Protectionists want you to spend your money on an American-made product, whether that product is better or not, and whether it is a good buy or not. To them, the money itself, and the spending of it, is more important than whatever is being bought with it.

So protectionists put forth arguments to show how bad and harmful and unamerican it is to spend your money on foreign imports. They typically say you are being selfish to buy that foreign import, because you are hurting your fellow Americans and destroying the U.S. economy only for a short-term gain for yourself, such as getting a lower price or a better product.

What is this harm you are inflicting when you buy that foreign import instead of an American product? Gus Stelzer lays it out on pp. 131-133 in his Nightmare of Camelot. It begins with the phenomenon called "the multiplier effect."

When you spend your money, the party you pay it to goes out and spends it again, and then the next party spends it yet again. So the same money you spent in the first instance gets spent over and over again. So, he says, your original expenditure of $1000 can "generate $4,000 to $12,000 in national income" in one year.

That sounds good, doesn't it? Did you ever consider that when you spend your money, you are actually "generating national income" for others? Almost like you're doing a good deed, right?

But now the bad news. What if instead of spending that $1000 on U.S. products or services, you pay it to a foreign producer? What happens? Well, if those foreigners don't reciprocate by buying a U.S. product, "the multiplier effect in the U.S. stops immediately!" So all that income you would have generated stops. Or rather, it is diverted into that other country's economy.

So, for example, the U.S. trade deficit from 1971 to 1993, $1.5 trillion, "was responsible for at least $7.5 trillion in lost national income." And all of us who bought foreign imports then share the blame for this $7.5 trillion in "lost national income."

Do you feel guilty? Are you hanging your head in shame? Before you head off to confession, let's take a closer look at this. It doesn't pass the smell test.

You're an American. But you are other things too. Perhaps you are a Californian, and perhaps you are an Anglo-Saxon (or whatever), and let's say you are a redhead, and you're a Methodist, and how about a Democrat.

Whatever. Now, supposing you were all the above, do you cause "lost income" to Californians if you buy something made in Wisconsin? Or do you cause "lost income" to other Anglo-Saxons if you buy something from an Armenian-owned grocery? Are you depriving other redheads of income if you buy from someone with brown or black hair? Are you a traitor to your fellow Methodists if your barber happens to be a Catholic? or an atheist? And are you undermining your fellow Democrats if you buy something from a Republican or a Libertarian? By Stelzer's logic, if you don't buy from other members of your group, you are depriving that group of "income" which you would have generated if you had kept your spending within the group.

You see? You not only need to check every product before buying to make sure it was made in America. You need to make sure the producer was of the same ethnic identity and religion and political party and hair color as yourself. After all, don't you want to "generate income" for others of your kind?

And how about eye color? Shouldn't you support your fellow blue-eyed or brown-eyed brothers and sisters? And how about your astrological sign group. Shouldn't you Capricorns support one another and keep your money within your group? Think how much Capricorn "income" you could "generate" if you would just support your own. Every time you buy from a Leo or a Sagitarius, you are interrupting the multiplier effect and causing "lost income" to your group. Right? Sure.

Enough hocus-pocus. What is the truth? The reality is more likely the opposite: If you go out of your way to patronize your own group, buying products that are higher-priced or of lower quality, you are doing more harm to your group in the long run. Why? Because you are subsidizing mediocrity, you are helping to preserve that in your group which is weak and inferior, whereas if you let the market take its course and let the weaker members of your group suffer the rigors of competion, at least some of them will change and become stronger and more competitive, and then they won't need you to subsidize them, but they will make it on their own by offering you a more competitive product.

You don't uplift your group by subsidizing the weaklings, but by encouraging them to become strong. Economic inbreeding has similar unhealthy consequences to biological inbreeding.

But let's return to the multiplier effect and the "lost national income" Stelzer complains about. There's more here that smells rotten.

Suppose, instead of buying that foreign import and interrupting the multiplier effect, you take your $1000 out to the back yard and bury it or stuff it in your mattress; and leave it there for good. Are you not then interrupting the multiplier effect?

But no one does that, you say. But some people do. Yes, they lose interest income, but they do it anyway. There are penny collections that total into the thousands of dollars each. If you add to this all the piggy-bank savings, there are surely tens of millions of dollars or more stashed away, not being spent or invested, not generating income. Is this also bad for the economy? Are all these savers doing damage and depriving the economy of possibly billions in "lost income"?

Isn't each one who stashes away $1000 doing as much harm as one who spends $1000 on a foreign import?

Some of you will say yes, even though it makes you uncomfortable. It's easier and more spine-tingling to say harm is done when the money goes into the pockets of foreigners. But into the piggy bank? "Well yes, maybe that too," most protectionists mumble, "but let's not talk about piggy banks, let's talk about them dern foreigners."

But what we must really talk about is the process of money being taken out of circulation, or the supply of money in the U.S. economy being reduced -- no matter where that "lost" money ends up. Properly speaking, this is what Stelzer is referring to. He's saying that the economy is damaged when the money supply or the money in circulation is reduced.

When that money goes to Japan, for example, it leaves the U.S., so we are left with less money in circulation than before, the same as would be the case if it were to be buried in the back yard or deposited into a piggy bank. And Stelzer's logic must be that it is always bad for the economy if money goes out of circulation. It chokes off the income-generating process, causing less total spending and a slowdown of the economy.

