The menace of right-wing socialism
Once upon a time, I chauffeured Pat Buchanan. Around the same time, I even listened to right-wing talk show host Alex Jones. This is going back around 18 years ago for both. I say this to help readers understand that I don’t write as a left-wing Democrat. As I took time to actually learn and understand economics starting in the year 2000, I equipped myself to discern fact from fallacy. Today, I see the right wing promoting a plurality of dangerous fallacies. I never thought I would have to sit here believing that the biggest menace we now face is right-wing socialism.
On one hand, President Trump and the right wing are complaining about the actions of Fed head Jerome Powell. Why? Because the Fed is tightening. From a free-market, Austrian-school perspective, Jerome Powell and the Fed are doing the right thing. Yet, the right wing is agitating for quantitative easing in perpetuity. On the other hand, President Trump and the right wing are agitating for bigger government to impose trade and immigration controls, and build a border wall.
Pursuing an uber-loose monetary policy in juxtaposition with tighter trade and border controls is about the worst of all combinations. The case I make is that if we solved our economic problems through sound policy, settled would be the symptoms of bad policy like job losses and trade deficits that the right wing is trying to remedy through bigger government.
When one understands how capital flows, it becomes much easier to see the absurdity of Trump trying to remedy the trade deficit through tighter trade controls while simultaneously agitating for a promiscuous Fed. David Hume taught us how capital flows in 1752:
“Suppose four-fifths of all the money in GREAT BRITAIN to be annihilated in one night, and the nation reduced to the same condition, with regard to specie, as in the reigns of the HARRYS and EDWARDS, what would be the consequence? Must not the price of all labour and commodities sink in proportion, and every thing be sold as cheap as they were in those ages? What nation could then dispute with us in any foreign market, or pretend to navigate or to sell manufactures at the same price, which to us would afford sufficient profit? In how little time, therefore, must this bring back the money which we had lost, and raise us to the level of all the neighbouring nations? Where, after we have arrived, we immediately lose the advantage of the cheapness of labour and commodities; and the farther flowing in of money is stopped by our fulness and repletion.
“Again, suppose, that all the money of GREAT BRITAIN were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages?” —David Hume, “Essays, Moral, Political, and Literary,” 1752
What David Hume describes in this superb passage is called arbitrage. Some people have an inverted understanding of how capital flows, believing that inflation is good for exports. As Hume articulated, inflation makes not only the money less attractive abroad, but the higher-priced goods as well. It also makes the higher-priced goods less attractive right here at home. Using inflation to remedy a trade deficit is akin to breaking a leg to make yourself more competitive.
It should come as no surprise that inflation and the trade deficit have risen in juxtaposition with one another. With inflation comes higher costs. To reduce costs, capital flight takes place. Inflation nurtures dependence on cheaper foreign markets to supply us with production. Trade controls are not the solution. The problem isn’t that foreign markets are cheaper, but that the U.S. has been too expensive. Why? Because we’ve had an uber-loose Fed, which the right wing wants to continue on unabated. The only path to repatriating dollars and curtailing capital outflow is Fed tightening. Attacking Jerome Powell and the Fed for making moves in the right direction is serious error.
The right wing platform is one of creating inflation, scapegoating immigrants for subsequent economic problems, and then trying to combat the effects of its own policies through tighter trade controls, which are objectively capital controls. In other words, pour on the money supply, blame immigrants and foreigners for our economic problems, and then restrict trade for Americans. That’s why I say what the right wing is agitating for is the worst of all combinations. There’s a synergy in having a promiscuous Fed in juxtaposition with tighter trade controls.
When President Trump was candidate Trump, he unveiled a plan to proscribe remittances sent to Mexico. Amazingly, remittances sent to Mexico were characterized by Trump as “de facto welfare.” Pursuant to the Trump calculus, money earned through productive work in the private sector is synonymous with welfare. By treating honestly earned money on the free market as “welfare” that the government can seize, this would discourage immigrants from performing honest and productive work. No matter where dollars earned flow, productive work is a benefit to the economy.
The purpose of Trump’s plan was to pressure the Mexican government into taxing its citizens in order to fund a border wall. In other words, Donald Trump has wanted to impose capital controls in order to get the Mexican government to pay for his cronies to build a border wall, which somehow isn’t considered to be welfare.
