Milton Friedman About Subsidies

“You know you could have a great employment in the city of Logan, Utah, of people growing bananas in hot houses. If we had a high enough tariff on the import of bananas, it could become profitable to build hot houses and grow bananas in hot houses. That would give employment. Would that be a sensible thing to do? If that isn’t sensible than neither is it sensible to artificially restrict the import of steel.” This video clip is an excerpt from Milton Friedman’s lecture to the University of Utah in 1978.

Source: eltigre001 YouTube channel.

Transcript:

Questioner:

You've mentioned about the import of steel, I would like to allude to that. We hear from the American steel industry that in Japan for instance steel producers are producing it at less than cost with support of the government so as to keep employment up, there. And as result, the American steel industry here is not going to be able to compete. So they are going to shut down and we are going to have higher unemployment here. What is your answer to that.

Milton Friedman:

Well, that’s a very good question and it’s a very easy answer. Because I may say that the answer I’m giving is not my answer. It was the answer that was given by Adam Smith the man whose face appears on my tie, I may say. It was given by Adam Smith in 1776 in the Wealth of Nations. From that time to this, hardly any professional economist has believed in tariffs or protection or anything but free trade. But the answer is very straight forward.

Let us suppose for a moment that the Japanese flood us with steel. That will reduce employment in the American steel industry, no doubt. However, it will increase employment elsewhere in America. We will pay for that steel with dollars. What will the Japanese do with the dollars they get for the steel? They aren’t going to burn them, they aren’t going to tear them up. If they would, that would be best of all. Because there’s nothing we can produce more cheaply than green pieces of paper! And if they were willing to send us steel and just take back green pieces of paper, I can’t imagine a better deal. But they’re not going to do that. They’re not stupid, they’re smart people. They’re going to use those dollars to buy goods and services. They’re going to spend it. In the process of spending them, they may spend them directly in the United States, and that directly provides employment in the United States. They may spend them in Brazil, or in Germany, or in China, or anywhere else. But whoever gets them in turn is going to spend them. So the dollars that we spend for the steel will find their way back to the U.S. as demand for U.S. goods and services. You will have less employment in the steel industry. You will have more employment in the industries producing the goods we export. Overall, total employment will not be affected. But overall, the American consumer will be benefited, because he will get the steel more cheaply, and the goods made from the steel more cheaply than he otherwise would. That’s the benefit to the American consumer.

Now why is the steel industry and similar industries, why are they so effective in their campaigns for protection? Because of a very common problem that affects not only this, but lots else. And that is the difference between the visible and the invisible. The people who are going to lose their jobs in steel are very visible. They’re a collective group, you can name their names. Suppose we restricted imports from Japan. Then people are going to lose their jobs in these export industries. They will be widely spread over the country. You and I couldn’t name one person. But that doesn’t mean they’re any less real. But the greater propaganda effect of the steel industry is because you can set the visible is a more potent political force than the invisible people who will lose their jobs. I urge on those people who think there’s some sense to the steel industry argument to consider it in a more absurd setting. You very often bring out the logic of an argument by carrying it to an extreme. You know you could have a great employment in the city of Logan, Utah, of people growing bananas in hot houses. If we had a high enough tariff on the import of bananas, it could become profitable to build hot houses and grow bananas in hot houses. That would give employment. Would that be a sensible thing to do? If that isn’t sensible than neither is it sensible to artificially restrict the import of steel.

Now with respect to the charge that the Japanese government is subsidizing the export of steel, number one it’s very dubious that it’s true, but suppose that it were true. Now that would be a foolish thing for the Japanese to do from their own point of view, but why should we object to their giving us foreign aid. We’ve given them quite a bit.

Thank you.

Video: 

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