Editor’s note: Beginning next week, Porter will deliver the Daily Journal every day that markets are open – that is, every weekday, Monday to Friday.

Inside today’s Daily Journal…

In virtually every angry reply I received from my dear, paid-up subscribers about Monday’s Journal essay “Thank God For Unanswered Prayers,” there was this extraordinary claim: U.S. trading partners are unjustly enriching themselves at our expense.

One example:

Trade is the voluntary exchange of goods or services at market-clearing prices. There is no “loser” in such exchanges, just like there’s no loser when you run a “trade deficit” with Costco. Both sides win. How do I know for sure? Because if both sides weren’t winning there would not have been an exchange. No one gets “ripped off” by trade.

Instead, free exchanges and free markets are the best means of creating wealth. This isn’t new information. Adam Smith (Wealth Of Nations) clearly described these concepts in 1776, and they’ve been tested continuously in the real world since. Free trade always wins for the same reason that free markets always win.

Today the comparative advantage wealth-creating dynamic of global trade is the most well-documented and best-understood concept in all of economics. It is the one thing that every credible economist (left, right, or center) can agree on. And yet… the sophistry of “they’re ripping us off” never dies.

The basis of the claim today is that because other countries have tariffs and we don’t, they are “cheating” (see “Mailbag” below).

But that’s absurd too.

When a country erects a trade barrier (like a tariff), it doesn’t “win” a trade war. It increases its cost of capital, reduces its domestic consumption, and creates a “deadweight loss” that stifles its own growth.

It is the economic equivalent of cutting off your nose to spite your face. Erecting similar barriers on your own economy is like watching all of your friends kill themselves by jumping off a bridge and then deciding that it looks like fun, so you try it too.

The president claims other countries will pay for the U.S.’s tariffs. These are clearly lies. Consumers pay 100% of all the costs of production – always, no matter what the president says.

If Americans want to import wine from France, then American consumers will pay for the tariffs, not France’s wine merchants. This is economics 101. And Federal Reserve researchers recently documented this obvious fact.

But we don’t need the Fed’s researchers to discover who actually paid for the tariffs. Since they were struck down we can just wait and see who sues to be reimbursed! Perhaps someone will tell President Trump it ain’t foreign countries or foreigners who are owed a refund. It’s FedEx – the American importer, whose bills are paid by Americans, that was first to sue for reimbursement.

But let’s say that you don’t believe in free markets. You think planned economies (like China’s, for example) are sure to beat our “chaotic” system with its emphasis on “short term” results. And so you believe trade, like the rest of the economy, should be controlled by the government.

Well how does that work out?

Since the advent of NAFTA (the North American Free Trade Agreement) in 1994 and China joining the World Trade Organization in 2001, Republicans insist the U.S. has been getting ripped off by free trade. But what happened to the American economy in that period? What’s happened to all of the countries with the most open trade policies? And what’s happened to the economies that protected themselves from getting “ripped off.”

Surely if Mexico and China have “stolen” U.S. jobs and the U.S. manufacturing base, then America would have gotten poorer. And, according to the Republicans, countries with the biggest barriers to trade should have done the best, because they were “protected” from this threat.

If any of that were true, you’d see it in the numbers over the last 30 years. And yet… the exact opposite is what you see in the numbers.

The developed economies with the most open economies have seen, by far, the most wealth creation.

The Index of Economic Freedom, produced annually by The Heritage Foundation, is the definitive benchmark for measuring how a country’s government supports or hinders economic activity, including trade. It measures the rule of law (property rights, civil rights), the size of the government (tax burden), regulatory efficiency, and trade. As most developed nations have similar governments, courts, and regulatory regimes, the “fulcrum” of this analysis comes down to trade policy.

And just as you would expect, the developed nations that have the most open trade policies have created the most wealth over the last 30 years. Tops on the list? Ireland.

