Late in 2001 and early in 2002, America's economic mercantilists (who tend to ascribe domestic economic difficulties to all things foreign) were complaining about cheap foreign steel in the U.S. economy. No sooner had the Bush administration slapped higher tariffs on foreign steel than the mercantilists started spinning sky-is-falling tales about Asians selling computer software and medical technology to Americans at bargain basement prices. The latter spawned a media cottage industry around the term, "outsourcing."
So what's the mercantilists' 2005 cause celébrè? Believe it or not, it's high-priced imports! Oil imports to be specific. Not low-priced imported oil, mind you, but high-priced oil. Apparently, low import prices and high import prices both pack a damaging economic punch, at least for the mercantilists. An economic contradiction? Yes. One of the scenarios has to be wrong. Two plus two always equals four, not just sometimes.
When I've posed the contradiction to mercantilist acquaintances, their responses usually go something like "... oil is economically different than steel, software and medical technology; there's no comparison." My asking for specifics about the economic differences invariably evokes a "...er...er...um...um, they're just different; everyone knows that."
Yeah, right. What about the fact that oil, steel, computer software, and medical technology services are all produced in the United States. I guess we have to ignore that. Likewise, what about the fact that Americans who produce oil domestically are highly skilled and well-paid, just like their counterparts who produce steel, software, and medical technology? Ignore that too. And never mind the fact that all the products figure importantly in Americans' high living standards. Ditto for the fact that none of the products can be distinguished from the others based on some national defense shibboleth.
What we have, rather, is a clear contradiction. If the mercantilists' steel, software, and medical technology scenario is correct, it follows that high-priced imported oil must help Americans. On the other hand, if the mercantilists' oil scenario is correct, their wringing-of-hands about cheap foreign steel, software, and medical technology is mistaken. That the two scenarios coexist in the business and political media is a sad commentary on our pundits' insightfulness.
Of the two, only the oil scenario has credibility. The reasons are two-fold. First, higher import prices encourage Americans to reduce purchases of oil that was wealth-enhancing prior to the price increase. Second, more of what Americans consume will come from what were formerly higher cost domestic sources. And for precisely the same reasons, cheap foreign steel/software/medical technology will augment U.S. living standards.
Is the mercantilists' inconsistency something new on the economic horizon? Not really. In the past, however, the flip-flop has usually appeared as nations transition between peacetime and wartime footings. That is, the politicians who engage in peacetime import protectionism also try to undermine the economies of their wartime enemies by preventing them from importing. Or as Henry George so aptly put it in his 1886 book, Protection and Free Trade (online at the Mises Institute), "What protection teaches us is to do to ourselves in time of peace what enemies seek to do to us in time of war" (p. 169).
Abraham Lincoln provides a quintessential example of the peacetime/wartime contradiction. Recall that Lincoln and his fledgling Republican Party rode a protectionist banner to power in the 1860 elections. But as soon as war with the Confederacy broke out, Lincoln did an "economic about-face," setting up naval blockades around Confederate seaports to hamper foreigners' ability to sell to southerners. So, what was good for the United States during peacetime would harm the Confederacy during wartime? Is that right? No, one of Lincoln's positions had to be wrong for the same reasons the other was right.
Don't look to historians for an explanation of Lincoln's about-face. They give Lincoln a pass on the contradiction, just as today's pundits give mercantilists a pass on the oil vs. steel/software/medical technology contradiction. Perhaps economists have higher grading standards than others, but getting your economics right fifty percent of the time means you fail my course. Enough said.