Donald Quixote Trump Tilting with Tariffs at Robotic Windmills

The cult classic, Blade Runner, was based on a novel, “Do Robots Dream of Electric Sheep”.  The most human characters in the movie were the androids in revolt; individuals who looked like people but had been genetically engineered not to reproduce and to have an accelerated aging process so that they would die quickly after their productive years.  The robots were not happy about that, and were looking for ways to reverse engineer their DNA.

Rutger Hauer and Darryl Hannah

Androids from the original movie

Blade Runner

 

Yesterday, Gary Cohn, formerly with Goldman-Sachs, and more recently Donald Trump’s economic advisor resigned.  Mr. Cohn had considered resignation after the president said that there were good people among the anti-Semitic, white supremacists who marched in Charlottesville, VA.  Mr. Trump’s latest announcement that he was going to institute tariffs on steel and aluminum, and his intransigence in his position was apparently the last straw.

Cohn has been seen as one of the few sane people on the White House staff by Wall Street investors and international bankers.  His resignation will come as a blow to those who hoped that he would be able to convince President Trump to steer clear of tariffs.

Wilbur Ross, Secretary of Commerce, made his millions (700) as the “King of Bankruptcy” restructuring companies in bankruptcy.  Secretary Ross has a BA from Harvard, but seems not to know much about commerce. 

Ross was, apparently, completely caught off-guard by Trump’s tariff decision.  When asked about the president’s announcement he said something like, “whatever he said is what he said, and whatever he says tomorrow will be whatever he says.”  Although he has tried to parrot Trump’s party line, Ross can’t seem to figure out what party he is parroting.  That’s easy to understand; Ross was a Democrat until 2016.

George Will doesn’t think that Ross knows much about commerce, and he called tariffs a “sneaky tax” on consumers.

Tariffs are nothing new.  In fact, tariffs were imposed by George Washington at the request of Alexander Hamilton.  The effect was complicated.  While the tariffs were imposed to protect nascent American businesses in the Northeast from European competition, they created disruption within the American economy.  Southern planters who depended on a European market for cotton, molasses and other agricultural products lost their European market, and means of transportation to domestic markets.  The money raised by Hamilton’s tariffs went to create roadways and rail to the Midwest to increase markets and further industrialization.

This economic divide only served to strengthen an idealistic divide between those who believed in a strong central government and a planned economy, like Hamilton, and those who believed in a decentralized government and a free market economy, like Thomas Jefferson.

Throughout the 1800s, depending on which party was elected to power, tariffs were reduced or increased, and the target of the tariffs changed.

A fairly comprehensive history of tariffs, as viewed through the lens of a free-market conservative (who talked about Hamilton as an “elite”), appears here.

By the beginning of the 20th century it was generally agreed that tariffs served no good purpose because, even if they accomplished their goal of protecting American businesses, consumers paid the price as the cost of both domestic goods went up because of lack of competition, and the cost of foreign imports went up as a result of increased prices. 

Trump promised tariffs to punish China for dumping cheap steel on the U.S. market.  The problem is that China is not even in the top ten countries from which we import steel.  In fact the leading producer is our neighbor to the north, Canada. 

Trump is putting up a straw man, claiming that unfair competition is to blame for the decline in U.S. steel production.  Domestic steel producers like Nucor are recycling steel from scrap.  What disappeared was production from iron ore, and those were the jobs which disappeared from Pennsylvania and Ohio. 

Tariffs have a ripple effect.  If I make “blivits” from steel I pay more for the steel.  My customers who make machines from the blivits absorb the cost of my pricier steel.  The company that buys the machines with my blivits then sell them to a customer who pays the increased price.  In the short run, if the company making my blivits or the company making machines from them hired more workers those workers would experience a temporary benefit in employment and wages that disappeared once they bought a machine made from steel.

The important “if” is the one about hiring more workers.  This is where we talk about the real competition to labor; American and foreign. 

The degree to which computerization and robotics has destroyed jobs is debated among economists, but the fact that it has happened is not under question.

Robohub which seems to be a site discussing issues and changes within the industry takes a fairly conservative view of the change.

