Tag Archives: Tariffs

Hold On To Your Country: Vote Down the Leftists

27 Tuesday Oct 2026

Posted by in Election, Socialism, Tyranny

≈ Leave a comment

Tags

, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

The Babylon Bee has it just about right. But putting aside important medical, ethical and cultural issues for the moment, lots of voters are pissed off about “affordability”, or a lack thereof. Will that, or something else, keep GOP voters away from the polls? Or will it cause them to switch allegiance to Democrats, or persuade independents to swing left this time? That would be a huge mistake.

Dumb Policies and Own-Party Turnout

The trend of rising prices isn’t new, of course, and it will continue as long as federal spending continues to escalate. In that context, voters should recall that Democrats, enabled by the Fed, left us with much higher prices after Joe Biden’s term in office, and Dems aren’t offering workable solutions to reduce the cost of living — they don’t have any.

But for his part, Trump hasn’t exactly restrained the growth of government, and his protectionist (and almost certainly illegal) tariff policies have taxed businesses and consumers. The Iran war and blockade have completely washed out the price effects of other pro-energy policies, at least for now, though it would be crazy to allow Iran to possess nuclear weapons.

I’m unhappy with Trump on a number of other scores, such as his push for the federal government to take wasteful and ultimately coercive equity stakes in hitherto private companies, which might ultimately offer Democrats a treasure chest to fund their favorite NGOs. Furthermore, Trump’s political motivations are so baldly obvious, like his promise to have the Treasury pay every American $5,000 if both houses of Congress remain in GOP hands for the next two years.

So yes, there are reasons to wonder whether the GOP will struggle in this year’s midterms that go well beyond the usual explanations for incumbent underperformance (own-party apathy and a motivated opposition).

What Motivates Me

Since I’m not drooling over the prospect of a $5k payout, and in fact I hate the profligacy it would represent, what do I care if the Democrats take control of Congress? Well, there’s plenty to fear from a Congress controlled by Democrats, and I will discuss some of risks below. I fully confess that what follows is a rant, but right now it needs to be said.

The Democrats have become preoccupied with fervid anti-Americanism, anti-Semitism, anti-capitalism, and vengeance against their political enemies. (Don’t tell me about Trump’s Justice Department… what do you expect after years of immigration fraud and criminally bogus government actions against him.) The Dem’s platform this time is largely focused on the chanting of words like “affordability”, “government health care”, and “Free Palestine”, without explaining exactly what policies they’d implement. But their real agenda is far worse than any of that sounds.

The thing is that ultimately Trump will move along. Disenchanted Trump voters should keep that in mind, even as they keep a suspicious eye on him and potential successors. Despite Trump’s penchant for expanded executive power, I believe that in the long run our public and private institutions, and our constitutional order, are in much safer hands with a Republicans majority in Congress than a Democrat majority. As a matter of fact, certain Democrats have as much as promised to demolish many of our key institutions if they are elected or control Congress. They would pull out all the stops to eliminate anything they think might place the left at a disadvantage.

Even Dumber Policies

I’ve dealt with the pros and cons of most of the following issues in the past, so I won’t elaborate much on any of them. And it is by no means a complete list! Suffice it to say that the kinds of positions shown below would be disastrous for the nation, our prosperity, and for the cause of individual liberty. Just so I’m not accused of painting with too broad a brush, let me qualify this by noting that there are centrist democrats who do not support all of the listed positions. Nevertheless, this is where their party is headed, as it’s members continue to normalize and drift toward ever-more extreme positions:

  • Abolish the Senate? This would destroy the key basis of the Great Compromise that enabled the founding of our nation. Without it, a simple majority in the House could enable a tyrannical regime or destabilize the country.
  • Abolish the electoral college? Again, an effort to destroy a compromise that was and is critical to our union.
  • Pad the Supreme Court with extra justices? Get a Democrat supermajority? Like hell!
  • Rewrite the constitution? Well, only if you want to remove limits on the power of the federal government to confiscate, regulate, and spend without restraint.
  • Restrict speech? Because the left does not recognize the distinction between words (opinions or honest disagreement) and violence, or pretends not to. Hurting feelings is not violence!
  • Legalize abortion? It’s somebody else’s body in your body. A person. Let them live!
  • Legalize infanticide? Because they view children as inconvenient and basically worthless!
  • Confiscate the means of production? Sure, and the victims of this theft will simply have to explain to these geniuses how it all works. Break out the Richard Scarry books. No problem!
  • Tax wealth? Goodbye standard of living.
  • Impeach Trump? For being elected and for governing!
  • Demonize success? Because they think profit has nothing to do with creating value.
  • Prosecute Elon Musk? Because we must punish the most productive man on Earth! This threat long preceded the Starlink shutdown in Ukraine, which was arguably justified.
  • Assassinate Elon Musk? Because we must eliminate the most productive man on Earth!
  • Universal healthcare? As PJ O’Roarke once said, “If you think health care is expensive now, wait until you see what it costs when it’s free.” People aren’t as crazy about it when they learn the details.
  • Stop the data centers? No one should fall for this. Data centers can be great opportunities for local communities, so why prohibit them outright? No, they seldom use much water and they aren’t pushing up retail power costs. Negotiate!
  • Abolish ICE? Zero immigration enforcement. Get real!
  • Wide open borders and no vetting? Please, take my land, my home, my daughters!
  • Defund the police? Guess what’s coming to your neighborhood. Who you gonna call?
  • Abolish prisons? Same.
  • Crime and Release: Sympathy for aggressors. Victims… meh.
  • Revoke gun rights? You can forget about self-defense. But disarm and conquer is the final objective.
  • Outlaw voter ID? Kiss electoral integrity goodbye.
  • Abandon Israel? Exterminating Jews, from the river to the sea. Oh, and apparently here too! Genocide in Gaza is a fiction enabled by Hamas’ strategic ploy to forcibly embed with civilians.
  • Higher oil prices? Yes, much higher than even now, because the left hates fossil fuels.
  • Publicly ostracize Republicans to diminish their career and social prospects? Because they differ!
  • “Reeducate” Republicans? Because they differ!
  • Shoot Republicans? Because they differ!

