This is a guest post by Manarin Investment Counsel investment advisor and Creighton University economics professor Tim Bastian.

Of all the bad policy moves during the 1930’s, probably the most damaging were the trade protectionist acts designed to “protect American producers and workers”. The Great Depression started out as a really deep recession, but isolationist policy makers started an ever-escalating series of trade restrictions and as other countries retaliated with moves of their own, world trade collapsed. Just in case you’ve never heard why it is so good, even necessary for prosperity, or if politicians of today are coaxing you into thinking new import restrictions are needed, or that America needs to be more self-sufficient, I wanted to share some basics about the greatest human economic invention in the history of the world: trade.

Trade is simple, yet the benefits are enormous. As you probably know I’m on the faculty at Creighton University where I teach undergraduate economics classes. I particularly enjoy teaching trade theory in my microeconomics classes because students from many different academic majors and backgrounds come together in the same room. It’s one of the few courses where I’m just as likely to have pre-med students as I am to have philosophy, finance, theology, or even physics majors.

Inevitably, when I start to discuss international trade more than a few students immediately fall into the “America first” protectionist camp. Others lean toward the idea of “Fair Trade”, or paying more than market price to producers in developing countries to presumably help them attain a higher standard of living. While telling both sides they’re dead wrong doesn’t make me the most popular guy in the room, it is a rush to watch them drop their biases toward free trade as I explain its benefits.

As you know, trade involves two parties; one party who makes something and another party who wants what the other made. As long as the party who made it values it less than the party who wants it, an exchange is made. The beauty of such an exchange is that both parties end up better off. Over thousands of years, mankind has realized that if we all produce what they’re best at, and then trade that good or service for things that we really want, our prosperity will be maximized. For example, I could change the oil in my car, but I don’t. I’m better at other things, and my time is better spent doing them. I use the money I earn to hire someone who’s really efficient at changing oil. That frees me up to do what I’m best at, presumably to maximize my income.

Let’s take this to the national level. I keep hearing political pundits talk about limiting international trade to “protect American jobs and industries”, and that trade is, somehow making us poorer. To demonstrate why this is such a silly statement let me posit the following: If trade is not good between nations, then it could not be good between states. If trade were not good between states, then it would not be good between communities, and if trade were not good between communities, it must not be good between individuals. Now, imagine what it would be like to live here in Omaha: we’d all live in mud huts since we have very few trees here in Nebraska; we’d most likely have a lot of hungry people, since we’d all grow our own food; we’d almost certainly not get to know one another very well, because we’d all have to build our own form of transportation; and a lot of us would freeze to death next winter because the only thing that would keep us warm would be to burn our corn!

Trade is good, it is very good. More trade is better than less trade, more trading partners are better than fewer trading partners. The key is for producers to make what they are best at making. Too often inefficient industries lobby government for special protections, usually in the name of “protecting American jobs”. This behavior hurts our economy in two ways:

 1.) consumers pay more for the products produced by the protected industry, and 2.) resources used in the protected industry are not allowed to naturally flow toward the more efficient industries, lowering profits there (not to mention available jobs in that industry).

Step back for a moment and consider this: World trade allows consumers to purchase goods at the very lowest prices possible, giving them more while spending less. For producers, world trade opens up new markets with more willing buyers and allows producers to sell more of their products at the highest price possible. In other words, you get to consume more at lower prices while being able to sell more at higher prices. Could it get any better?

In most contexts, when people hear “reform” they think “progress in the right direction,” regardless of specific details. – Ben Casnocha

With today’s headlines cluttered with mass media thoughts on the health reform bill recently passed by the House of Representatives, we thought we’d offer up the free market/anti-statist analysis of this overhaul with the following collection of links:

CATO Institute:  It’s NOT a Health Bill, Not a Medicare Tax and It Can’t Possibly Cost Only $940 Billion   

Cafe Hayek:  Poof! Problem Solved

Carpe Diem:  Why Obamacare Won’t Work: It Will Be Rational for People and Companies to Drop Insurance, Pay Fine

Mises Economics Blog:  Healthcare Legislation and a Potential Ron Paul Presidential Run in 2012

John Stossel:  Good News: Obamacare to Create 16,500 New Jobs!

Congressman Paul’s Texas Straight Talk:  Health Care Reform Passes

Over on the Creighton University College of Business video blog, Manarin investment advisor Tim Bastian weighs in on minimum wage debate and argues how it harms those who it is designed to help.