“We found that industrial robots increase labour productivity, total factor productivity and wages. While they don’t significantly change total hours worked, they may be a threat to low- and middle-skilled workers.”

An article from MIT Technology Review, titled, How Technology is Destroying Jobs, reviews the work and conclusions of economists at MIT.  .

Professor, Erik Brynjolfsson of the MIT Sloan School of Management, and his collaborator and coauthor Andrew McAfee argue that sluggish employment is the result of 10-15 years of increasing computer technology and industrial robotics.

They see this process as an ongoing force that will transform many other processes from clerical work and retail sales, to professions like law, medicine, financial services and education.  Their view is that, “rapid technological change has been destroying jobs faster than it is creating them.” In graphic form, the decoupling of productivity from employment:

Graphic Summary of "How Technology is Destroying Jobs".

Within the economist community of MIT there are differences of opinion.

“David Autor, (another) economist at MIT who has extensively studied the connections between jobs and technology, also doubts that technology could account for such an abrupt change in total employment.”

Autor calculates the impact differently and his conclusion is that a shift in the types of jobs has occurred with an increase in high paying analytical jobs – often aided by computers - and an increase in demand for low paying jobs such as restaurant workers, janitors and other service jobs that are nearly impossible to automate.  What has disappeared is the middle income sector that included bookkeepers, auto workers, and other rule driven jobs that are easily automated.  It is the opinion of many economists that these mid-level rule driven jobs are never coming back.

My own experience working in hospital laboratories for 35 years was that computerization and robotics made analyzers more efficient in terms of the sample of blood required, were smaller in size and more powerful in terms of the number of tests that could be done in an ever shorter period of time.

Analyzers that could run 12 tests simultaneously in 1975 were replaced by computerized machines that could run 18 at once. Those were the size of a minivan, and required their own air conditioned room to take care of the heat generated by the computer.  By 2006 when I retired dozens of tests could be done on a machine the size of a desk top computer and monitor with a robotic arm that sampled not milliliters, but microliters of blood, and sent the results directly to the patient’s bedside as soon as the technologist verified and released the results.  Additionally, because of computerization and selective robotic sampling, panels of tests could change from patient to patient within a run.

There were benefits of speed and reproducibility of results, but the effect on laboratory techs was stultifying.

Productivity went up while the numbers of employees and the wages of the employees were static.  The advantage of speed made clinicians and patients expect instant results so that the phone rang incessantly for results.  This disrupted the flow of work in such a way that an automated phone messaging machine was installed.  No one was happy.

The techs asked for input from the “time and motion” people.  They got it.  The conclusion was that there were too many employees and they recommended cutting several positions.  Employees should have known that the consultants were hired by the hospital to cut costs, not make their jobs easier.

As bad as things are in manufacturing they are also bad in the service industry.  The difference is that it is difficult to outsource lab tests on sick hospitalized patients to the Far East.

Robots in industry aren’t like androids or humans; they don’t dream, take time off, get pregnant, require a lunch break, or save for retirement.  Retirement for them is the scrap heap.

They don’t have the looks or personality of the Blade Runner androids, but are a greater threat.

Robots are the enemy of middle skill labor.  Fighting foreign competition with tariffs is like tilting at windmills.

Views: 148

Comment by koshersalaami on March 7, 2018 at 1:03pm

I have seen situations where tariffs make sense but I’m not sure I see any now. If a company or country Dumps here, yes.

Comment by Anna Herrington on March 7, 2018 at 1:22pm

Clever title.

Quixote dies from a fever, no?  ; )

(Soon?)

Comment by Rodney Roe on March 7, 2018 at 1:35pm

Anna, Si.  más temprano que tarde.  (Yes.  Sooner rather than later.)

kosh, my initial thought when Trump first began talking about tariffs was that it would be a good thing.

Can you think of a situation where the consumer would not be the one left holding the bag?

If China were the one dumping cheap steel then it might make sense to impose a selective tariff on them.  I'm not well versed in trade war tactics.

Comment by koshersalaami on March 7, 2018 at 2:27pm

Yes, I can, but not short term as consumers. 