Much of this adds up to a putsch for a one-party state. Don’t tell me I’m exaggerating: I’ve heard members of my own extended family engage in eliminationist rhetoric. And I’m far from alone. It’s not a joke. Yes, those are just words, but nevertheless, the left is actively normalizing even the most extreme and nonsensical positions. These people are insane.

The Clown Car

Who do the Democrats wish to elect in November? Well, for starters, a bunch of dyed-in-the-wool, big government lefties who would push for many of the agenda items listed above. This includes Senate candidates such as Roy Cooper (NC), Sherrod Brown (OH), and DSA member Angie Nixon (FL). But the worst of the worst for the Senate might be Abdul El-Sayed in Michigan, a fake physician with ties to the Muslim Brotherhood (see this ridiculous ad from a supportive PAC, especially the end). Then we have James Talarico in Texas, a wokie who has played up his pastoral ambitions and has flipped on critical issues (youth transgender medical care and sports, abortion, and energy). And what about Graham Platner? … Oops, no, the Maine Oystergrüppenführer had to drop out due to accusations of sexual abuse — but this guy received 70% of Maine Democrats’ vote in the primary and support from prominent Democrats elsewhere. Nice people!

Some of the Democratic House candidates are even more extreme, including Democratic Socialists Darializa Avila Chevalier (NY), Melat Kiros (CO), Donavan McKinney (MI), William Lawrence (MI), and DSA-backed Claire Valdez (NY). Don’t allow them to waste the next two years of congressional time and energy trying to make ridiculous charges against Trump stick, or even worse, waste our time debating a socialist policy agenda.

The Democrats’ gubernatorial candidates include another collection of radical nut cases. Oregon Governor Tina Kotec is one of them. So is Gina Hinojosa of Texas, who has received an endorsement from the Council on American-Islamic Relations (CAIR), which in turn defends Sharia law. Others include Amanda Janoo (VT), Deb Haaland (NM), and Hannah Pingree (ME), all for big taxation and grandiose plans for big government.

These Democrats are cheered on by such luminaries as:

  • the noted anti-Semite and socialist Hasan Piker;
  • Kamala Harris, whose patter is nearly 100% vapid drivel;
  • the oily, DSA worshiping Gavin Newsom;
  • the inimitable socialist Bernie Sanders, who has never done an honest day’s work in his life;
  • the former transportation secretary Pete Buttigieg, who thinks highways are racist; and
  • the former narcissist-in-chief Barack Hussein Obama, who has played an instrumental role in radicalizing Democrats over the past two decades and would love to have another opportunity to pull strings.

Electoral Mischief

One of the policy issues bulleted above requires elaboration: our country has a major lack of election integrity. Our electoral process is not free and fair. It is rife with fraud. Already, well before Election Day, we have a major scandal with noncitizens voting, and you can be assured that it’s not confined to LA or California (see here for the latest case). In Georgia, various kinds of voter fraud in this election have already been identified, which may interfere with certification of the results. Cybersecurity has now become an additional concern with respect to electronic voting.

Of course, the manipulation of elections is nothing new. Local vote counts in jurisdictions dominated by a single political party are the most vulnerable to shenanigans, and those areas tend to be heavily urban with reliable Democrat majorities. These distorted and exaggerated vote counts can certainly have an impact on national results. The best means of bringing this kind of manipulation under control is voter identification, strict deadlines, and eliminating cyber threats via paper ballots. Of course, the election process is once again a major issue this cycle. If you want secure elections, DO NOT sit this one out!

Seditious Conspiracy?