He says, "$50,000 in added national income will generate one job," and he blames the trade deficit (lost income, money lost out of the U.S. economy) for a slowdown in economic growth. And if that $1.5 trillion trade deficit had been instead a $1.5 trillion piggy-bank savings, it would have produced the same lost income and the same slower growth, applying Stelzer's logic. So all disappearance of money must be bad for the economy, not just that of the trade deficit.

But wait. If this is true, there is a miracle cure for all our economic woes! Money can also be put into circulation as well as being taken out of circulation. If less money is always bad, as Stelzer says, then more of it must be good.

Sh'zam! Not only is there a cure to all this, but you or any other individual can perform this cure, without needing the government's approval. Just print money! The counterfeit kind! Yes, as long as it passes for the real McCoy. Just be sure to spend it on American products. Then you will be setting the multiplier effect into motion and will generate national income.

Stelzer says it -- money out: BAD. But then conversely, money in: GOOD. It has to be. You can't have one without the other. You can't say it's bad for money to be reduced unless you also mean it's good for it to be increased. And surely it doesn't matter where the new money comes from, anymore than it matters where the old lost money disappeared to. There's nothing in the concept of the multiplier effect which puts any condition on where the money goes to or from whence it comes. It stops when the money flow stops, and it starts up again when the money flow resumes, whatever the source of the money.

Do you get the impression that all the talk about the "multiplier effect" is just a bunch of pablum-puking nonsense? Well you're right. It's plain cow manure and nothing more.

You do not generate "income" when you spend your money. When you spend your money, all you're doing is this: you are rewarding yourself for the work you did when you earned that money, and you are rewarding (or compensating) the individual seller you're paying the money to. AND THAT'S IT! All the rest is snake-oil economics. And hogshit.

What is the real flaw in the multiplier theory? There must be one, because common sense tells you we cannot create prosperity by printing up tons of money and spending it on U.S. goods. And yet, if Stelzer's theory of the multiplier were correct, all we'd need to do is roll those printing presses, and we'd all get rich and the economy would boom.

Well, obviously, if you print money by the tons and inject it into circulation, you'll cause inflation. And in fact, even small doses of new money will cause incremental inflation. And likewise, small leaks of money out of circulation (whether to Japan or into your piggy bank) will cause incremental deflation. It is this, the incremental deflation, which offsets the lost money when that money is spent on a foreign import.

Money goes out, yes, but at the same time there is a small increment of deflation, or downward pressure on prices, which is added to the economy. The net inflation rate may be positive, but that small loss of money from circulation puts downward pressure which causes the net inflation rate to be a small increment lower than it otherwise would have been.

It has to be. It makes no sense to say that only a huge increase or decrease in the total circulated money can affect the inflation rate. Small increases or decreases must also have a small incremental effect. You know that 2 or 3 trillion dollars dumped in will cause measurable inflation, so why not assume that a mere hundred thousand or a million will also cause a small change, perhaps immeasurable? And surely the degree of effect on inflation is about the same, whether it is a dumping of new money into circulation (inflation) or a loss of money out of circulation (deflation).

Such changes are neither good nor bad, as long as they are small enough to not be disruptive. And if there is a large change which could be disruptive, then it's the government's job, or the Federal Reserve's, to do what is necessary to smooth it out -- add some dollars to offset a sudden outflow of money, or subtract some to offset a sudden inflow. And, by one means or another, the Fed does do this (or is prepared to do it if the need occurs).

So all the sophistry about the multiplier effect and the "lost national income" when you buy your foreign import is nothing but snake-oil economics. It is not your function, as a consumer, to subsidize U.S. producers or to "generate income" or support jobs for Americans, or to worry about how much money is in circulation. These are silly demands by protectionists who are addicted to factory jobs and are obsessed with putting Americans to work in factories even though we don't need them there.

The factories and factory workers we really need will be there -- don't worry, the market will take care of that via supply and demand. The only jobs or factories that disappear are the ones that are uncompetitive in the marketplace. If they don't change and become competitive, then they should disappear.

Consider how ludicrous the multiplier argument is. If it's true, then it's more important how you spend your money than how you earn it. If Stelzer is right, then the counterfeitor who spends his counterfeit money on American goods is generating income and thus contributing more value to the U.S. economy than an honest person who works and earns his money but spends it on foreign imports. Really?

Come on, cut it out. You know perfectly well that a person who works and deals honestly and provides a desired product or service to consumers is the more valuable contributor than the one who prints his money rather than working, no matter how either of them spends that money. You know that! And thus, the multipler theory is rubbish!

Your work is your contribution to society, not your spending of money. Did you hear that, Mr. Protectionist? It's when you work that you contribute, not when you spend. Memorize it! Go write it on the blackboard a hundred times.

End of Part 4. Proceed to: Part 5: Compete? Yes, but not with them foreigners!

Return to:

Free Trade Forever front page

The Sucking Sound and You Introduction

Part 1: What about those declining wages?

Part 2: What about those high tariffs in the 19th century?

Part 3: What about that deindustrialization?

Part 3: What about that deindustrialization? cont'd

Proceed to:

Part 6: Lower Cost vs. Higher Income

Do you have a bitch against free trade?
Post it in this web page (click here).

All arguments against free trade (total unilateral free trade) will be posted in this site and debunked.