Economics 101 for presidential candidates

The protectionist trade policies espoused by Donald Trump and Hillary Clinton demonstrate how little they understand about economics.

Economics is not hard; it’s just that key concepts are politically inconvenient.

Here’s a remedial lesson in the economics of trade.

All resources are scarce; demand and supply determine their value.

Markets are more effective than governments at setting prices. Adam Smith’s “invisible hand” operates through supply and demand to establish prices and allocate resources. In a free marketplace, millions of individuals strive to maximize well-being by producing goods or services, then buying other goods and services that they want. Free trade promotes economic growth by ensuring that scarce resources are put to their highest-value uses.

Costs outweigh benefits for a country imposing import restrictions. Because domestic consumption has included imports, domestic producers have supplied less than 100 percent of consumer demand.

Comparative advantage still works in the 21st century. Countries, like individuals, are better at doing some things than others. The concept of comparative advantage explains that neither individuals or nations should seek self-sufficiency because not everyone or every country can do everything well.

People deserve the freedom to buy from and sell to whomever they choose.

Imports are good. They help ensure that people benefit from a wide variety of competitively priced items, thus expanding consumer choice and raising living standards. Value added to the economy by U.S. manufacturers hit $2.4 trillion in 2015, its highest level in history. Imports also provide competition for domestic businesses, stimulating innovation and product improvements.

Exports also are good. They are needed to pay for imports. And, since comparative advantage means that all nations are relatively better at doing some things than others, the United States has an obligation to allow its products and services to be exported so that other people will be able to buy them.

Both imports and exports lead to expanded employment. They do this indirectly by improving resource allocation and facilitating economic growth.

The major party presidential candidates would be well advised to reconsider their trade policy proposals. Protectionism will undermine the freedoms of Americans and lower their standards of living. Bad policy choices mean bad economic outcomes. This is not the way to lead a great nation forward

Daniel Pearson is a senior fellow at the Cato Institute. Send comments to [email protected]