Finally, in a dramatic illustration of how crazy and seditious some high-level Democrats have become, there is strong evidence that insiders, including prominent office holders, are attempting to lay plans for a so-called color revolution after the mid-term election. Here is Glenn Reynolds’ summary of the alleged plan:

“If the Democrats take the House and Senate (and maybe if they don’t), various leftist groups will stage violent protests, intended to press Trump into invoking the Insurrection Act and sending in troops. Once he does, Democratic governors in blue states will denounce his acts as illegal (whether they are or not) and mount resistance on various levels. The goal is to destabilize things enough that they can seize power and replace the Constitution.“

This might sound far-fetched, but again, there is solid documentation to back up the allegations. Chuck Devore in The Federalist gives more detail here (and there is more here). The Trump Administration certainly knows about this plot, but the excellent X poster Cynical Publius believes they want to avoid abetting these plans by deferring any necessary actions until after the midterms.

Final Thoughts

The people behind the plan to stage a color revolution are skunks, and one hopes they’ll be punished. But Democrats have other broad problems, I mean, other than the sheer stupidity of expecting big government to solve problems and protect basic liberties. Factions like the DSA, and a significant share of Democrats overall, really do want a one-party state. But today, the far left wing includes an Islamist faction whose beliefs are fundamentally at odds with ideals the left had championed for decades, like the rights of women, gays, lesbians and more recently, the trans community. Left-wing Jews need a loud wakeup call as well.

I think this clip from Bill Maher and Justine Bateman represents a pretty accurate take on what could happen if the leftist Democrats “get it all”. Do not allow them to take control of our country. They will bring disaster. Get out and vote, and make your vote count against Democrats, even against more moderate Democrats, because they are unlikely to present an obstacle to the radical agenda. Hold your nose if you have to, but you just might help to preserve our safety, our liberties, and our country.

Almost Looks Like the Fed Has a 3% Inflation Target

16 Sunday Nov 2025

Posted by in Inflation, Monetary Policy

≈ Leave a comment

Tags

, , , , , , , , , , , , , , , , , , , ,

Inflation leveled off below 3% in 2024 and has drifted around the 3% level in 2025. The rate of increase in the core PCE (Personal Consumption Deflator) is the inflation measure of most interest to the Federal Reserve as a policy reference, but advances in the core CPI (Consumer Price Index) have settled at about the same level. The core inflation rates exclude food and energy prices due to the volatility of those components, but even with food and energy, inflation in the PCE and the CPI have been running near 3%.

It’s a 2% Target… Or Is It?

The Fed continues to maintain that its “official” inflation target is 2% for the core PCE. However, the central bank is now easing policy despite inflation running a full percentage point faster than the target. The rationale turns on the Fed’s dual mandate to maintain both “price stability” and full employment, goals that are not always compatible.

Currently, the labor market is showing signs of weakness, so the Fed has elected to ease policy by guiding the federal funds rate downward, and by putting a stop to run-off in its balance sheet holdings of securities. The latter ends a brief period of so-called quantitative tightening.

Just a couple of months ago, the central bank announced a new emphasis on targeting 2% inflation in the long run, with notable differences from the “flexible average inflation targeting” (FAIT) that it claimed to have adopted in 2020. In some respects, the Fed appeared to be giving more primacy to the “2%” definition of price stability than to the full employment mandate. Yet the “new approach” still allows plenty of wiggle room and might not differ much from the approach followed prior to FAIT.

No FAITful Error

Here’s how David Beckworth characterizes the way FAIT ultimately played out. He says that in practice the Fed took:

“… an asymmetric approach to the dual mandate: It would implement makeup policy on misses below the inflation target, and it would respond to shortfalls from maximum employment. These asymmetries, while well- intended, created an inflationary bias that caused FAIT to fail the ‘stress test’ of the 2021–22 inflation surge. This failure caused the Fed to effectively abandon FAIT in early 2022 and become a single-mandate central bank focused on price stability.“

Scott Sumner says the Fed never really really practiced FAIT to begin with. It should have been a symmetric policy, but it wasn’t. During 2021-22, the Fed did not attempt to correct for rising inflation. Instead, it focused on the recessionary effects of Covid and the impingements of Covid-era restrictions on employment.

Clearly, Covid was a shock that monetary policy was ill-suited to address without reinforcing inflation. Furthermore, the pandemic inflation was thought by the Fed to be transitory, but easing policy was a critical error. Stimulating demand via monetary accommodation gave inflation more permanence than the Fed apparently expected.

Lost In the Tea Leaves Again

While a strong commitment to price stability is welcome, it’s not clear that is what’s guiding the Fed’s decisions at the moment. Again, the Fed’s preferred inflation gauge has flattened out at around 3%. However, with uncertainty about tariffs and tariff pass throughs in 2026, the weak dollar, and unrelenting Treasury borrowing, easier monetary conditions could well set the stage for persistent inflation above 3%, despite the official 2% target. That might help explain the failure of longer-term interest rates to decline in the wake of the Fed’s latest quarter-point cut in the federal funds target in October.

Suspicious Minds

Speculation that the Fed is allowing its true inflation target to creep upward is hardly new. Back in June, former New York Fed economist Robert Brusca noted the following:

“A Cleveland Fed survey already has the business community thinking that the REAL target for inflation is 2.5%.”