Before its trade liberalization in the early 1990s, Ireland was the poorest country in Europe. Today? It’s the wealthiest. It’s seen its per-capita GDP grow from $19,000 to $106,000 – up 452%. It’s ranked #3 in the world on the Heritage Foundation’s Index of Economic Freedom.

Ranked #1 on the Freedom Index is Singapore, which has grown per-capita GDP by 263% – this a nation without any resources, a country that after World War II had been completely destroyed and was one of the poorest places on earth.

Ranked #2 on the Freedom Index is Australia, which has seen per-capita GDP increase 217% over the last 30 years.

The developed countries that have done the worst of the last 30 years? They all have significant barriers to free trade and relatively low economic freedom.

That’s Japan (#65), which has seen per-capita GDP decline 21% over the past 30 years; Italy (#32), which although it has low tariffs and access to the European market, has a completely dysfunctional regulatory state and has seen economic stagnation for 30 years; and, for the same reasons, France (#38).

The U.S., which ranks #26, has seen its per capita GDP grow 200% in the last 30 years.

The U.S. hasn’t suffered from free trade. It has benefitted from it massively – as virtually every American consumer could vouch for simply by looking in their closet.

The Republicans used to be the party that supported smaller government and embraced the wealth-building dynamics of free markets. But suddenly, Republicans are the politicians trying to copy France. Or Japan… Or China.

It makes no sense. It’s economic suicide. And because it will hurt the economy (just look at what it’s done so far to U.S. farmers) it will not lead to winning elections. It will lead to Republicans losing elections, massively. Mark my words.

The vitriol of the responses I received on this topic showed me something else, too.

People accused me of “hating” Trump, of having Trump Derangement Syndrome. People said my points were “fake news.” They said I must hate America. And they repeated a slew of other meaningless political slogans.

It was like they’d all lost their minds.

So… why does this happen? Why do men insist on believing in something that they know – or obviously should know – isn’t true? And why does this happen most often in the sphere of politics? That’s where otherwise sensible people seem to completely lose their minds.

What’s behind this madness?

Eric Hoffer (my all-time favorite philosopher) explained why people believe nonsense – and believe in it so passionately. In his masterpiece The True Believer: Thoughts On The Nature Of Mass Movements (1951) Hoffer wrote:

People who buy into nonsensical economic sophistry (like the broken-window fallacy or the idea that tariffs help win trade “wars”) or who come to believe in obviously false market memes, like “Peak Oil,” or who embrace “scientific” fantasy like climate change, are no longer interested in the truth. Instead, they want to belong to something that’s bigger than themselves, to create meaning in their lives. They desperately need the illusion of power. They have no control over their own lives. So they must control yours.

Facts are hard and cruel. They don’t carry any special power or promise any unrealistic benefit. But lies? They’re like Santa Claus. They promise to make all your dreams come true. They give the true believer an immense sense of power over reality.

And that’s why politics is always about lies. People don’t become fanatical about the truth. They only become fanatical about lies – because it is only a lie that can possibly give them what they’re seeking. The truth won’t help at all.

I remember when Barack Obama(!) was elected president, there was a video of a poor black woman crying with joy. Was it because she was proud that America had overcome its racist past and elected a charming black man as president? Nope. She looked at the camera and said in a tone of pure love (aka delusion): Obama gonna pay my mortgage!

When people join a political movement, they become invulnerable to the evidence of their senses and immune to reason. They don’t believe in the propaganda because it’s true. They believe it explicitly because it’s a lie. Telling them it’s a lie will only make them believe in it more. Why? Because it’s the lie that gives them a sense of power.

That’s why democracies are terrible (and dangerous) ways to organize society. That’s why the government’s powers must be strictly limited. And that’s exactly why America’s founders separated the government’s powers into three equal branches, specifically denying the president the ability to arbitrarily create taxes or tariffs.

If you haven’t ever read The Federalist Papers I’d urge you to at least read #10 and #51. Both were written by James Madison, Thomas Jefferson’s protégé.