During the 1970’s, Japan developed color televisions using technology the US gave them for free. They had government-set margins at home, so they made plenty of money and built up production. At a certain point, in order to keep their assembly lines moving, they dumped sets in the US below their cost because it was worth it to keep economies of scale for production. The US did not protect its industry. American manufacturers attempted to dump in Japan, but the Japanese government refused to allow the importation of American sets. American manufacturers could not continue to operate at a loss, so they all either went bankrupt or sold off to international competitors within a year. Within a year, there was no American owned television set industry.

Japanese dumping helped American consumers. However, they cost American jobs, and the thing about American consumers is that they have their own livings to make, some of which may be dependent on the spending of their now unemployed neighbors. If they’re in a community that manufactured television sets, some of these discounts may have ultimately come at an unaffordable price. 

Let’s use a domestic example to illustrate the phenomenon. This isn’t about tariffs, but it’s about consumer discounts and what they cost. Let’s look at WalMart.

WalMart has been very good to American consumers, as consumers. They have also decimated the economies of thousands of communities. How? What happens when rural consumers switch their spending from local businesses to WalMart? The first thing that happens is that local businesses close, which means the profits from those businesses are no longer spent in the local economy. This eliminates jobs, but WalMart is hiring. The problem is that WalMart jobs are intentionally overwhelmingly part time. Employees that used to have benefits, such as health insurance and retirement, now don’t. Not only are they now poorer, they can afford to spend less with the surviving local businesses who now see their sales numbers drop. But hey, don’t local consumers have more disposable income because of how much less they now spend on goods because of WalMart?

Not enough. The consumers are served as consumers but they’re screwed as workers and business people. 

Sometimes higher pricing is less dangerous to the local economy than the alternative. Sometimes those local full-time jobs are just more important than the discounts. 

There’s another issue with tariffs: It may depend on balance of trade. This actually has a lot to do with why NAFTA was approved in the first place. If we spend way more with China than China spends here and tariffs interrupt trade, might we come out ahead by biting the bullet on prices in order to employ more Americans? If we don’t spend that money overseas, we spend it here, and the people we spend it with spend their money with us, which is not so true of the Chinese. It was, however, very true of the Mexicans when NAFTA was negotiated. We were better off losing jobs to a country who would take that extra income and spend a lot of it in the United States. The jobs were leaving but, in terms of the American economy, it mattered where they were going. Because of our bad balance of trade, a completely free market might not be in our best interests. 

Comment by koshersalaami on March 7, 2018 at 4:28pm

“America doesn’t produce or export televisions that can compete with those made in Japan.”

During the 1970’s, that is exactly the statement that was wrong. It’s a null concept now because American owned companies haven’t manufactured television sets since the 1970’s. Any American-sounding brand name is owned overseas. There are no American television set companies per se.

Unfortunately, those in the United States government who were hearing the television set industry’s complaints as they were going under had the same attitude as that statement, but the reason American companies couldn’t compete was specifically that Japanese companies were selling TV sets here at below what it cost to produce them. At similar margins, American companies could compete. 

Japan is not a free market economy. It certainly wasn’t then. Japan had a commercial industrial complex like we have a military industrial complex - a whole lot of government involvement, oversight, and assistance, as well as setting policies. 

Japan views business as war. The United States doesn’t and didn’t understand it was at economic war, which it came damned close to losing as a result. 

When the United States gave Japan color television technology, the government swung into action. They decided which few companies would make TV sets. They arranged for banks to finance manufacturing expansion, which involved zero risk because the government was setting retail pricing in Japan, giving the manufacturers an extremely healthy profit margin, and because the government wasn’t allowing the importation of television sets to compete with their own industry, meaning the manufacturers had a captive market half the size of the population of the United States.

Given that, the Japanese manufacturers developed huge economies of scale. With so few competitors and no risks on their investments, they built huge capacities which brought the cost per set way down.

Now they had to sell some of the excess sets they were producing. They were making so much margin on the domestic market that it was cost effective to sell the excess inventory below cost overseas, which had the additional advantage of undermining future competitors. 

Now these below cost sets started showing up in the US. The US couldn’t compete because they were selling at less than what it cost Japanese companies to make them. This isn’t a quality issue, it’s a dumping issue. American companies couldn’t make money on the sets they were producing and, when they tried to retaliate, the Japanese government simply refused to allow the importation of American sets. In the meantime, people in Congress were assuming that

America doesn’t produce or export televisions that can compete with those made in Japan

and that erroneous assumption cost the United States an entire industry in about a year.