More recently, Mark Sobel of the Official Monetary and Fiscal Institutions Forum stated that the real target, for now, is probably 3%:

“But could the Fed stealthily and unintentionally end up near 3%? Even apart from above-target inflation in recent years, short- and longer-term structural forces are at play that could usher in slightly higher inflation, notwithstanding Fed speeches on the sanctity of the 2% inflation target.“

Chewing On Data

It’s pretty clear that the Fed has become a skittish about the pace of the real economy, lending more weight to the full employment part of its dual mandate. Employment growth slowed over the past year, partly due to government employee buy-outs and separations of illegal immigrants from their employers. The last official employment report was in early September, however, so the nonfarm payroll data is two months out-of-date:

Private payroll growth from ADP over the past two months has not looked especially encouraging:

Tariffs and weakened profit margins have likely had a contractionary effect, and the six-week government shutdown just ended will shave 0.5% or more off fourth quarter GDP growth. Furthermore, while money (M2) growth has accelerated over the past year, it remains fairly restrained.

And the monetary base has been pretty flat for most of 2025:

We’ll see where these aggregates go from here. The extended “restraint” might now be of some concern to the Fed, given recent doubts about employment and economic growth. Still, in October, Fed Chairman Jerome Powell said that another quarter-point cut in the federal funds rate target in December was not a foregone conclusion. That statement seems to have worried equity investors while offering little solace to bond investors.

Aborted Landing

If (and as long as) the Fed gives primacy or greater weight in its policy deliberations to employment than inflation, it might as well have adopted an inflation target of 3% or more. The additional erosion in purchasing power wrought by that leniency is bad enough, but the effect of monetary policy on the real side of the economy is more poorly understood than its effect on nominal variables. The Fed’s shift in priorities is both unreliable on the real side and dangerous in terms of price stability. These concerns are even more salient given the upcoming appointment (in May) of a new Fed Chairman by President Trump, who seems eager for easy money.

A Tax On Imports Takes a Toll on Exports

10 Friday Oct 2025

Posted by in Free Trade, Tariffs

≈ Leave a comment

Tags

, , , , , , , , , , , , , , , , , ,

Tariffs have far-reaching effects that strike some as counter-intuitive, but they are real forces nevertheless. Much like any selective excise tax, tariffs reduce the quantity demanded of the taxed good; buyers (importers) pay more, but sellers of the good (foreign exporters) extract less revenue. Suppose those sellers happen to be the primary buyers of what you produce. Because they have less to spend, you also will earn less revenue.

The Lerner Effect

The imposition of tariffs by the U.S. means that foreigners have fewer dollars to spend on exports from the U.S. (as well as fewer dollars to invest in the U.S. assets like Treasury bonds, stocks, and physical capital). That much is true without any change in the exchange rate. However, lower imports also imply a stronger dollar, further eroding the ability of foreigners to purchase U.S. exports.

The implications of the import tariff for U.S. exports may be even more starkly negative. Scott Sumner discusses an economic principle called Lerner Symmetry: a tax on imports can be the exact equivalent of a tax on exports! That’s because two-directional trade flows rely on two-directional flows of income.

Note that this has nothing to do with foreign retaliation against U.S. trade policy, although that will also hurt U.S. exporters. Nor is it a consequence of the very real cost increase that tariffs impose on U.S. export manufacturers who require foreign inputs. That’s a separate issue. Lerner Symmetry is simply part of the mechanics of trade flows in response to a one-sided tariff shock.

Assumptions For Lerner Symmetry

Scott Sumner enumerated certain conditions that must be in place for full Lerner Symmetry. While they might seem strict, the Lerner effect is nevertheless powerful under relaxed assumptions (though somewhat weaker than full Lerner Symmetry).

As Sumner puts it, while full Lerner Symmetry requires perfect competition, nearly all markets are “workably competitive”. In the longer-run, assumptions of price flexibility and full employment are anything but outlandish. Complete non-retaliation is an unrealistic assumption, given the breadth and scale of the Trump tariffs. Some countries will retaliate, but not all, and it is certainly not in their best interests to do so. The assumption of balanced trade is one and the same as the assumption of no capital flows; a departure from these “two” assumptions weakens the symmetry between tariffs and export taxes because a reduction in capital flows takes up some of the slack from lower revenue earned by foreign producers.

Trump Tariff Impacts

So here we are, after large hikes in tariffs and perhaps more on the way. Or perhaps more exceptions will be carved out for favored supplicants in return for concessions of one kind or another. All that is economically and ethically foul.

But how are imports and exports faring? Here I’ll quote the Yale Budget Lab’s (YBL) September 26th report on tariffs, which includes the chart shown at the top of this post:

“Consumers face an overall average effective tariff rate of 17.9%, the highest since 1934. After consumption shifts, the average tariff rate will be 16.7%, the highest since 1936. …

The post-substitution price increase settles at 1.4%, a $1,900 loss per household.“

The “post-substitution” modifier refers to the fact that price increases caused by tariffs would be somewhat larger but for consumers’ attempts to find lower-priced domestic substitutes. Suppose the PCE deflator ends 2025 with a 2.8% annual increase. The YBL’s price estimate implies that absent the Trump tariffs, the PCE would have increased 1.4%. If that seems small to you (and the tariff effect seems large to you), recall that monetary policy has been and remains moderately restrictive, so we might have expected some tapering in the PCE without tariffs.

