In a recent meeting to discuss measures to mitigate the impact of soaring inflation, Speaker Gloria Macapagal Arroyo and the Duterte administration’s economic managers tackled the possible lowering of tariffs on various food imports.
However, Cabinet officials were unanimously against the proposal to reduce to zero the tariff on some agriculture products, citing the scheme’s adverse effect on local producers.
Arroyo displayed good economics. The Cabinet displayed bad economics. A bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.
In 1946, Henry Hazlitt, a famous economic journalist, wrote a book entitled, Economics in One Lesson. This economics primer, which builds on an 1850 essay by the French economic journalist, Frederic Bastiat, is perhaps the all-time best-selling treatise in economics.
The book starts with the story of a young boy who breaks the window of a shopkeeper by throwing a ball through it. As a result, the shopkeeper hires a glazier (a glass repairman) to fix the window. Some observers, noting the highly visible employment of the glazier, argue that the broken window is a good thing because it created a job for the glazier. However, as Hazlitt stresses, this is wrong because it ignores the secondary effects.
If the shopkeeper had not spent the funds fixing the window, he would have spent them on other things, perhaps a pair of shoes, new clothes, or similar items. If the window had not been broken, employment in these other areas of production would have been larger and the community would have had both the window and the items purchased by the shopkeeper. Once the secondary effects are considered, it is clear that destructive actions such as those resulting from floods and typhoons, and destructive public policy such as tariffs and import quotas, harm a society and fail to expand net employment. The view that destructive acts and trade barriers create employment and are good for the economy is now known as the “broken window fallacy.”
Hazlitt’s one lesson was that when analyzing an economic proposal, a good economist:
“…must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone.”
Hazlitt believed that failure to apply this lesson was the most common source of economic error. He had written extensively on the economy during the Great Depression of the 1930s, and he knew that, especially in politics, there is a tendency to stress the short term benefits of a policy while ignoring the longer term and often unintended consequences.
Trade restrictions between nations have important secondary effects. The proponents of tariffs and import quotas on foreign goods almost always ignore the secondary effects of their policies. Tariffs and quotas may initially protect Filipino workers who make similar products at a higher cost. But there will be unintended secondary consequences.
Consider, for example, the import quotas restricting the sale of foreign-produced sugar in the US. As a result of these quotas, the domestic price of sugar in the US has been approximately twice the price of the rest of the world for many years. The proponents of this policy—primarily sugar producers—argue that the quotas “save jobs” and increase employment. No doubt, the employment of sugar growers in the US is higher than it would otherwise be. But what about the secondary effects?
The higher sugar prices mean it’s more expensive for US firms to produce candy and other products that use a lot of sugar. As a result, many candy producers have moved to countries like Canada and Mexico, where sugar can be purchased at its true market price. Thus, employment among sugar-using firms in the US is lower than it otherwise would be. Furthermore, because foreigners sell less sugar in the US, they have less purchasing power to buy US products. This, too, reduces US employment.
Once the secondary effects of tariffs and trade restrictions are taken into consideration, there is no reason to expect employment to increase as a result. There may be more jobs in favored industries, but there will be less employment in others. Tariffs and trade restrictions reshuffle employment rather than increase it. But those who fail to consider the secondary effects will miss this important point.
In sum, we must be good economists. We must not ignore the long-term consequences or the secondary effects.
eric.jurado@gmail.com