Donald Luskin on Free Trade: Guess He Skipped the Stolper-Samuelson Lecture

Let’s be clear – Donald Luskin knows nothing about economics. His college education consisted of going to Yale University and dropping out during the first semester. His incredible lack of knowledge comes through in his latest attempt to explain the benefits of free trade:

Make no mistake about it. The benefits of free trade are settled science. It goes all the way back to the 18th century, beginning with the path-breaking work of Adam Smith and David Ricardo. From then till now, the science of economics has deepened its virtually unanimous embrace of free trade. Today’s best-selling college economics textbook, Macroeconomics by Harvard’s N. Gregory Mankiw, enshrines among the “ten principles of economics” the axiom that “Trade Can Make Everyone Better Off.” Indeed it can, and indeed it has. During the last several decades of unprecedented global economic growth we have witnessed increasing global trade and falling trade barriers. For all the worry about “outsourcing American jobs,” the U.S. unemployment rate stands today at a low 4.5 percent. On the other hand, the Great Depression of the 1930s involved a collapse of global trade, triggered by the Smoot-Hawley Tariff Act. Back then there was no outsourcing. But the unemployment rate exceeded 20 percent.

Let’s separate the long-run or microeconomic issues and the short-run business cycle or macroeconomic issues for a moment. The benefits of free trade come from the efficiency benefits from the division of labor. Few deny this. But there has been a lot of economics since David Ricardo presented his simple comparative advantage model. Maybe real world economics is over Luskin’s head, but most economists have heard of the Stolper-Samuelson theorem. I seem to recall writing something on this suggesting that some people lose from free trade as their real wage is reduced.

Luskin jumps from the microeconomics to business cycle issues. He seems to think that the cause of the Great Depression was the Smoot-Hawley Tariff Act, which was passed in June 1930. Of course, this is absurd given the fact that the Great Depression was already on the way in 1929. Didn’t Milton Friedman and Anna Schwartz suggest the cause of the Great Depression was monetary policy? Or was it the Hoover decision to enact fiscal restraint? Reductions in aggregate demand can be caused by a variety of factors. And the Smoot-Hawley Tariff Act was a reaction to the decline in aggregate demand in the hope that this expenditure-switching policy would increase U.S. net exports. Of course, other nations retaliated. Such beggar-thy-neighbor policies likely worsened the global Great Depression, but they were not the cause.

Luskin also claims that the world has seen a great boom over the last few decades as a result of the opening of free trade. It seems to have forgotten about two periods. During the early 1980’s, the U.S. went through a very deep recession, which may have been one reason why President Reagan pushed through trade protection for certain sectors of the U.S. economy. A few years ago, we had another recession and we saw President George W. Bush pushing through protection for sectors like the steel industry. Is Donald Luskin so stupid that he doesn’t even remember these things?

Update: AB reader Spencer points us to this story:

The Bush administration, facing heavy pressure to deal with soaring trade deficits, said Friday it is imposing economic sanctions against China to protect American paper producers from unfair Chinese government subsidies … The action means that China’s imports of glossy paper will be subjected to tariffs ranging from 10.9 percent up to 20.4 percent as a penalty for subsidies that the Chinese government is providing for its own companies. Those extra duties will be imposed immediately on a preliminary basis pending further review in coming months to set the final penalty margin. The case, which was brought by NewPage Corp., was being closely watched by a number of other U.S. industries from steel to furniture. For two decades, the U.S. government has held that American companies did not have a right to challenge government subsidies granted to their foreign competitors if those companies were in “nonmarket economies” such as China. However, last year, the administration let it be known that it was ready to consider reversing that policy.

Spencer is wondering if Greg Mankiw will condemn this act. I bet he will join me in decrying this protectionist move. The real question is whether the National Review nitwits are even aware that George W. Bush is not the free trade advocate he claims to be. But maybe Donald Luskin will shock us all and also decry this protectionist policy from a Republican Administration. We’ll wait and see!