We also know that the early effects of the tariffs have been dominated by thinner margins earned by businesses on imported goods. Those firms have been swallowing a large portion of the tariff burden, but they will increasingly attempt to pass the added costs into prices.

But back to the main topic … what about exports? Unfortunately, the data is subject to lags and revisions, so it’s too early to say much. However, we know exports won’t decline as much as imports, given the lack of complete Lerner symmetry. YBL predicts a drop in exports of 14%, but that includes retaliatory effects. In August the WTO predicted only about a 4% decline, which would be about half the decline in imports.

Seeking Compensatory Rents

More telling perhaps, and it may or may not be a better indicator of the Lerner effect, is the clamoring for relief by American farmers who face diminished export opportunities. As Tyler Cowen says, “Lerner Symmetry Bites”. Other industries will feel the pinch, but many are likely preoccupied with the more immediate problem of increases in the direct cost of imported materials and components.

The farm lobby is certainly on its toes. The Trump Administration is now asking U.S. taxpayers to subsidize soybean producers to the tune of $15 billion. Those exporting farmers are undoubtedly victimized by tariffs. But so much for deficit reduction! More from Cowen:

“Using tariff revenue to subsidize the losses of exporters is a textbook illustration of Lerner Symmetry because the export losses flow directly from the tax on imports! The irony is that President Trump parades the subsidies as a victory while in fact they are simply damage control for a policy he created.“

A List of Harms

Tariffs are as distortionary as any other selective excise tax. They restrict choice and penalize domestic consumers and businesses, whose judgement of cost and quality happen to favor goods from abroad. Tariffs create cost and price pressures in some industries that both erode profit margins and reduce real incomes. For consumers, a tariff is a regressive tax, harming the poor disproportionately.

Tariffs also diminish foreign flows of capital to the U.S., slowing the long-term growth of the economy as well as productivity growth and real wages. And the Lerner effect implies that tariffs harm U.S. exporters by reducing the dollars available to foreigners for purchasing goods from the U.S. In these several ways, Americans are made worse off by tariffs.

We now see attempts to cover for the damage done by tariffs by subsidizing the victims. A “tariff dividend” to consumers? Subsidies to exporters harmed by the Lerner effect? In both cases, we would forego the opportunity to pay down the bloated public debt. Thus, the American taxpayer will be penalized as well.

Tariff Challenges at the High Court

12 Friday Sep 2025

Posted by in Executive Authority, Tariffs

≈ Leave a comment

Tags

, , , , , , , , , , , , , , , , , ,

The world doesn’t ordinarily revolve around tariffs, but so much has happened to make tariffs into an economic and political linchpin of the moment. Donald Trump put them in the spotlight, of course, and while he’s still seeing roses, things won’t turn out entirely the way he hopes. At the tariff levels he’s instituted, this shouldn’t be too surprising.

While tariff revenue is helping to shave the federal budget deficit, the tax falls largely on the backs of American consumers and businesses with all the attending distortions that entails. Sadly, the extra revenue also seems to have offered a handy excuse to put spending cuts on the back burner. Tariffs and tariff uncertainty have businesses attempting to compromise between reduced margins and price hikes. Thinning margins due to tariffs have played a role in the weak employment numbers we’ve seen over the past few months. And tariffs, at least until now, have quite rightly reinforced the Federal Reserve’s cautious stance toward easing policy. However, the weak labor market has likely convinced the Fed to cut its short-term interest rate target, despite inflation stubbornly remaining well above the Fed’s 2% objective. That upward price pressure will remain.

Now, the legal battle over Trump’s tariff authority is about to reach a climax. That’s what I’ll focus on here. The Supreme Court has agreed to fast track the challenge to the President’s discretion to impose retaliatory tariffs unilaterally. There are two cases at hand: V.O.S. Selections, Inc. v. Trump, and Learning Resources, Inc., et al. v. Donald Trump et al. In both cases, small business plaintiffs contend that Trump’s invocation of the International Emergency Economic Powers Act (IEEPA) is unwarranted, and that “most” of the tariff actions taken by Trump have usurped Congress’ power of the purse under Article I of the Constitution. Here’s Ilya Somin, who is a Volokh Conspiracy regular and one of the attorneys representing the plaintiffs:

“… IEEPA doesn’t even mention tariffs and has never previously been used to impose them, that there is no ‘unusual and extraordinary threat’ of the kind required to invoke IEEPA, the major questions doctrine, the constitutional nondelegation doctrine, and more.“

This isn’t the first time a U.S. president has imposed tariffs unilaterally, but it is easily the most drastic such action. Historically, nearly all tariffs were levied by acts of Congress. Prior to Trump II, perhaps the broadest tariff imposed by a President was Richard Nixon’s brief 10% surcharge on all imports, but that was lifted quickly. Presidents Johnson and Obama imposed some selective tariffs. All of these episodes seem piddling compared to Trump’s tariffs, which are both sweeping and in many cases painfully selective.

