor country specializes in sectors where it is the least
inefficient compared to a rich country then it will gain from trade.
The Ricardian Model, based on differences in labor productivity, is best explained using a simple
situation based on the following assumptions: two countries, one called Wealthy, the other Poor; two
goods, jeans and sneakers; and labor is the only factor of production. Both countries have 40 hours of
labor available but Wealthy has more advanced technology which gives it an absolute advantage in the
production of both goods. These countries will benefit from trade because pre-trade relative prices
differ. For this example assume that sneakers and jeans are traded in world equilibrium on a 1 for 1
basis and that there
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International trade, Comparative advantage, Sweatshop, David Ricardo, Free trade, Offshoring, Gains from trade, Absolute advantage, Free trade debate, Causes of unemployment in the United States
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