I am often confused by the varying ways in which people approach problems. For instance, in some areas of human endeavor, people will automatically look for every implication, every possible repercussion, even worry about the symbolic significance. Then, when it comes to other topics, they will overlook all but the most obvious consequences.

For example, when discussing decriminalization of drugs, not only will those supporting continued criminalization argue the indirect consequences, such as increased health costs and lost labor, but even symbolic costs, saying that it would "be like giving up" and asking "what message will it send our children?"¹ Yet, those same people, when arguing about topics such as our protective tariffs, will not look beyond the immediate impact of a few cents increase one  pound of sugar. Similarly, any restriction on free speech will be parsed for any "chilling effect"², but topics such as the stimulus will be debated, even by critics, in the most superficial terms, concentrating mainly on the cost and the recipients, without even a thought about the long term consequences.

Of course this may be because the average American simply has little interest in economics. In part, I blame the economic profession. Since economists are largely employed by financial institutions, and investors, they have developed a largely quantitative focus, and, as an outcome there have been three unfortunate trends. First, people have come to think of economics as a very math-intensive field. Second, a belief that we can apply quantitative analysis on a macroeconomic scale. And finally, a dreadful ignorance of economic theory, as opposed to quantitative methodology³.

I bring this up because of a post I was intending to write but had to put on hold⁴. In the course of researching it, it occurred to me how little most people think through economic questions.

Let us take, for example, sugar import quotas. These are often used by economists as a perfect example of why special interests have such an easy time passing legislation, while the opponents have such a hard time fighting them. And, superficially, they are right. The sugar companies need such a tariff, they would not exist at all if sugar could be freely imported, as sugar production in the US is just not competitive with production in other nations, even with the cost of transportation. So they have an interest in spending millions to maintain those tariffs. On the other hand, the cost to individuals is small. Even companies using a lot of sugar see a relatively small increase in cost. And, as all sugar consumers are saddled with the same cost increase, there is no real competitive disadvantage from such tariffs, except in competition with foreign foodstuffs, but in that case, other tariffs balance out the advantage.

And there ends the traditional analysis of such tariffs and quotas. They may cost us millions, but are distributed in such a way that no one has a real interest in fighting them, at least not enough interest to invest the money it would take to get rid of them, to counter the money being spent by the sugar industry.

But that analysis overlooks so many details, all the less obvious harms done by these quotas and tariffs. By looking only at the direct cost to consumers, it fails to consider what else might be were the quotas not in place.

For example, it fails to consider the resources tied up in the US sugar industry. Protectionists like to point to the jobs "created" by protective tariffs and quotas, mainly because protectionists are obsessed with jobs⁵. Unfortunately, the traditional analysis seems to share this bias. The truth is, unless there is inflation⁶, or government meddling in the labor market, be it pro-union legislation or otherwise, labor will not remain on the market in a free economy⁷. So, rather than "creating" jobs, what we are doing with such quotas is tying up resource sin sugar production which be more productively used elsewhere. As shown by the fact that sugar would be cheaper to import, sugar production in the US is not efficient, so we would be much wealthier were we to import sugar and use those resources to produce something that is efficient to produce here.

But even that ignores some costs. Not only are resources tied up in a productive venture which is inefficient, but we are also forced to pay a higher price for sugar. While, admittedly, the cost for an individual is small, but when seen in the aggregate, a huge amount of income is spent needlessly on sugar which could have been spent on other goods. While traditional analysis tends to look only at the individual costs, it misses the aggregate loss to the entire economy.As a result, we are impoverished even more.

And finally, by making these ventures profitable, they draw investment funds and loans which could be left available for other ventures. As I discussed in "Anti-Business Businesses ", because existing firms have clout with politicians, and can get protection enacted. As a result, it becomes harder for new firms to start. With funds tied up in on-viable protected ventures, less funding is available for new ventures, and established firms continue despite inefficiencies.

And that may be the biggest problem with protection, it manages to cause the economy to stagnate.Government intervention very rarely favors newcomers, as existing firms have the pull with politicians. As a result protection tends to enshrine the status quo. However, though politicians like to pretend "stability" is a desirable goal, that "protecting" jobs and "preserving business" are to be applauded, in reality, bankruptcies and closures are the sign of a vibrant, healthy economy. We need less stability and more growth, and to have growth, sometimes the old firms need to go away. But with protection that is not possible.

