Democrats Cry Wolf after 1,161 Layoffs on Range, but who is the Real Wolf?

 

Despite Facts Representative Rick Nolan Introduces Steel-Ban Bill

 

By Marvin Pirila

 

After the announcement of 1,161 layoffs (Minntac:700; Keetac: 412; Grand Rapids-based Magnetation: 49) on the Iron Range, Minnesota Democrats Rick Nolan, Al Franken, and Amy Klobuchar, are calling for increased tariffs on imported steel.  By controlling the supply of steel they hope to keep steel prices high enough to support higher paying union jobs.  Higher steel prices are good for steel workers and their families, but worse for consumers, who are forced to pay more.  While Democrats decry the lower prices being offered, they look the other way on issues affecting the steel industry they are directly responsible for such as the immigration policy, increased regulation, and excessive taxation.

 

St. Scholastica’s Tony Barrett, professor of economics, stated, “U.S. industries that use steel – for construction or consumer products – are benefiting from the cheap foreign supply.”  Booming economy can’t help iron ore, Duluth News Tribune, 4/6/15.  The claim of a ‘booming economy’ is debatable, but will not be addressed in this article.

 

The much hyped climate change claims have led to excessive regulation of coal, oil, and gas.  The added cost to meet these regulations have pushed prices higher in the energy sectors, and ultimately into nearly every product.  The coal industry is on life-support and new gas refineries cannot be built for a reasonable price.  Higher energy prices take a bigger chunk of a consumer’s budget, leaving less for other items.  The U.S. surpassed reasonable regulations on carbon emissions long ago, and will achieve little measurable benefit from further reductions.

 

A tariff by the U.S. on other countries inevitably leads to a trade war where they too will impose tariffs on our goods.  Everything ultimately gets more expensive as we restrict markets, all in the effort to secure political position and ‘buy votes.’   Look no further than OPEC for what happens when a few can control supply, and ultimately the price, for everyone else.  It wasn’t until the U.S. started fracking that OPEC’s control of the oil market was broken.  They could no longer control the supply, and with the world economy tanking and oil inventories rising, prices had to give.  The same has happened with steel (higher inventories and sinking global economy), the only difference being that the U.S. steel industry wants to control the price for domestic users and not the world – but still want to trade globally.  When other countries need steel, they aren’t limited to just supplies controlled by a tight-knit group like OPEC.  Other countries may not be free market societies, but they are still seeking the cheapest source of imported steel.

 

Because the U.S. can’t dominate the world steel market, they lean towards tariffs in the quest to monopolize the market domestically – all in the aim of maintaining higher prices.  This pits the steel producers against the consumers, one wanting a higher price and the other lower.  The first is created by increases in demand, relative to supply, or restricting supply relative to demand (tariffs).  The second is created by larger supplies and greater competition – both reduced considerably by steel tariffs.  One could call it monopolization by government policy.

 

“Free trade weakened labor unions’ monopolies on the supply of labor for industries such as steel, auto manufacturing, and airlines and limited the wage premiums they collected from consumers. The higher pay of union jobs represents nothing more than an unfair tax on consumers. Higher priced goods that cover the higher cost of union labor transfer money from poorer nonunion consumers to highly paid union labor. This transfer has never been economically sustainable without government-mandated labor laws and closed trade borders that prevent non-union competition. If some manufacturers can shift a portion of their manufacturing to lower-cost non-union suppliers— if the government opens borders to allow non-unionized imports, for example— then prices will fall to match the lower cost of labor. Consumers benefit from lower prices. In the 1970s and 1980s, foreign competition gained a toehold in the markets. Prices fell and consumers captured the savings. The United States only lost high paying union jobs because unions lost their ability to tax consumers. At the same time, baby boomers and women flooded the workforce. This put downward pressure on wages. By the late 1980s, immigration into the United States began to increase, and by 2009, 50 million immigrants and their U.S.-born children lived here. This also put downward pressure on wages, especially the wages of white men who were previously the predominant source of labor.”  Source:  Conard, Edward (2012-05-07). Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong (Kindle Locations 244-255). Portfolio Hardcover. Kindle Edition.