Eric Boehm notes that when it comes to major constitutional questions, the Court has taken the position that

“… executive power should be construed narrowly, not broadly …. Rather than tying itself into knots to affirm nearly unlimited executive powers over commerce, the Supreme Court should tell the Trump administration to get permission from Congress before imposing new tariffs.“

I believe that will be the general shape of the outcome here. Maybe there’s a way for the Court to allow the tariffs to stand until Congress decides to “man up”, acting one way or the other. SCOTUS would probably like to do just that! Or maybe the Court could stay the lower court’s injunction until the case is heard by the Court in full on the regular docket, or until Congress acts.

There’s a decent chance, however, that Trump’s tariffs will be struck down, leaving it up to tariff supporters in Congress to lay down statutory rules rather than put up with the impulsive craziness we’ve witnessed thus far. If the Court lets the tariffs stand, it leaves the door open for new tests on the limits of executive discretion. Here is Greg Ip at the link:

“There would also be no end to uncertainty. ‘Unlike most other tariff authorities, these tariffs are not enshrined in statute, there’s no process to change them, and they can change very rapidly, in a day, without much notice, as we’ve seen,’ said Greta Peisch, a trade attorney at Wiley Rein and former general counsel for the U.S. trade representative.“

We’ve already seen strong hints that the Administration would like to force businesses to eat the cost of the tariffs rather than pass them along to consumers in higher prices. There hasn’t been any formal action of this kind by the Administration, at least not yet. Still, one can hardly blame businesses who might perceive an implicit threat if they fail to comply. That kind of bullying represents an a massive abuse of power. The Court could do everyone a big favor by clarifying that the authority to impose tariffs rests with Congress.

Attack Private Sector With Tariffs, Then Attack Pricing

26 Saturday Jul 2025

Posted by in Tariffs, Tax Incidence

≈ 1 Comment

Tags

, , , , , , , , , , , , , , , , , ,

An opinion piece caught my eye written by one Chad Wolf. It’s entitled: “Retailers caught red-handed using Trump’s tariffs as cover for price gouging”. A good rule is to approach allegations of “price gouging” with a strong suspicion of economic buffoonery. You tend to hear such gripes just when prices should rise to discourage over-consumption and encourage production. The Wolf article, however, typifies the kind of attack on capitalism we hear increasingly from the “new right” (and see this).

Wolf, a former Homeland Security official in the first Trump Administration, says that large retailers like Walmart and Target are ripping off American consumers by raising prices on goods that are, in his judgement, “unaffected” by tariffs.

We’ll get into that, but first a quick disclaimer: I have no connection to Walmart or Target. Sure, I’ve shopped at those stores and I’ve filled a few prescriptions at a Walmart pharmacy. Maybe I have an ETF with an interest, but I have no idea.

Competition and Consumer Choice

Of course, no one forces consumers to shop at Walmart or Target. Those stores compete with a wide variety of outlets, including Costco and Amazon, the latter just a few clicks away. In a market, sellers price goods at what the market will bear, which ultimately serves to signal scarcity: a balancing between the cost of required resources and the value assigned by buyers. Unfortunately, in the case of tariffs, buyers and sellers of imports must deal with an artificial form of scarcity designed to extract revenue while benefitting other interests.

Wolf touts the “gift” of a free market for American businesses, as if private rights flow from government beneficence. He then decries a so-called betrayal by large retailers who would “price gouge” the American consumer in an effort to protect their profit margins. The free market is indeed a great thing! But his indignance is highly ironic as a pretext for defending tariffs and protectionism, given their destructive effect on the free operation of markets.

Broader Impacts

Wolf might be unaware that tariffs have an impact on a large number of domestically-produced goods that are not imported, but nevertheless compete with imports. When a tariff is charged to buyers of imports, producers of domestic substitutes experience greater demand for their products. That means the prices of these import-competing goods must rise. Furthermore, the effect can manifest even before tariffs go into effect, as consumers begin to seek out substitutes and as producers anticipate higher input costs.

Obviously, tariffs also impinge on producers who rely on imports as inputs to production. It’s not clear that Wolf understands how much tariffs, which represent a direct increase in costs, hurt these firms and their competitive positions.

“Expected” Does Not Mean “Unaffected”

Wolf cites the Federal Reserve’s Beige Book report (which he calls a “study”) to support his claim that businesses are gouging buyers for goods “unaffected” by tariffs. Here is one quote he employs:

“A heavy construction equipment supplier said they raised prices on goods unaffected by tariffs to enjoy the extra margin before tariffs increased their costs,” the Beige Book report said.“

Read that again carefully! Apparently Wolf, and whoever added this to the Fed’s Beige Book, thinks that being “unaffected by tariffs” includes firms whose future costs, including replacement of inventories, will be affected by tariffs! He goes on to say:

“… Walmart has already issued price hikes under the guise of tariff costs.“

The examples at his “price hikes” link were for Chinese goods in April and May, after Trump announced 145% tariffs on China in April. In mid-May, Trump said China would face a lower 30% tariff rate during a 90-day “pause” while a trade agreement was negotiated. It is now 55%, but the point is that retailers were forced to play a guessing game with respect to inventory replacement costs due to uncertainty imposed by Trump. They had a sound reason for marking up those items.

