All Commentary
Tuesday, May 9, 2017

Trump’s Anti-Trade Dr. Strangelove

Does the new administration have its own "evil genius" whispering in the President's ear?


Dr. Strangelove is the fantastic genius in Stanley Kubrick’s classic movie Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb.

Einstein referred to Neumann as Denktier, which translates from German as Think Animal.

The character was based on an even more fantastic character: John von Neumann. Neumann was a brilliant Hungarian who was responsible for major breakthroughs in several intellectual fields. To name a few: pure mathematics, hydrogen bombs, and game theory— a method that ‘solved’ economics. And somewhere along the line, he also helped to invent computers.

Johnny

At the age of eight, he was able to divide two eight-digit numbers in his head. Try dividing 96,871,923 by 17,935,569 on paper. Einstein referred to him as Denktier which translates from German as Think Animal.

Like most fantastic geniuses, John von Neumann had some character flaws. Johnny had a bit of a compulsive sex drive, not so surreptitiously alluded to in Stanley Kubrick’s movie. When his wife double-guessed—and discovered—his womanizing, he wrote her, “I hope you have forgiven my modest venture in double-crossing.”Apparently, game theory could also be applied to solve marital problems.

Minimax

In another application, John von Neumann used game theory when advising President Eisenhower. Yes, he also had the ear of the American President.

The advice was simple and of irrefutable logic. “Defeat is inevitable if you aim to win rather than avoid losing.” To destroy the Soviets, throw the bomb first. If necessary destroy the whole world, minus the United States. This is the “minimax” theorem, vaguely related to David Ricardo’s theory of comparative advantage.

President Eisenhower was reluctant to execute the genius’ irrefutable logic. After all, when developing the hydrogen bomb, John von Neumann made a minor miscalculation and received a major overdose of radioactivity in return. He was reduced to a wheelchair and subject to inner-angst panic attacks.

The theatrical entrance of this crippled figure into the White House presenting the benefits of atomic destruction may have swayed the President’s decision. We don’t know. But there would be no “minimax” first strike against the Soviets.

The New Dr. Stranglove

Dr. Navarro is the new Dr. Strangelove. Clearly, he is not as intellectually formidable as the original, but equally destructive in his intentions. And, he has President Trump’s ear.

While John von Neumann devised strategies on how to save the world by first destroying it, Dr. Navarro is not far off. He believes that to save America, trade first needs to be destroyed.

From the books he pens, it seems that Dr. Navarro somehow has a problem with anything China, in particular trade. Here is a sample of titles and subtitles of the books he wrote: Death by China, Blood and Nukes for Oil, Made in China: the Ultimate Warning Label and The China Price is the Cheating Price.

Mercantilism 

Modern economics originated as a reaction against mercantilism, a doctrine named after the merchants who provided economic advice to their king, prince or other lordship on how to become rich.

How could an economy be better off if import restrictions were to be applied?

The advice had to be simple—so that the Excellency could understand—and had to bring about immediate results. “Sire, to be rich, acquire as much gold as you can, export as much a possible and limit the imports.”

The first economic theorists all opposed this approach because they realized that what makes a country rich is not gold, but the goods it produces and consumes. They stated the case for free trade thousands of times. Trade will bring peace and prosperity.

Trading Prosperity

Adam Smith wrote:

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it from them with some part of the produce of our own industry employed in a way in which we have some advantage.”

Charles de Montesquieu, a passionate supporter of laissez-faire economics, saw many virtues in le doux commerce. The natural effect of commerce is to lead to peace. Frederic Bastiat is credited with “When goods do not cross borders, soldiers will.” Although, there is no evidence he actually wrote this.

David Ricardo, with deceptively simple intellectual force, articulated the benefits of free trade. His theory of comparative advantage proved with real irrefutable logic that every participant benefits from specializing in what he or she was relatively best at producing, and then engaging in exchanging for everything else.

John Stuart Mill pointed out:

“The only direct advantage of foreign commerce consists in its imports. A country obtains things which it either could not have produced at all, or which it must have produced at greater expense of capital and labour than the cost of the things.”

The real reason a country needs exports is to pay for its imports.

Ever since, all economic schools of thought have accepted the benefits of trade. Trade brings prosperity. Even North Korea—when not fiddling with their nuclear contraptions—trades coal to import a few goods for its people and tons of luxury goods for its Dear Leader. Dr. Navarro still lives in the age of mercantilism.

Hidden Code

Why would a man like Dr. Navarro believe that his thinking about international trade makes any sense at all? How could an economy be better off if import restrictions were to be applied? Is there any logic behind this? Perhaps he convinced himself that there is a hidden mercantilist code in the formula that calculates the size of an economy, better known as the gross domestic product (GDP).

GDP = Consumption + Investment + Gov. Spending + Exports – Imports

“And therefore Mr. President, the irrefutable logic is that if we minimize imports, GDP automatically will increase.” This obviously is utter nonsense. GDP is an accounting statement, and like all accounting, it is a measurement of a state of affairs at one point in time. It doesn’t say anything about the underlying dynamics that led to this state of affairs.

Takeaway

Imagine you are an undergrad student in economics at the University of California, Irvine. Incidentally, this is the place where Dr. Navarro teaches. To make ends meet, you work at a Chinese takeout restaurant. All of a sudden you need to deliver food at the Navarro Residence, and the doctor himself opens the door.

Here is how that conversation could go:

“Hello, young person. I want you to know I only ordered this Chinese food because it is not too bad, and compared to others it is good value for money. Here is your money. Now, always remember that The China Price is the Cheating Price. Do you know who I am?”

When reality strikes Dr. Navarro’s advice will be exposed for what it is: failed economics.

“Yes Sir, you are Dr. Navarro. You wrote Death by China. Enjoy the food. Thank you for your purchase.”

Indirect Consequences

President Trump entered the White House on a policy to interfere with international trade to protect American jobs. For that purpose, he uses Dr. Navarro to put some credibility to his intentions.

In places like the USA’s Midwest, it initially may play very well when the President says, “I told this company not to relocate to China or I will inflict serious import tariffs. And all the suddenly they have created 10,000 jobs in the USA.” People are cheering.

But when reality strikes the same people will experience that there are many indirect consequences to this policy and that they, in fact, have become impoverished. The tide will turn.

When reality strikes, Dr. Navarro’s advice will be exposed for what it is: failed economics.


  • Bart Remes is based in Singapore. His company Economica Action P/L provides insights about economics to business people so they can make more informed decisions.