 

Policies affecting wages

 

Democrats would allow illegal aliens to become citizens, with estimates of five million or more now in the works.   A number that high puts downward pressure on wages.  On one hand Democrats claim to be protecting union jobs and on the other, they promote a policy that undermines it greatly.  In political terms, they want both groups to vote Democrat by cleverly crafting a message of the benefits of tariffs (higher wages for steel workers) while omitting the higher costs for the rest of us.

 

Tax Rates Undermine Demand

 

The high tax rates of Minnesota, and those of other states, make a big dent in consumer budgets, leaving them less for discretionary spending.  Minnesota has an individual income tax with a top rate of 9.85%, 4th among states levying them.  Source:  Tax Foundation.  In the Tax Foundation’s State Business Tax Climate Index, Minnesota ranks 47th.  This index compares the states in five areas of taxation that impact business:  corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and taxes on property, including residential and commercial property.  It takes Minnesotans until April 29th (5th latest nationally) to pay off their total tax bill.  When you cut taxes, you increase the ability of consumers to buy outside of their necessary costs.

 

Regulations Strangling Businesses

 

The Federal Register of federal rules and regulations for business, as of 2010, is 81,405 pages long.  These regulations are crippling in terms of cost.  A study by economists Nicole V. Crain and W. Mark Crain show the net cost of regulations in 2009 cost businesses and consumers $1.75 trillion, or nearly 12% of America’s 2009 GDP.  In comparison, corporate pre-tax profits for all businesses totaled about $1.46 trillion the same year.

 

Government regulations are also used to hide spending programs that are not easily traced to the government and not fully accounted for in the true cost of regulations.  For example, without creating expensive government initiatives, government created emission standards force businesses to carry out and bear the cost to meet the new requirements.  These higher costs are passed down to consumers in the form of higher prices.

 

Eliminating regulations that are stifling economic growth would free some of the $1.75 trillion cost of federal regulations, freeing up capital for businesses to invest, expand, create new jobs, and lower prices.

 

Rules of Supply and Demand

 

The rules of supply and demand state that when you increase supply relative to demand you get lower prices and a larger quantity offered by producers.  When demand increases relative to supply, prices increase, and more people will buy more.  Policies that stifle demand, such as imposing tariffs that result in trade wars, must be avoided.  Likewise, overhead costs associated with excessive regulations/oversight and taxes, hurt demand.

 

The Democrats endorse a restriction of supply via tariffs, forcing prices upwards for consumers and resulting in less steel being purchased. If both Demand and Supply increased proportionally, the price would remain the same while more units would be sold.

 

Increased demand via less regulation and less taxes is better for everyone because it increases discretionary income and reduces barriers to entry for new industries.

 

Free Trade and Barriers to Entry

 

“As competition grew for products [from Free Trade] that enjoyed worldwide economies of scale -- autos, steel, machine tools, etc. -- job growth from the largest companies with the highest paying jobs began to slow. Large companies with the most promising investment opportunities generally pay the highest price for labor. Economies of scale and entry barriers, which create the need for large competitors, also reduce competition, often to only a handful of companies. In the early stages of an industry’s life cycle, when markets are growing, these obstacles to competition allow large companies to earn higher profits. This, in turn, allows them to pay higher wages. Smaller companies often compete in fragmented industries without the benefit of scale or entry barriers. That’s why competition is fragmented. Competition is more intense, and competitors squeeze costs, including wages, to survive.”  Conard, Edward (2012-05-07). Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong (Kindle Locations 266-272). Portfolio Hardcover. Kindle Edition.

 

An important fact to draw from the preceding paragraph is that small businesses are kept out of the markets where economies of scale and barriers to entry are great.  Before free trade, the steel industry had little domestic competition and could charge whatever they wanted.  Their largest worry was a downturn of the economy and weakening demand.  Free trade not only increased competition (supply) but it also increased demand from other countries.

 

The U.S. Steel Industry has been harmed by free trade but to the benefit of even more American’s who can now afford projects and items based on the lower price of steel.  All jobs and industries are always in flux due to ever changing economic variables and none should be isolated from competition that comes from a free market.

 

Who is hurt by Steel Dumping (or other Dumping)

 

When overseas companies dump products on the market, they are sometimes “subsidizing” them to increase their exports.  Subsidizing is simply selling the products for less than it costs to make them.  The U.S. did it for Ethanol, and now does it for wind power, solar energy, and a host of other enterprises.  Our domestic subsidies have the same effect as international ones.  Taxpayers are forced to pay a portion of every solar panel or wind mill put in, as they are subsidized.  Without any benefit to themselves, taxpayers are forced to pay towards someone else’s purchase.  The big difference is that subsidies paid by other countries to sell products under cost are passed on to consumers in the U.S.  Taxpayers lose with domestic subsidies and gain by international subsidies via imports.

