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Mar 03 2018

Plus ça change, plus c’est la même chose

Mercantilism is a national economic policy designed to maximize the trade of a nation and, historically, to maximize the accumulation of gold and silver. Mercantilism was dominant in modernized parts of Europe from the 16th to the 18th centuries before falling into decline, although some commentators argue that it is still practised in the economies of industrializing countries, in the form of neomercantilism.

It promotes governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers. Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance-of-trade, especially of finished goods. Historically, such policies frequently led to war and also motivated colonial expansion.

Mercantilist theory varies in sophistication from one writer to another and has evolved over time. High tariffs, especially on manufactured goods, were an almost universal feature of mercantilist policy. Even if mercantilism and protectionism are applied through the same economic measures, they have opposite aims. Mercantilism is an offensive policy aimed at accumulating the largest trade surplus. Conversely, protectionism is a defensive policy aimed at reducing the trade deficit and restoring a trade balance in equilibrium to protect the economy.

Well, true enough except for that last bit about Mercantilism and Protectionism being different because they have opposite policy aims. They have the same aim- to enrich your country at the expense of others. Labeling one “offensive” (bad) and the other “defensive” (good) is simply propaganda.

However because they posit a zero sum game between national powers you can see the appeal to The Donald who 1) is a simplistic moron and 2) views any negotiation as a contest of wills in which there are winners and losers (probably because of #1).

As I was taught in History and Economics 101, Mercantilist and Protectionist policies can be effective under certain conditions for a limited amount of time. They are variations of what is generally called a “Command Economy” where Policy Makers decide what goods and services are available to citizens (at reasonable prices, there are always leaks) and allocate Labor and Capital to enterprises that are viewed as beneficial to the State (L’état, c’est moi), mostly but not always military power.

Think Command Economies are ineffective? Well, they worked Ok for France and England in the 16th, 17th, and 18th Centuries and more contemporarily for Germany and the Soviet Union in the 20th (not that the 19th was immune, just it was more of the same).

The essential conditions for implementing a Command Economy are that you not starve too many people (you can starve quite a few but once you pass a certain threshold production declines), that you have control over Imports (Tariffs and Customs Interdiction), that you have control over your domestic market (Luxury Taxes or Prohibitions), and that you have control of your Capital (Nationalize tradeable commodities, restrict currency transfers). Labor? They’re basically Slaves anyway, who cares? Use your Monopoly on Violence (at least internally) to beat them into submission.

If you have those and your Economy is sufficiently large and varied enough to sustain itself internally you can basically tell the rest of the World to piss up a rope. Japan did this for 400 years.

In the 19th Century many Nations became Industrialized enough that their Internal Market was no longer able to absorb their entire output and finding some sucker other party to trade for it was essential for continued growth. A School of Economic Thought developed that instead Nations should concentrate on promoting Industries where their output was superior or more desirable (Competitive Advantage) and instead encourage the removal of Trade barriers to increase the volume of Money flowing in and decrease the cost of essential commodities that others could produce more cheaply.

And now the Modern Monetary Theory part. As long as “Money” was tied to a central commodity (historically Gold and Silver) it was easy to keep score but more and more transactions were taking place in commodity valuations of more useful kinds (How many pounds of Opium do you want for those Silks? How much Oil for those Guns?) and the relative scarcity of Gold and Silver produced severe constraints on the Growth Potential of Economies since Governments were reluctant to inflate because of damage to the wealth of Elites (Sorry, you lost the War. Your Slaves and your currency are both worth exactly nothing.).

Eventually in 1972 we did away with even evaluating Currency in terms of other Currency and it now serves the purpose of being a means of transaction and nothing else. I’d advise you to invest in Bananas due to the coming Cavendish Plague but they rot really quick and might go bad on you before the Market takes off. Maybe Yap Island Stones.

So Tariffs are not as effective as they were since many Markets are now dominated by Producers who have Competitive Advantage. Indeed in many cases Nations no longer produce essential goods (we can’t build a Missouri Class Battleship today, not that they’re essential any more- history has passed them by, they are relics) and are forced to trade for them meaning that opportunities for retaliation are rampant. The chief Economic result is a voluntary rise in inflation, a consumer tax, as vendors pass through their new cost ($175 a Car for example).

You don’t even hurt the people you’re thinking you do. If for instance you think China is going to take it on the chin (oh yes, pun intended) you might be surprised to learn that they are only 11th in Steel and 4th in Aluminum.

Number 1 in both?

I’ll note Russia is #5 and #2. You should really check with your puppetmaster Donald.

Other allies who are effected? Steel- Brazil (2), South Korea (3), Mexico (4). Aluminum- United Arab Emirates (3).

Now I totally get why The Donald did this. He’s pissed as hell about Hope Hicks and worried sick that Mueller is going to prove him a traitor (not likely, we’re not technically at war with Russia but there are other laws) and scoop up the rest of his family who are all criminals and as the reports say, he wants to punch somebody. In waltzes Wilbur Ross who says- have I got a target for you (since he’s wanted this since before Day 1) and smuggles in a group of Steel and Aluminum lobbyists for an impromptu dog and pony show.

Yawn. I rate the likelihood it will every be implemented around a 3 (on a scale of 1, never, to 10, for sure) and it may boost his popularity among his rabid base by 1 or 2 points for a week or so (though not on Wall Street) and then it will vanish on the ash heap of history.

If not it will sting for a while and then be instantly reversed by the next Administration with abject apologies and hundreds of Billions in make up dollars (which is also a pun, see if you spot it).