Watch the video here:  CreightonBiz.tv

This is a guest post from Tim Bastian.  Tim is a Manarin investment advisor and an economics instructor at Creighton University.

Every now and then, I like to revisit some of the things that we previously said to our clients, or in this case, anyone who would listen.  If you remember back last October when it appeared the entire US economy along with the stock market were going down the tubes, we made some very bold statements about what was causing the meltdown and what could be done immediately to stem the rising tide of panic.

Thanks to the research and writings done by Brian Wesbury, Chief Economist at First Trust, we were very early joiners of a then very small chorus that was singing about the problems created by what is known as “mark-to-market” accounting standards.  Here is a link to one of Mr. Wesbury’s excellent articles on this subject.

Officially, this is known as FAS 157.  FASB is the Financial Accounting Standards Board.  Here’s a brief description of FASB:

Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting.  Those standards govern the preparation of financial statements.  They are officially recognized as authoritative by the Securities and Exchange Commission (SEC) (Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979).  Such standards are important to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information.  (Source: www.fasb.org)

Between October 2008 and February 2009 several attempts to provide more guidance on FAS 157 failed to bring about any significant changes in the way it was being applied.  This prompted Congress to finally call for, and have a hearing on the matter.  Prompted by threats of government action, FASB loosened the rule to allow firms to value their assets based on, in my opinion, more realistic assumptions (like using a “mark-to-maturity with a sensible default rate assumption”).  Since the announcement of that Congressional hearing, the stock market, as measured by the S&P 500 Index, has increased by a stunning 58%.  Here is a short timeline with links to original stories for you to read:

• Rep Kanjorski call for hearing:   March 5, 2009
• Federal Reserve Chairman Bernanke calls for MTM changes:  March 10, 2009
• Congressional hearing held:  March 12, 2009
• FAS 157 New Guidance Issued:  April 9, 2009

I have also included a graph below of the S&P 500 to show you the connection between its value (the underlying values of the firms that make up the index) and the changes in FAS 157.  Coincidence?  I think not.

From CATO – Treasury Secretary Tim Geithner seemed to go from zero to hero in one day when the stock market soared on March 23, ostensibly because of his latest plan to help banks unload illiquid securities of uncertain worth.  The Wall Street Journal headline shouted, “Toxic-Asset Plan Sends Stocks Soaring.”

But homebuilder stocks jumped as much as bank stocks, suggesting the same day’s news about a 5.1% jump in existing-home sales deserves much of the credit.  Any remaining credit should go to Fed Chairman Ben Bernanke, not Geithner. 

The rally in financial stocks began after Ben Bernanke’s March 11 speech to the Council on Foreign Relations.  He came out strongly against the nationalization of banks and admitted that the bookkeeping problems of many banks are largely an artifact of foolish federal regulations.  Bernanke said, “capital standards, accounting rules and other regulations have made the financial sector excessively procyclical.”

Until recent headlines gave Geithner undue credit for a one-day rally, the administration officials had correctly insisted such daily moves could be misleading.  Weekly stock market moves, however, are not so easy to brush off.  The administration must learn to respect sustained market reactions to its policy proposals because the loss of stockholder wealth has had a devastation effect on consumers, banks and businesses.

Since last September, the federal government has justified numerous costly and heavy-handed programs by claiming each new intervention would help the banks and restore confidence to financial markets.  The only objective measure of success or failure is the market value of financial stocks.  By that standard, government solutions have been the biggest problems. 

From The Right Perspective:

Russian Prime Minister Vladamir Putin has said the US should take a lesson from the pages of Russian history and not exercise “excessive intervention in economic activity and blind faith in the state’s omnipotence.”

“In the 20th century, the Soviet Union made the state’s role absolute,” Putin said during a speech at the opening ceremony of the World Economic Forum in Davos, Switzerland.  “In the long run, this made the Soviet economy totally uncompetitive.  This lesson cost us dearly.  I am sure nobody wants to see it repeated.”

Sounding more like Barry Goldwater than the former head of the KGB, Putin said, “Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors, and shareholders for their decisions, is being eroded in the last few months.  There is no reason to believe that we can achieve better results by shifting responsibility onto the state.”

The below video is a follow up to this recent post showing America that many leading economic minds strongly disagree with the government’s stimulus plan.