Looking back to 1790 doesn't make the trade picture any prettier

Continuing on the valuable discussion over trade, I certainly agree with Donald Wilkie that government regulations are stifling economic growth, as I've noted before.  And my previous writings on the explosion in the size of government as a percentage of the American economy since the 1930s are also consistent with the view that rising statist influences over the past 85 years are doing massive damage.

This in no way lets trade off the hook, particularly when it comes to simply erroneous claims that "we got rich as a country through trade."  The data since 1960 are unequivocally clear.  More trade correlates with lower economic growth in the United States.  That isn't to say that there are not many other factors that have contributed to this problem, but there is absolutely no evidence during the past half-century that America "got rich as a country through trade," nor that it is getting richer via more trade.

Arguments that increasing trade is making the U.S. rich – but that we cannot see this purportedly great positive impact because it is hidden under the negative burden of regulations and other factors – are simply not compelling.  It bears repeating: "please, no econometric multiple regression snake oil trying to show that what is going backward is actually going forward via the judicious selection of variables."

Let's not restrict our discussion to the post-1960 era.  Here is the plot of total trade in goods and services as a percentage of GDP against the corresponding growth rate of real per capita GDP going all the way back to 1790.

There is no positive correlation between the amount of trade and economic growth over this 225-year period.  Actually, the correlation is slightly negative.

But perhaps the data is skewed by the big government era of American history during the 20th century and any disruptive impacts of the major wars.  So let's restrict the graph to just the period between the nation's founding and the end of the 19th century – which is the period of smallest government and (arguably) least state regulation.

Again, the correlation is negative, not positive.  You can't get rich off trade if it is negatively correlated with economic growth across your entire national history.

The best way to summarize the data is via aggregating average rates of economic growth over ranges of trade quantities across U.S. history.

On average, the American economy has grown far more rapidly under a low-trade regime.  Keep in mind that the current level of trade is 30% of GDP.  If history is any lesson, U.S. economic growth has always been stagnant during such periods – and not learning from history is a sure way to repeat it.

It is not just the quantity, but also the quality of trade, that plays a key role in understanding trends.  U.S. trade history is complex, but one generally finds that the most prosperous periods existed under protectionist trade policies, and that as trade has become more free in recent decades – especially with less developed nations – economic growth has become nearly nonexistent.

Free trade is like free love.  It sounds so liberating and natural; what could possibly go wrong?  Until venereal diseases run rampant, the nuclear family falls apart, and society decays rapidly.  Walls – both literal and metaphorical – were invented for a reason: to keep the good stuff in and the bad stuff out.

Thus, all trade is not good.  Trade that facilitates the acquisition of natural resources or technologies that cannot be developed indigenously is a clear advantage.  Shipping jobs and know-how elsewhere – particularly to authoritarian geopolitical adversaries – in a labor pricing race to the bottom is a net disadvantage.

Continuing on the valuable discussion over trade, I certainly agree with Donald Wilkie that government regulations are stifling economic growth, as I've noted before.  And my previous writings on the explosion in the size of government as a percentage of the American economy since the 1930s are also consistent with the view that rising statist influences over the past 85 years are doing massive damage.

This in no way lets trade off the hook, particularly when it comes to simply erroneous claims that "we got rich as a country through trade."  The data since 1960 are unequivocally clear.  More trade correlates with lower economic growth in the United States.  That isn't to say that there are not many other factors that have contributed to this problem, but there is absolutely no evidence during the past half-century that America "got rich as a country through trade," nor that it is getting richer via more trade.

Arguments that increasing trade is making the U.S. rich – but that we cannot see this purportedly great positive impact because it is hidden under the negative burden of regulations and other factors – are simply not compelling.  It bears repeating: "please, no econometric multiple regression snake oil trying to show that what is going backward is actually going forward via the judicious selection of variables."

Let's not restrict our discussion to the post-1960 era.  Here is the plot of total trade in goods and services as a percentage of GDP against the corresponding growth rate of real per capita GDP going all the way back to 1790.

There is no positive correlation between the amount of trade and economic growth over this 225-year period.  Actually, the correlation is slightly negative.

But perhaps the data is skewed by the big government era of American history during the 20th century and any disruptive impacts of the major wars.  So let's restrict the graph to just the period between the nation's founding and the end of the 19th century – which is the period of smallest government and (arguably) least state regulation.

Again, the correlation is negative, not positive.  You can't get rich off trade if it is negatively correlated with economic growth across your entire national history.

The best way to summarize the data is via aggregating average rates of economic growth over ranges of trade quantities across U.S. history.

On average, the American economy has grown far more rapidly under a low-trade regime.  Keep in mind that the current level of trade is 30% of GDP.  If history is any lesson, U.S. economic growth has always been stagnant during such periods – and not learning from history is a sure way to repeat it.

It is not just the quantity, but also the quality of trade, that plays a key role in understanding trends.  U.S. trade history is complex, but one generally finds that the most prosperous periods existed under protectionist trade policies, and that as trade has become more free in recent decades – especially with less developed nations – economic growth has become nearly nonexistent.

Free trade is like free love.  It sounds so liberating and natural; what could possibly go wrong?  Until venereal diseases run rampant, the nuclear family falls apart, and society decays rapidly.  Walls – both literal and metaphorical – were invented for a reason: to keep the good stuff in and the bad stuff out.

Thus, all trade is not good.  Trade that facilitates the acquisition of natural resources or technologies that cannot be developed indigenously is a clear advantage.  Shipping jobs and know-how elsewhere – particularly to authoritarian geopolitical adversaries – in a labor pricing race to the bottom is a net disadvantage.