In #10 Madison offers this critical insight about human societies: there is no such thing as the common good. Instead, in a free society there will always be factions because these different beliefs stem from differences in human nature: unequal property ownership, differences in religion, etc. What a good government ought to do is not eliminate contrary factions – because that’s tyranny – but instead it should control their impact. And that’s why Madison warned explicitly about democracy and designed the U.S. government to be a constitutionally limited republic. He did not want our government to be controlled by any faction, but to remain open to competing factions.

In #51 Madison makes one of his most famous remarks: “If men were angels, no government would be necessary.” That’s exactly why the U.S. government was created with so many checks and balances. “Ambition must be made to counteract ambition.”

People often assume that government gridlock is a fault of the U.S. system. It isn’t. It’s a feature.

P.S. The good thing about the market (as opposed to the government) is, when market participants become “true believers,” they quickly run out of capital. False belief is punished quickly in the market. Not so in the government.

Tell me what you think of today’s Daily Journal: [email protected]

Good investing,

Porter Stansberry
Stevenson, Maryland

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Craig H. writes about Porter’s Monday Daily Journal applauding the Supreme Court for ruling many of President Donald Trump’s tariffs unconstitutional:

Porter Comment: Hi Craig –

I don’t hate Trump at all. I’ve visited with him at Mar-A-Lago. I agreed with most of the things he said he’d do as president. I wanted the administration to: 1. Cut the deficit. 2. Cut fraud and waste and thereby reduce government spending. 3. Stop funding (and starting) foreign wars.

No offense, but your understanding of economics – especially the dynamics of trade – is simply wrong.

I’d suggest a few basic economics books, if you want to learn:

But honestly, if you’ll just think about it for a minute, you’ll grasp the core idea very quickly. Trade is a free exchange between willing parties. These actions determine the market price. There is no “winner” or “loser.” Both parties must be winning because the exchange is voluntary.

You’ll also realize that consumers pay 100% of all costs of production. That’s all costs, including all taxes or tariffs.

So when other countries charge a tax or a tariff on imports, it isn’t American companies who pay for these taxes. It is the importers and the consumers in that nation.

It isn’t clear to me why America would want to copy the failed policies of its trading partners. I mean, you don’t see people dying to go live in places with huge trade surpluses do you?

Trump’s tariffs are simply a huge new additional tax for Americans to pay.

My view is: We’ve paid enough. The government is already collecting almost 20% of GDP. Government spending at that level will bankrupt us eventually. So… maybe Trump should look at that side of the ledger. The Feds will spend more than 25% of GDP this year.

There’s no way we can afford government spending at this level.

Tariffs won’t solve that problem.

Kind regards,

Porter

P.S. Race-pandering Democrats have made Baltimore (and many other places) a hellhole.

Nathan T. writes:

Porter Comment: That’s because, unfortunately, you missed my point. I object to tariffs and taxes. But done with congressional approval, they are certainly legal. The other statutes you name require Congressional approval within 150 days. My concern is about the fundamental, limited power of the executive.

Neal T. writes:

Porter Comment: Neal —

It seems odd to me that you’d want to trade a critical and core foundation of the Republic – the limited power of the president – just so this president could have the power, in your mind, to restore the U.S. manufacturing base.

That won’t happen, by the way… show me the last time raising taxes helped anything in the economy. And don’t start with me about how other countries are going to pay these tariffs. That’s utter nonsense. Consumers pay 100% of the costs of production, including all taxes.

Hasn’t it occurred to you that giving this president the power to levy taxes means that all of the future presidents will have this power too?

And what will that future president do with such power? Tax whatever he wants.

That’s not a good idea.

The founders of America, the writers of the Constitution, built the most perfect form of government yet invented. It works because no one person controls the power to tax. Only Congress has that power. The executive can only enforce the laws, he cannot craft them.

Thank God.

Best,

Porter

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