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| President Trump and Commerce Secretary Howard Lutnick |
The American public, however, seemed less enthusiastic. Within hours, the internet was ablaze with AI-generated images of armies of teens and portly, middle-aged Americans sitting side-by-side on the assembly line in giant sweatshops laboring to screw tiny screws into iPhones.
Undeterred, Secretary Lutnick doubled down on this promise last week: “This is the new model, where you work in these plants for the rest of your life, and your kids work here, and your grandkids work here!”
Secretary Lutnick might’ve chosen a poor example to rally Americans to the factory front lines. Still, economists struggle to explain the fallacy behind promises to “restore American manufacturing” and “bring jobs home.” It’s hard to convince ordinary people that free trade is good by relying on abstract concepts like “opportunity costs” and “comparative advantage.” It’s especially challenging when protectionists can point to specific jobs being “saved” and factories being “reshored” as evidence of the virtues of restricting trade. The “costs” of trade are highly visible—workers losing jobs, factories being shut down. The benefits, in contrast, are hidden and easily taken for granted.
Thankfully for us, there’s Frédéric Bastiat, the greatest economic storyteller of all time. No one was better at explaining dense economic ideas in ways a popular audience could understand.
The parable runs like this. Suppose a band of troublemaking kids hurl a rock through a storekeeper’s window. At first, the storekeeper is devastated about having to replace his window. But suppose a (bad) economist approaches him and says: “Don’t fret, there’s a silver lining in this dark cloud! The $1,000 you spend replacing the window will create a job for a local glazier. That glazier can then use that income to buy a suit, thus creating income for a tailor, and so on!” The ultimate result of this broken window, he giddily concludes, will be to create jobs and increase economic growth!
It’s easy to see why journalists so often fall for this tall tale. But to the trained economist’s eye, the fallacy at its heart is easy to detect. The (bad) economist is ignoring the opportunity cost of the $1,000 that is spent repairing the window. In other words, he or she is neglecting everything else the shopkeeper could have bought with that $1,000 if his window hadn’t been smashed. Perhaps he could’ve spent it on a new bike, thus creating a job and income for the bike store owner. That bike store owner could’ve spent this income on new shoes, thus creating income for a cobbler, and so on.
The moral of the story is simple: destruction doesn’t create wealth. Destruction only destroys wealth. In this case, the economy is made poorer to the tune of one broken window (or, in dollar terms, roughly $1,000). This concept has become popularized as the “broken window fallacy.”
Paradoxically, this fallacy is so obvious that it’s easy to fall prey to it. A simple reductio ad absurdum exposes its lunacy. If destruction creates wealth, then we should celebrate natural disasters and equip an army of misfit teens with rocks so they can “stimulate” the economy by smashing windows. But keep an eye out, and you’ll find plenty of intelligent people committing it when they discuss the economic impact of wars, terrorist attacks, and natural disasters like the recent California wildfires.
The reason why so many commit it, Bastiat argues, is because they fixate on “that which is seen” and neglect “that which is not seen.” That which is “seen,” in this case, is the spending to replace the window and all the jobs that are created from that spending. It’s easy to point to the jobs created for the glazier and tailor to see how they benefited. What’s harder for the economically untrained eye to detect is the “unseen”—all the jobs and wealth that would’ve been created if not for the spending that must now go towards replacing the broken window. In this counterfactual, our shopkeeper could’ve had $1,000 and an intact window. Instead, he had to spend $1,000 replacing a perfectly good window.
Although it’s not typically used in the context of discussing international trade, Bastiat’s parable beautifully illustrates how tariffs and trade wars destroy rather than create wealth.
Economists since Adam Smith, David Hume, and David Ricardo have argued that trade increases society’s wealth by enabling us to specialize in what we’re most efficient at making (i.e. what we can produce at the lowest opportunity cost), then trade with others for what they’re most efficient at making. This is just as true at the macro-level for nations as it is at the micro-level for individuals.