Yet, thoughts of such matters rarely arise when we discuss protectionist measures⁸. While free speech, affirmative action, and so on are always discussed in terms of all the many implications, when it comes to economics we tend to become myopic in our focus. And that is a shame, as a little more broad perspective would make clear just how much damage we do, even through "minor" and "common sense" measures. Once you look beyond the immediate firms and the single issue, you will se just how damaging even small interventions can be.

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1. As regular readers know, I am a partisan for decriminalization on both theoretical and practical grounds. My arguments can be read at "Drug Legalization" and the links contained in that post.

2. At least, at one time speech was so ardently protected. Back in the 1980's, it was the one liberal position I respected, their firm dedication to freedom of speech. But then came the liberal thought police in the form of "hate speech" legislation and campus speech codes, and then the McCain-Feingold incumbent protection act, and it seemed that those who had a commitment to individual liberties were left without a home. The Republicans have some members dedicated to free speech, but also an unfortunately vocal wing of authoritarian social conservatives, and so have to consistent platform in defense of individual freedoms See "The State and Morality" and "A Bit More Explanation".

3. I have often argued that quantitative analysis is a pipe dream, at least beyond very constrained models, such as analysis of individual firms. And even there it provides only an estimate. Yet many have come to believe, thanks to absurd Keynesian theories and the neo-technocrat econometricists, that they can somehow analyze the entire economy with something approaching precision. Nothing of the kind is possible. See  "The Limits of "Scientific" Management", "The Limits of Econometrics" and "The Limits of Technocracy".

4. My post, in case I never complete it, was a look at the total taxes on a gallon of gasoline. Not just the explicit tax, but, as I described it: 

You see, the star-spangled bandit is present at every step of the process. It isn't just the tax on the final sale. The cut that goes to the vendor is taxed as profits. The other part that goes to the oil company is also taxed as profits. And should they turn enough of a profit, the shares held by the public get capital gains taxes as well. But it doesn't even stop there. When the oil is imported, there is a tariff. Should the oil be sold from one company to another, that transaction is taxed, as are any profits. The tanker trucks that transport the oil are taxed, as it the gasoline that fuels them. The salary of the cashier that sells you the gas is taxed. The gas pump from which you get the gas undergoes a mandatory inspection for which a fee is assessed. There are additives and ethanol added to gasoline by law, which increase the cost. The vendor even needs to purchase a business license to just be allowed to sell you gasoline.

It was an ambitious plan, calculating exactly how much tax was involved in buying a gallon of gasoline, but, sadly, the research proved daunting, at least for an amateur writing during down times at work. Perhaps in the future I will find time to do it properly.

5. See  "Jobs, Jobs, Jobs, and More Jobs".

6. See "Inflation and Uncertainty".

7. See  "Exploiting Workers?", "Fairness and the Free Market", "Capital Investment", "Exploited Labor" and "Greed Versus Evil".

8. For an overview of my thoughts on protectionism in general see "Cash For Clunkers Revisited",  "War Stimulates the Economy? Let's Nuke San Francisco!", "Jobs, Jobs, Jobs, and More Jobs" and "Clarfiying My Argument".

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POSTSCRIPT

Oddly enough, I have a feeling some will wonder why I wrote this, as issues such as protectionism and tariffs aren't even on the political radar right now. And, I suppose there is good reason for that, as many more blatantly harmful measures are passing through congress. Still, I think it doesn't hurt to be reminded that many measures, considered relatively harmless are far from it, and that even if we manage to defeat the monstrosities such as health care nationalization and cap and trade, there still remain a host of small interventions which do real damage, yet tend to draw little attention.

POSTSCRIPT II

I had forgotten, as it was quite some time ago, but I made a similar point about interventionism leading to economic stagnation in "Now I Get It!" and "Environmentalism For The Economy?". as I argue there, it is bizarre that environmentalists, who think nature knows best, and believe nature crafts new forms through evolutionary pressures, would acts so strongly to keep evolution from taking place. Similarly, it is odd that liberals who think the status quo is unfair and favors the rich would enact laws that so strong favor preserving the status quo.