The Disingenuous Economics of Ron Paul

02/20/2012 02:33 pm ET | Updated Apr 21, 2012
  • Ian Fletcher Author, 'Free Trade Doesn't Work,' Advisor, Coalition for a Prosperous America

Ron Paul, even among his detractors, enjoys a reputation for being a man of clear and consistent principle. Perhaps on some issues he is. But the more I study his positions on free trade, the more the one word that comes to mind is... disingenuous.

What does Rep. Paul have to say about free trade? A supporter's website neatly summarizes his position as follows:

Ron Paul is a proponent of free trade and rejects protectionism, advocating "conducting open trade, travel, communication, and diplomacy with other nations."

OK. Not my position, obviously, but it's a clear stance. Unfortunately, the rest of his thinking is a mish-mash of abstract ideology, doubletalk, and blindness to the logical consequences of facts.

To wit, continuing with the same summary:

He opposes many free trade agreements (FTAs), like the North American Free Trade Agreement (NAFTA), stating that "free-trade agreements are really managed trade" and serve special interests and big business, not citizens.

So Rep. Paul is in favor of free trade in theory, he's just not in favor of free trade as actually practiced. What a neat way to simultaneously preserve one's fealty to an ideological ideal while also being able to take a swipe at unpopular "special interests and big business."

Any problems you think free trade causes? They're the bad guys' fault.

This stance renders the idea of free trade logically immune to any empirical counter-evidence, because one can always explain away that evidence as being due to imperfect implementation. Marxists once used this trick: "No, the failure of Russia, China, Cuba... doesn't disprove communism. They don't represent real communism!"

Unfortunately, free trade isn't just a good thing, badly implemented. It is fundamentally defective in its own right. (There's not the space to explain why here, but I did write a whole book on the question, with a skeleton summary here.) For most of American history, we didn't practice it.

Now, to be fair, it is indeed true that what we have today isn't real free trade. As I and many other people have pointed out many times, it's one-sided free trade, in which America opens its market to the world but major foreign nations do not reciprocate. Lack of reciprocity isn't the whole problem, but it's at least half of it.

But does Dr. Paul say this? No. He doesn't even give a hint that he's even aware of it. So this isn't, apparently, what he means. (My apologies if it is and I somehow failed to find this in his published record.)

But let's continue:

He voted against the Central American Free Trade Agreement (CAFTA), holding that it increased the size of government, eroded U.S. sovereignty, and was unconstitutional... Congress, rather than the executive branch, should construct FTAs.

Fair enough. I believe all these complaints are true. But... suppose we did a free trade agreement his way? How would the outcome be any different? How would a trade agreement negotiated by Congress (i.e. without using the 1934 Trade Agreements Act, in which Congress, arguably unconstitutionally, handed its tariff-setting powers over to the president) be any better?

It wouldn't. And I can't help noticing that, back before the 1934 Act, when trade policy was set by Congress, America was protectionist. So perhaps Rep. Paul has a glimmer of the right idea here, but it leads to policy conclusions the opposite of his own.

Similarly, Rep. Paul claims to revere the Constitution and the intentions of the Founders. Someone needs to tell him that they were protectionists.

Ron Paul hates "managed" trade. He sees it as the great corrupter of free trade. But here's the problem: if we're going to fix the problems caused by free trade -- like massive trade deficits -- we're going to do it by having managed trade, not by avoiding it.

For example, we're going to have to tell China, quite bluntly, that they only get to sell us $1 billion of stuff if they buy approximately $1 billion back from us. But we're never going to solve our problems by having more "free" trade, because if China isn't confronted with this kind of deal, it will just take advantage of us and run surpluses against us.

You can play word games, if you like, about what counts as "free" trade and what doesn't. Perhaps you want to define "free" as meaning "free in both directions." Fine, and that's actually not a bad policy choice. But if you're going to enforce that "in both directions" bit, then trade has to be managed -- somehow, somewhere, by somebody.

Where does Paul get his policy ideas on free trade from? Like most people, they derive ultimately from theory, his beliefs about how the world works. So let's take a look at what he says he thinks here. He once said (February 12, 2001):

Free trade is the process of free people engaging in market activity without government interference such as tariffs or managed-trade agreements.

Well, in that case, we can forget about the idea having much relevance (at least on this planet), because in the real world, most international trade is manipulated by governments in one way or another. And because trade requires a foreign counterparty, this includes governments that we have no control over. He continues, in the same speech, saying:

In a true free market, individuals and companies do business voluntarily, which means they believe they will be better off as a result of a transaction.

Here Rep. Paul has slipped in that ancient laissez-faire canard that any voluntary transaction must be beneficial to all concerned -- or, after all, why would they engage in it?

Why indeed?

Because you might as well ask whether it's a good thing for a starving man to sell his shoes.

Voluntary transactions may be beneficial in the instant, but this edits out of the picture how the parties to the transaction arrived at the bargaining position they found themselves in when they did the transaction. This argument has been used for centuries to justify the unjustifiable, from child labor on down. Most of what counts in economics is about how we all wind up in the economic circumstances we inhabit, not about the individual transactions we then execute.

You can't justify free trade just by looking at individual trade transactions. You need to look at what kind of economic system you get, when you have free trade. And, need I tediously point out, our individual transactions are hardly free, either, when we're buying goods produced with slave labor, or close to it, in places like China.

Some further elements of the Pauline economic philosophy:

If taxes are low on imported goods, consumers benefit by being able to buy at the best price, thus saving money to buy additional goods and raise their standard of living.

True enough, but again, it's only a half-truth. Cheap goods don't only give us cheap immediate consumption, they also deplete our capacity to produce goods ourselves when their importation destroys domestic industries. And without domestic industries, where do we earn the money to buy imports? In technical terms, Paul has given a partial-equilibrium solution to a general-equilibrium problem.

Similarly, so-called managed trade agreements like WTO favor certain business interests and trading nations over others, which reduces the mutual benefit inherent in true free trade.

Okay, fine, but... which "certain business interests and trading nations?" Rep. Paul declines to tell us, I suspect, because the correct answer here is "the business interests of nations that practice mercantilism, and the nations that practice it." Giving this answer would require admitting that mercantilism -- you know, the economic philosophy practiced by nations, like China, which are cleaning our clock right now -- can work, which is contrary to free-market ideology.

Free market ideology says mercantilism can never work, because manipulating markets can never work. Only dumb socialists try to do that, and they always fail. Free-market ideology has never heard of state capitalism, much less of the fact that it is proving a devastatingly effective rival to the U.S.

President Obama appears to be merely ignorant of this last fact; Rep. Paul seems to go him one better by believing that it can't be true as a matter of fundamental principle,. What we need right now is a president who knows that it is true, and has a plan for America to fight it.

Maybe I'm wrong. Maybe Rep. Paul does, somewhere, acknowledge the existence of state capitalism, and that in the right hands it can work very well indeed. Good for him if he does. But if this is true, then the whole underlying economics of libertarianism -- that pure free markets are always best -- collapses.

Here's a good video clip of Paul's disingenuousness on free trade:


Ron Paul