Americans, for instance, may very well be better than Vietnamese workers at making textiles—we may be able to produce more textiles per worker, especially since our workers tend to be “higher-skilled.” In economic parlance, we’d have an “absolute advantage” over Vietnam in textiles. Nevertheless, Vietnamese workers may be more efficient than us—they may be able to make textiles at a lower cost per unit. Vietnam has a “comparative advantage” in textiles when it can produce them at a lower opportunity cost compared to other goods. In this context, “cost” refers to the alternative products that must be sacrificed to focus on textile production. For the United States, this cost is high because the country excels in high-tech industries and services. In contrast, Vietnam faces lower costs for textiles since high-tech industries are not viable alternatives for them.
The fact that Vietnam is the lower-cost producer of textiles means that they should specialize in them, even if we could do it ourselves. This frees American workers, who tend to be higher-skilled, to specialize in making higher-valued products where we possess a comparative advantage. We can then use our higher incomes from making these products to buy more stuff from Vietnam and elsewhere.
The result of specialization and trade is that both Americans and the Vietnamese are made better off. Vietnamese workers secure middle-class textile jobs that allow them to escape the grinding poverty of subsistence agriculture or manual labor. Since Americans can now buy textiles more cheaply from Vietnam instead of making them ourselves, more of our high-skilled labor is unleashed to work in higher-quality jobs like software development or computer programming. Both sides win from trade.
How does this relate to Bastiat’s broken window fallacy and today’s trade war? If trading with Vietnam and other nations makes American workers and consumers better off, then eroding this global division of labor by breaking off trade with them makes us poorer. Sure, some factories may be “reshored” to America. A (bad) economist is sure to point out that these factories will “create jobs” for some Americans. But any good economist will tell you that these jobs come at a very high (opportunity) cost —namely, all the higher-quality jobs that Americans could have specialized in if not for these trade restrictions. These costs are difficult to see and hard to quantify, as is all the wealth that could’ve been created through trade. But they’re real. Á la Bastiat’s broken window parable, the net result of protectionism is fewer high-quality jobs for Americans and a smaller economic pie.
More than 175 years later, Bastiat’s lesson rings truer than ever. Breaking trade relations, like breaking windows, isn’t some “weird new trick” for creating wealth. It’s an age-old recipe for destroying wealth by shattering the global division of labor that created it in the first place.
Today’s news cycle is a great example. When Secretary Lutnick gloats about bringing iPhone factories back to the U.S., he’s essentially bragging about creating jobs for glaziers by breaking the windows of our global supply chains. In literal terms, he’s boasting about diverting millions of U.S. workers away from higher-skilled jobs into low-skill assembly line jobs with much lower pay. That’s a tough sell to an American public that isn’t exactly pining for a return to the assembly line, as evidenced by the 500,000 domestic manufacturing jobs that U.S. employers can’t fill.
According to a Cato Institute study, 80 percent of Americans want more manufacturing jobs in the U.S., but 73 percent say they don’t want to work them. As the great economic thinker Dave Chappelle bluntly put it: “I want to buy iPhones, not make them!” Or, as another group of great economic thinkers put it, somewhat more abstractly: “What is desired is specialization in production but diversity in consumption.”
Nineteenth-century economist Henry George brilliantly explained the self-defeating nature of protectionism by likening it to a self-imposed blockade: “protectionists seek to do to our own nation in times of peace what our enemies seek to do to us in times of war.” We can all agree that a naval blockade is an effective way to suffocate a rival’s economy (for evidence, see the Confederacy’s economic collapse during the Civil War or Germany’s during World War I). Why, then, would we ever think that cutting ourselves off from foreign trade by, in effect, imposing a naval blockade on our own citizens would be a recipe for prosperity?