Fibbing on the Margin

Here’s an excerpt from Wolf’s diatribe that demonstrates his cluelessness even more convincingly:

“We all know many of these large retailers are sitting on comfortable, even expanded, profit margins because of the price hikes from COVID-19 that never came down. But it’s not enough for them. They want to fleece the American consumer and blame it on President Trump’s America First agenda.“

So let’s take a look at those profit margins that “never came down” after the pandemic, but in a longer historical context. Here are gross margins for Walmart since 2010:

Walmart’s margin today is about the same as the average for discount stores, and it is lower than for department stores, retailers of household and personal products, groceries, and footwear. Furthermore, it is lower today than it was ten years ago. While the margin increased a little during the pandemic, it fell in its aftermath, contrary to Wolf’s assertion. That the company has rebuilt margins steadily since 2023 should be viewed not as an indictment, but perhaps as a testament to improved managerial performance.

Wolf goes on to quote a former Walmart CEO who says that the 25 basis point increase in the gross margin in the latest quarter (from ~24.7% to 24.94%) indicates that the chain can “manage” the tariff impact. Of course it can, but that would not constitute “price gouging”.

A Trump Lackey

Of course, Wolf is taking his cues from Donald Trump, who has been bullying American businesses to “eat” the cost of his tariff onslaught, rather than passing them along to the ultimate buyers of imported goods. However, private businesses should not be expected to take orders from the President. This is not Mussolini’s Italy. Moreover, anyone familiar with tax incidence will understand that sellers are likely to eat some portion of a tariff (sharing the burden with buyers) without jawboning from the executive branch. That’s because buyers demand less at higher prices and sellers wish to avoid losing profitable sales, to the extent they can. But the dynamics of this adjustment process might take time to play out.

It’s also worth noting that a retailer might attempt to hold the line on certain prices in an uncertain cost environment. This uncertainty is a real cost inflicted by Trump. Meanwhile, pointing to increased prices for domestic goods, even if they are truly unaffected by tariffs, proves nothing without knowledge of the relevant cost and market conditions for those goods. It certainly doesn’t prove an “unpatriotic” attempt to cross subsidize imported goods.

In fact, one might say it’s unpatriotic for the federal government to restrict the market choices faced by American consumers and businesses, and for the President to tell American sellers that they better “eat” the cost of tariffs (or else?). And say, what happened to the contention that tariffs aren’t taxes?

Conclusion

Attacks on sellers attempting to recoup tariff costs are unfair and anti-capitalist. They are also somewhat disdainful of the economic sovereignty of American consumers, though not as much as the tariffs themselves. In the case described above, Chad Wolf would have us believe that sellers should not act on their expectations of near-term tariff increases. He also fails to recognize the impact of tariffs on import-competing goods and the cost of tariffs borne by producers who must rely on imported goods as inputs to production. Even worse, Wolf misrepresents some of the evidence he uses to make his case.

More generally, American businesses should not be bullied into taking a hit just because they serve customers who wish to buy imported goods. There is nothing unpatriotic about the freedom to choose what to goods to buy, what goods to stock, and how to maintain profitability in the face of government interference.

June Budget Surplus and Wishful Tariff Thinking

21 Monday Jul 2025

Posted by in Deficits, Tariffs

≈ Leave a comment

Tags

, , , , , , ,

The federal government ran a budget surplus of $27 billion in June, much to the surprise of nearly everyone. The Trump Administration and MAGA-friendly media were eager to credit a big revenue boost from higher tariffs, which… ahem … they have assured us are not really taxes. In any case, to attribute the June surplus to tariffs is flatly ridiculous. The truth is these “non-tax” magic revenue generators made a relatively small contribution to the apparent shift in the government’s fiscal position in June. And I say “apparent” because the surplus itself was something of a mirage.

Yes, tariffs brought in a total of almost $27B during June, which is about the same as the surplus recorded, but that was purely coincidental. It does not imply that tariffs “created” a surplus. Nor does it suggest that tariffs might just be able to balance the federal budget. Not a chance!

Here is one of two other sides of the story: the Treasury reported that the budget balance this June improved from a year ago by a total of $89 billion, from a deficit of $72B in June of 2024 to the aforementioned surplus of $27B in June 2025. Outlays were lower by about $38B this June, accounting for almost 43% of the improvement. Receipts were about $59B higher, with tariffs increasing by $20B relative to June 2024. So tariffs contributed just over a third of the boost in receipts. Altogether then, tariffs accounted for 22.5% of the improvement in the June budget balance between 2024 and 2025. That version of the story, as far as it goes, does not support the contention that tariffs “caused” the budget surplus in June, only that tariff revenue was a contributing factor.