If Trump planned to impose capital controls in order to build a border wall, why believe a border wall wouldn’t be used to impose capital controls? With legislation like Foreign Account Tax Compliance Act that passed in 2010, why believe it would be used for anything other than trapping people and capital into the United States? Yet we were supposed to believe that Trump’s capital controls would have been used only against immigrants and until the Mexican government ponied up the capital to build a border wall, at which time Trump would cease being a menace.
Supposedly, Trump’s plan would have been limited to immigrants (somehow making it a good thing). Arbitrage has a funny way of holding lawless regimes in check. Desperate governments – like ones with a $22 trillion debt – do desperate things, and if we can justify curtailing capital outflow to Mexico in one instance, then why not in every instance? Why stop with just Mexico? Why not every other country?
I didn’t have to read about Trump’s plan to know that Trump would impose capital controls. The populist indictment of immigration is that immigrants “drive down wages.” Not true. This argument dovetails with arguments in favor of minimum wage law as an effort to fix wages. The welfare-warfare state drives down wages. The problem is not the immigration, but the welfare-warfare state. As I wrote in 2010, immigration restrictionism taken to its logical conclusion: capital controls.
Pursuant to the right wing, more immigration means more labor and consequently lower wages. On the surface, it sounds plausible. But sound economics informs us that more productive labor results in higher real wages for everybody. Objectively, the argument is that the way to boost wages is not by increasing, and removing impediments to, productivity, but by shrinking the labor pool. Yet, curtailing immigration to the U.S. does nothing to shrink the labor pool. The aggregate supply of labor remains intact, but in other countries.
The government could inflict injury upon every employer of Mexican immigrants (legal or illegal). However, this would do absolutely nothing to create or save a job. If employing inexpensive labor at home is curtailed, this begets one of two possibilities: the job is destroyed altogether, or the employer flees the country altogether.
What next? Criminalize capital flight? Pursuant to the statutory case against hiring illegal immigrants, the de jure case for capital controls is already in place. If it’s illegal to hire an illegal immigrant at home, then why is it legal to do business with “undocumented” workers abroad? (In that case, one becomes the de facto employer of foreigners living abroad.) For the sake of logical consistency, outsourcing should be criminalized. All international trade and commerce should be criminalized. If the government should proscribe remittances, then why not proscribe Americans from traveling to Mexico and paying Mexican nationals for goods and services?
An economic iron curtain, which the right wing clamors for, works both ways. Let me remind you that if the government can trap capital in, it can trap people in. Try leaving the country without your capital. If immigrants aren’t permitted to send money to Mexico, then how can they be expected to leave the United States? This means that Trump has, almost paradoxically, devised a scheme to trap immigrants into the country. Coming to the United States will be akin to checking into a roach motel. Furthermore, remittances to Mexico would curtail emigration from Mexico. This means curtailing remittances to Mexico would encourage emigration from Mexico.
Restricting the flow of people necessarily restricts the flow of capital, and vice versa. Immigration controls focus on the person, while trade controls focus on the capital, but both achieve the same undesirable results. Even if you believe Trump has the best of intentions and would never use the border wall to trap Americans in, who is to say his successors won’t?
We are being told that protectionism and capital controls are used to protect us, to protect our jobs. In reality, capital controls are a makeshift effort to remedy capital outflow engendered by loose monetary policy — not to mention a backdoor bailout of the U.S. banking system. Loose monetary policy not only drives up prices, but it drives down rates of return. Capital naturally gravitates to cheaper, higher-yield economies. It’s called arbitrage. This is why the earnings — and therefore the returns — are overseas.
The only way to repatriate capital is for the central bank to stop inflating, force up interest rates and return to sound money. If we pursued the right economic policies, people would voluntarily keep their money in the United States. If the government in Washington seeks to curtail capital flight, it must stop fixing prices and stop using the central bank to suppress interest rates. If Powell is getting anything wrong, it’s that the Fed isn’t raising rates aggressively enough. The policy of gradualism will only postpone the day we hit bottom, sidelining investors.
Not only will capital controls not work, capital controls will beget greater problems. If we reject the free market argument against capital controls today, then the resulting chaos will be met with demands for tighter controls tomorrow. Trump’s plan will morph the United States into an open-air prison. Trump’s plan will actually precipitate an exodus of capital.
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