Contrary to what protectionists like Lutnick argue, there’s nothing patriotic or “America First” about trade wars that destroy the international division of labor that has lifted millions of Americans and billions around the world out of poverty. Any effort to destroy or erect barriers to this international division of labor invariably makes us poorer, not richer. Just like you can’t make an individual richer by cutting off their access to trade partners, you can’t make a nation rich through autarky. The net result of Lutnick’s master plan to reallocate thousands of American workers away from high-skill jobs and into low-skill manufacturing jobs would be to reduce their real incomes and lower U.S. GDP.
To see this, we needn’t time travel back to the halcyon days of Adam Smith and David Ricardo or Frédéric Bastiat and Henry George. We need only harken back to President Trump’s 2018 tariffs on steel and washing machines. Just as economic theory predicts, steel and washing machine prices rose sharply (as did complementary goods like dryers). Thus, U.S. taxpayers indirectly bore the lion’s share of this tax burden in the form of higher prices. According to the Federal Reserve, these tariffs imposed an indirect tax on Americans of $80 billion while bringing in only $82 million in tax revenue. Perhaps most shocking (especially given the Trump Administration’s stated objective both then and now of reducing trade deficits), the U.S. trade deficit increased from $517 billion to $785 billion in the five years after these tariffs took effect, and our manufacturing trade deficit rose by 60 percent.
Most germane to Bastiat’s lesson, though, was the considerable unseen costs these tariffs imposed on the economy. Although the tariffs “saved” or “created” an estimated 1,800 domestic steel jobs (the “seen” effect), they did so at a cost of $900,000 per job (the “unseen” effect). That’s a hefty price tag for replacing a proverbial broken window. All told, the tariffs reduced U.S. GDP by 0.2 percent in 2018 (or by about $50 billion) and by an estimated 4 percent over the next three years.
Fast forward seven years and President Trump’s latest tariffs are orders of magnitude larger. His 2018 tariffs only directly targeted a handful of nations and industries, affecting $360 billion in traded goods. His “Liberation Day” tariffs, in stark contrast, affect more than $3.5 trillion—a 10-fold increase. The Tax Foundation estimates the latest tariffs amount to an annual tax hike of $1,300 per U.S. household (who will bear the lion’s share of their burden in higher prices). The Wharton School projects they’ll lower domestic wages by 7 percent and U.S. GDP by 6 percent in the long run. If the 2018 “trade war” was a tiny tremor for the global economy, today’s is a massive earthquake.
The aftershocks of this seismic event are expected to hit American shores this month. The last cargo ships from China that weren’t subject to crippling tariffs arrived on the Pacific coast last week. The countdown to spiraling prices and inefficient supply chain reshuffling begins this May.
Many firms have just begun raising their prices in response to these tariffs. Companies like Amazon have even discussed displaying how much they’ve had to mark up their prices due to tariffs. The biggest victims of the tariffs, however, aren’t multibillion-dollar corporations like Amazon. They are small businesses. Smaller companies tend to have narrower profit margins. They also have fewer alternatives to buying from foreign suppliers; vertical integration isn’t exactly feasible for most small-to-medium-sized firms. Because they employ fewer workers on a per-company basis, they also hold far less sway to lobby the Administration for special exemptions.
In the coming weeks, readers should gird themselves for a tidal wave of “positive” headlines about factories being reshored and manufacturing jobs “coming home.” But remember: this is just a modern-day example of Bastiat’s fallacy of fixating on the “seen” but neglecting the “unseen.” To Bastiat, these headlines may as well read: “Broken window creates glazier jobs; economy booms!” Sure, some factories may be reshored. But that just means more U.S. workers will be diverted away from high-quality jobs into low-quality jobs. The net effect will be fewer jobs and lower growth.
Before they break any more windows, the Trump administration would be wise to heed the advice of the 1,800 economists who’ve called out its quixotic trade war for the farce that it is. If not, they’ll be stuck picking up the pieces of a broken economy and claiming it is a blessing in disguise.
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