 

The Irony is Unmistakable

 

There is a huge global oversupply of steel, blamed primarily on the slowdown in the Chinese economy.  Boasting that the U.S. economy is generally performing well, politicians now want more of the domestic market via a tariff.  When China and other global economies improve, they will skip buying more expensive American steel for cheaper steel.  The U.S. steel industry would effectively limit their market in the hope of charging higher prices on domestic consumers.

 

Tariffs typically have costs that outweigh the benefits. Tariffs are a windfall to domestic producers who gain from reduced competition causing prices to rises. The sales of domestic producers should also rise, all else being equal, because other suppliers have been removed from the market. The increased production and price causes domestic producers to hire more workers which causes consumer spending to rise. The tariffs also increase government revenues that can be used to the benefit of the economy.

 

The higher price of the good due to the tariff will force the consumer to either buy less of the good or less of some other good. There is only a benefit to one product at the cost of another.  The price increase results in a reduction in a consumers’ discretionary income. Since consumers are purchasing less, domestic producers in other industries are selling less, causing a decline in the economy.

 

Generally, benefits from the increased domestic production in the tariff protected industry and the increased government revenue do not offset the losses to consumers and the costs of imposing and collecting the tariff

 

The Whole Story on Tariffs on Steel

 

Studies show that tariffs cause reduced economic growth to the country imposing them.  If studies show that tariffs are damaging, the call for tariffs is purely political.  One study shows up to eight jobs being lost for everyone saved via tariffs.

 

U.S. Representative Rick Nolan said, “What’s more, there are no effective tariffs on foreign steel.  As a result, our jobs, our economy and our national security are being put at enormous risk.”  Booming economy can’t help iron ore, Duluth News Tribune, 4/6/15.  However, tariffs are the greatest risk to jobs, the economy, and national security.  Rep. Nolan and other Minnesota Democrats are playing politics to the detriment of all taxpayers.

 

The National Center For Policy Analysis estimates that in 1994 tariffs cost the U.S. economy $32.3 billion or $170,000 for every job saved.  The economy is put at greater risk by tariffs, than by its absence.

 

Representative Jason Metsa (DFL-Virginia) wrote a statement in the Herald Review on 4/1/15 that said, “When is enough going to be enough?  When will United States Congress stand up for the American worker?  When will they take action and prove that they do not support our global competitors who have been manipulating global ore prices and criminally dumping their products on our shores.”  The truth is that imposing tariffs damages the economy and the American worker.

 

In March of 2002 President Bush raised tariffs on imported steel goods between eight and 30 percent. His rationale, he wanted to give the steel industry time to rebuild.  Again?  The tariff contradicted a speech he gave during the 2000 in which he declared that he would be "a free trading president, a president that will work tirelessly to open up markets … that's why I am such a strong advocate of free trade and that's why I reject protectionism and isolation."
The Mackinac Center for Public Policy cites a study that suggested that the tariff would reduce U.S. national income by $0.5 to $1.4 billion. The study estimated that less than 10,000 jobs in the steel industry would be saved at a cost of over $400,000 per job saved. For every job saved, eight would be lost.  Is an 8 to 1 tradeoff a good policy, especially at a cost of $400,000 a job saved?

 

Fortunately, the Bush tariff idea effectively died without going into effect and minimal harm was done.

 

In his essay on Free Trade at The Concise Encyclopedia of Economics, Alan Blinder states that "one study estimated that in 1984 U.S. consumers paid $42,000 annually for each textile job that was preserved by import quotas, a sum that greatly exceeded the average earnings of a textile worker. That same study estimated that restricting foreign imports cost $105,000 annually for each automobile worker's job that was saved, $420,000 for each job in TV manufacturing, and $750,000 for every job saved in the steel industry."

 

The facts on tariffs show that they cause more harm than good, so why entertain the idea?  The existing trade agreement has penalties for dumping and must be addressed through those channels.  Sound economic policy dictates a full accounting of all variables and the quick call for tariffs is at best, a bad idea at an exceptionally bad time.