No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 380 in its economy rather than taxing its citizens for public works. The end result would have three units of gold in each economy. Let’s follow these actions by seeing how each country’s T-account changes. France starts in Step 1 with the public having four units of gold, and the government T-account is in balance with no assets or liabilities (yes, this is simplified!). When France issues a sterilization bond, this is a liability (a debt they have to pay) on their T-account, and the public’s T-account changes by the composition of their assets. Instead of four units of gold as an asset, they now have 3 units of gold, and one unit of bonds. So the dollar value of their assets hasn’t changed, just the composition. But they can’t spend the bond, and that is precisely the point since the government is trying to avoid the inflation that would reverse gold flows. Now France could stop there—but that wouldn’t do anything about England’s deflation and the monetary pressures on the other side of the English Channel. If they stopped, they would have a $ gold unit on the asset side of the government T-account (not shown in Figure 15.9 ) to correspond with the $ sterilization bond liability. If the French government then loans the gold that it borrowed from the French public to England, England’s T-account would change by receiving a $ unit of gold on the asset side, and a corresponding debt of $ of gold on the liability side. The English government doesn’t borrow the money to simply sit on it—they want to spend it, but don’t want to tax their citizens (in the near term) to gain the revenue to spend. So as we transition to Step 3, England spends the money and it ends up in the pockets of the English public—which is then free to buy more French stuff if they want. Notice that the T-accounts of both the English government and public change. The gold that was an asset on the government side in Step 2 becomes an asset on the public side in Step 3. But borrowing from France implies a future tax liability on the English public’s T-account, and the corresponding tax revenue is a future asset on the government’s T-account. Yes, astute readers; you are right—substitute U.S. for England, and China for France and you have a simple model for what happens currently in US/China trade! TARIFFS Now let’s consider the other way of keeping the gold in the country—by raising the cost of imports by tariffs. Tariffs are simply taxes that are levied on imported goods. Historically they were the primary means of raising federal tax revenue in the U.S. prior to the imposition of income taxes in 1913. Yet they have never been randomly applied across all products equally. Our review of public choice suggests that those industries that stood to gain the most from tariffs on foreign products would lobby Congress for higher tariffs. The general population would pay higher prices for those goods, and the affected domestic companies would receive larger profits by restricting foreign competition. The public is generally rationally ignorant of specific tariffs and the implication to their wallets (because the dollar cost is relatively low)—but the industry gaining the benefit knows full well how much the tariffs benefit them.