Comment by Ron Powell on March 7, 2018 at 4:32pm

I don't think it's a good idea to place tariffs on raw materials since we are still quite capable of exporting more than we import...

Finished products, like automobiles and televisions, make sense in order to protect American manufacturers.

However,  if the Americans can't produce a finished product that is superior to the imported models they suffer the consequences...

America doesn't produce or export televisions that can compete with the those that are made in Japan at the same or similar retail price.

The market share of US automobile makers declines for the same reasons. The apparent inability to compete for consumer dollars on a price/quality basis.  

The low end vehicle made in America cannot compete with the those made in Japan or elsewhere on a price/quality basis...

Hence the belief that tariffs help to protect the American manufacturers and market...

Tariffs on raw materials have but one effect, the increase of prices on everything produced from the commodity...

The tariff on the imported materials provides American producers cover for raising prices domestically because the materials cost more to import...

But wait....

How do domestic/American steel producers justify increasing the price of their product to domestic/American manufacturers who use steel in their products?

The answer is simple, they don't because the tariffs make it unnecessary to do so...

And the free market beat goes on....

And to round out this rosy picture of tariff induced higher prices, Mr  & Mrs Trump Voter pay for the whole thing in higher retail prices at the local Walmart where their higher 'tax cut' pay check is eaten up by the tariffs targeted at the Chinese who don't export enough steel to America to make an appreciable difference in the cost of manufactre, distribution, or sales of consumer goods and products made of  steel...

Comment by Ron Powell on March 7, 2018 at 4:36pm

The last Koshersalaami comment and mine are out of sequence...I edited and reposted while he was responding...

Comment by Ron Powell on March 7, 2018 at 4:56pm

"This isn’t a quality issue, it’s a dumping issue"

It may well have been a dumping issue but the Japanese were dumping superior quality TVS on the American market at prices that American companies could not handle.

Japanese electronics were/are superior in overall quality than the American counterparts in the same price categories...

Same holds true for Japanese automobiles...

You are not old enough to remember when the American consumer and manufacturers would laugh and scoff at the "made in Japan label" which was considered a commercial joke.

However, "Japan views business as war. The United States doesn’t and didn’t understand it was at economic war, which it came damned close to losing as a result."

Japan may have surrendered as a result of being the only nation hit with atomic weapons of mass destruction, but they haven't stopped fighting..

Comment by koshersalaami on March 7, 2018 at 5:43pm

Ron, I am old enough to remember Made In Japan as a commercial joke. 

“At prices that American companies could not handle.”

I just explained that to you twice. Japanese prices were artificially low. They were selling at below what it cost them to build the sets. That’s what “dumping” means. 

If Japanese sets were priced at what they were worth, American companies could have handled the prices.

Also, let’s please remember that in addition to everything else, it was American companies who had to invest to develop the technology. The Japanese were literally handed the technology at Zero cost. 

No, Ron, the American television set industry was not out-performed. It was mugged. 

Comment by Rodney Roe on March 7, 2018 at 6:49pm

The comments about Walmart are right.  Their headquarters are about 70 miles up the road from my home town.  When they first began running pharmacies in Oklahoma they undercut every pharmacy in every town they operated in until the drug stores closed.  Then the prices went to something more competitive, but there was no one left to compete.  All of those pharmacies had employees who lived and spent their money in the community.

There is nothing new about that sort of "dumping".  Walmart just does it in a meaner more efficient way.

The balance of trade is an issue.  What about the practice of tying the value of the yuan to the dollar that Trump complained about before the election?

"In a free market, a trade surplus should increase the value of a country’s currency. People want to be paid in local money, creating demand for the currency, which in turn raises its value. Over time, this provides a counterweight against runaway trade imbalances. That process doesn’t happen in China, because the government constantly prints new currency and uses it to buy U.S. dollars and U.S. government debt, thereby flooding the market with Chinese currency and increasing demand for American dollars."

Would selective tariffs against China ameliorate the trade imbalance?

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