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Choosing the Ceteris Depending on the Desired Paribus

Summary:
Let me repeat for newcomers: I am friends with Don Boudreaux and have made sure (over email) that he knows my intentions are pure when I do posts like this. I’m not “blowing him up,” it’s just that I only read a few blogs and so if I talk about something here, it will often concern him. Anyway, in this recent post Don is rightly criticizing Wilbur Ross on tariffs. Ross had claimed that “because American auto tariffs are so much lower than those of other countries, the only way U.S. trade negotiators can get trading partners to reduce their tariffs is by giving concessions against other U.S. industries. This, then, requires the government to pick winners and losers in our own economy.” So Don didn’t think that was a good argument. He responded to Ross like this:

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Let me repeat for newcomers: I am friends with Don Boudreaux and have made sure (over email) that he knows my intentions are pure when I do posts like this. I’m not “blowing him up,” it’s just that I only read a few blogs and so if I talk about something here, it will often concern him.

Anyway, in this recent post Don is rightly criticizing Wilbur Ross on tariffs. Ross had claimed that “because American auto tariffs are so much lower than those of other countries, the only way U.S. trade negotiators can get trading partners to reduce their tariffs is by giving concessions against other U.S. industries. This, then, requires the government to pick winners and losers in our own economy.”

So Don didn’t think that was a good argument. He responded to Ross like this:

Uncle Sam’s picking of winners and losers occurs not when it reduces some tariffs but, instead, when it imposes tariffs in the first place. Each tariff creates government-picked visible winners whose booty comes at the larger expense of many unseen losers. Therefore, reducing or eliminating any tariff, contrary to Mr. Ross’s claim, gets government further out of the cronyist business of picking winners and losers. Put differently, criticizing reductions in a subset of tariffs as ‘picking winners and losers’ is akin to criticizing a thief’s decision to reduce the number of people he robs as ‘picking winners and losers.’

That’s great; I endorse both the economics and the morality behind Don’s response.

The only problem is, this is not how many libertarian economists reacted when Trump/Pence worked out the Carrier deal. Later on, it came out that there might have been sticks involved, but when the story first broke, it was construed as carrots of special tax breaks for Carrier. And at that time, lots of libertarians objected quite strenuously to this proposal, saying the government shouldn’t be picking winners and losers in doling out these tax breaks.

I was curious to see what Don’s take was. I didn’t see him using the phrase “picking winners and losers,” but he was definitely critical. He wrote:

I’m all for cutting taxes. But I oppose selective tax breaks given to a particular business in exchange for that business agreeing to act in ways that it would not otherwise. Such selective tax breaks are merely bribes to entice particular businesses to do the government’s bidding.

Such a bribe was negotiated by President-elect Donald Trump and Vice-President-elect Mike Pence (still governor of Indiana) to be paid by Indiana to Carrier’s parent company, United Technologies, in exchange for abandoning plans to move 1,000 jobs to Mexico.

Unsurprisingly, politicians and Carrier’s workers are delighted. But even The New York Times was favorably impressed. It reported that this deal “also signals that Mr. Trump is a different kind of Republican, willing to take on big business, at least in individual cases.” (I’ll bet lots of big businesses are salivating at the prospect of being “taken on” this way by President Trump!)

But there is no “win” or “good news” here for anyone but Trump (who scored political points) and United Technologies workers and shareholders (whose incomes now are subsidized by taxpayers).

What this deal boils down to is Trump and other politicians spending other people’s money to bribe a corporation to continue to operate in an economically inefficient manner.

Now to be sure, there are some important differences between the two cases; I included a lot of the context to be fair to Don. But notice in particular that when it comes to tariff reductions, Don classifies that as restoring freedom to American consumers. But when it comes to corporate income (?) tax cuts on Carrier, Don doesn’t classify that as restoring freedom to Carrier’s shareholders and workers; instead he calls it subsidies provided by the taxpayer.

Either approach is defensible in isolation. But I’m not sure there is a principled reason to use one framing in the Carrier case, and the opposite framing in the tariff negotiation case, except that the Trump Administration officials on the other side of the policy position are using bogus logic to defend their view.

P.S. I’m not posting this so much because “Hey another Trump post!” but rather as an example of using different assumptions in an economic argument. I think we economists do it all the time; I’m only singling out Don because I just read this and it popped into my head. For another example, Noah Smith once brought up (back when I still read him) the idea that libertarian economists will immediately cite the tax incidence analysis when a politician proposes a new tax on businesses. But when it comes to the income tax, libertarian economists seem to think that pre-tax wages and salaries are what they are, and a high marginal tax rate will be totally absorbed by the worker (instead of partially “passed on” to the employer by pushing up pre-tax wages and salaries). Whether this is empirically important, I don’t know, but Noah was right that it never once occurred to me to use the tax incidence analysis when it came to taxing labor income.

Robert Murphy
Christian, Austrian economist, and libertarian theorist. Research Prof at Texas Tech and author of *Choice*. Paul Krugman's worst nightmare.

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