Wednesday, June 23, 2010

The Stupidity Of Tariffs To Protect Jobs

Matt Yglesias linked to an article in the WaPo about the last ironing board plant in America and writes about a tariff on imported ironing boards:
[The tax's] purpose is to protect the $15/hour jobs of 200 factory workers along with the profits of Chicago-based Home Products International.

What I would like to say is that this is a bad reason to impose extra costs on those of us who iron things from time to time. That if you repeal the tax, the profits will flow away from Home Products International and toward retailers like Target and Wal-Mart. Consumers will spend less money on ironing boards and will either spend more money on other things, or else will save more money generating extra investment funds. Either way, 200 people will lose their jobs but new jobs will be created from the extra investment and consumption financed by cheaper ironing boards. All-in-all, throughout the economy resources would be better-allocated and the vast majority of people will end up better off.

FLG completely agrees. However, then Matt goes off the rails:
The problem for me is that with unemployment at nearly 10 percent and projected by the Powers That Be to stay above 8 percent for years it’s really hard for anyone to say with a straight face that if the factory closes down the employees will be able to find new jobs. Those adjustments are always difficult to make, but given healthy labor markets they’re very possible. Given today’s labor market, I don’t think you can say that with a straight face. Which means the longer elevated unemployment persists, the more random trade barriers we’re going to see, not just in this country but in countries all around the world.

First, there is the positive statement -- we will see more trade barriers. FLG hopes it won't come true, but there's nothing wrong with assuming they will. Second, and where FLG has an issue, is the more normative aspect -- given today's labor market and the difficulty in finding new jobs, Matt seems to think that we ought not get rid of the tariff.

Let's do some math. According to the article, Americans "buy an estimated 7 million ironing boards each year" and "the United States levied anti-dumping taxes of 70 to more than 150 percent on its Chinese rivals." FLG did a search for ironing boards at the Target website and the median price is roughly $15. To be conservative, let's take the low tariff of 70%. The non-tariff cost is then determined by 15 = 1.70x. So, x = 15 / 1.7, which means the cost of an ironing board is $8.8 Since the cost plus the tariff equals 15, then the tariff equals 15 - 8.8 or 8.8 * .7, both of which equal $6.2. That means the direct cost to the American economy of the tariff is 7 million multiplied by $6.6, which is 46.2 million.

Now, FLG wants to be completely clear that he used the lowest possible tariff and ignored the deadweight loss to the economy that the increased prices create. However, he did assume that all boards were imported when they aren't, so perhaps it all evens out. Anyway, according to this back of the envelope calculation, protecting 200 $15/hour jobs costs the economy $46.2 million dollars.

If we assume that those workers work 40 hours a week for 50 weeks a year, then their salaries are 15 * 40 * 50 = $30,000. $30,000 times 200 equals $6 million dollars. If you factor in benefits, then maybe it bumps up to $10 million.

In any case, we're talking about costing the economy $46.2 million dollars to protect 200 jobs that pay somewhere around $10 million at the high end. That's self-evidently fucking stupid. And consequently Matt's seeming reluctance is too. It would be far better to allow free trade in ironing boards and just pay the workers $10 million.

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