Let’s dig a little deeper, however. Were it not for so-called “calendar adjustments” made by the Treasury, it would have reported a deficit of $70B in June. The reason? The first day of June fell on a Sunday this year, so certain payments were shifted to the last prior business day: Friday, May 30. That reduced June outlays substantially. Moreover, an extra business day in June 2025 added revenue. So the surplus in June was, in essence, an artifact of the calendar and had little to do with tariff revenue.

Incidentally, no one should be surprised by the growth of tariff revenue collected in June. When a tax rate more than triples (from a pre-Trump average of about 3% to 10% plus in June — net of tariff exclusions), one should expect revenue from that tax to increase substantially (and it was probably exaggerated by the extra business day).

Oh wait! Did I say tax?

With time, buyers will adjust and scale back their import purchases, reducing the revenue impact of the tariff hikes. However, we still don’t know how high tariffs will go. That means we could see substantially higher tariff revenue, though the demand response and a likely negative impact on incomes will cut into those gains. Either way, the revenue potential of tariffs is limited. Some estimates put the revenue impact of Trump’s tariffs at less than $250B annually. That seems conservative, but it’s significant revenue if it holds up. Still, it won’t come close to balancing a federal budget that’s almost $2 trillion in the hole. It certainly doesn’t justify a headlong dive into protectionism, which amounts to taking a crap on the economic freedom and prosperity of the American public.

The Mystery of the “Missing” Tariff Inflation

03 Thursday Jul 2025

Posted by in Inflation, Tariffs

≈ Leave a comment

Tags

, , , , , , , , , ,

Seemingly everyone wants to know: where is this tariff inflation you economists speak of? Even my pool guy asked me! We haven’t seen it yet, despite the substantial tariffs imposed by the Trump Administration. The press has been wondering about this for almost two months, and some of the MAGA faithful are celebrating the resounding success of the tariffs in this and other respects. Not so fast, grasshoppers!

There are a couple of aspects to the question of tariff inflation. One has to do with the meaning of inflation itself. Strictly speaking, inflation is a continuing positive rate of increase in the price level. Certain purists say it is a continuous positive rate of increase in the money supply, which I grant is least a step beyond what most people understand as inflation. Rising prices over any duration is a good enough definition for now, but I’ll return to this question below in the context of tariffs.

There is near-unanimity among economists that higher tariffs will increase the prices of imports, import-competing goods, and goods requiring imported materials as inputs. Domestic importers pay the tariffs, so they face pressure on their profit margins unless they can pass the cost onto their customers. But so far, since Donald Trump made his “Liberation Day” tariff announcement, we’ve seen very little price pressure. What explains this stability, and will it last?

Several factors have limited the price response to tariffs thus far:

— Some importers are “eating” the tariffs themselves, at least for now, and they might continue to pay a share of the tariffs with smaller margins.

— Cargo moves slowly: According to Neil Kashkari of the Minneapolis Fed:

“… cargo loaded onto ships in Asia on April 4 was not subject to the reciprocal tariffs, while cargo loaded April 5 was. Cargo coming from Asia can take up to 45 days to make it to U.S. ports and then must be transported to distribution centers and then on to customers. It is possible that goods from Asia subjected to high tariffs are only now making their way to customers. These two factors suggest the economic effects of increased tariffs could merely be delayed.“

— Data on prices is reported with a lag. We won’t know the June CPI and PPI until July 15, and the PCE price index (and its core measure, of most importance to the Fed) won’t be reported until July 31, and will be subject to revisions in subsequent months.

— Importers stocked up on inventories before tariffs took effect, and even before Trump took office. Once these are depleted, new supplies will carry a higher cost. That’s likely over the next few months.

— Uncertainty about the magnitude of the new tariffs. Trump has zig-zagged a number of times on the tariff rates he’ll impose on various countries, and real trade agreements have been slow in coming. This makes planning difficult. Nevertheless, inventories are likely to carry a higher replacement cost, but adjusting price creates a danger of putting oneself at a competitive disadvantage and alienating customers. Many businesses would prefer to wait for a clearer read on the situation before committing to a substantial price hike.

— Tariff exemptions have reduced the average tariffs assessed thus far to about 10%, well below the 15% official average. This will reduce the impact on prices and margins, but it is still a huge increase in tariffs and another source of uncertainty that should give importers pause in any effort to recoup tariffs by repricing.

— Importers are storing goods in “bonded warehouse“ to delay the payment of tariffs. This helps importers buy time before committing to pricing decisions.

— Kashkari notes that businesses can find ways to alter trade routes so as to lower the tariffs they pay. For example, he says some goods are being routed to take advantage of the relatively favorable terms of the free trade agreement between the U.S., Mexico, and Canada.

So it’s still too early to have seen much evidence of price pressure from Trump’s tariffs. However, that pressure is likely to become more obvious over the summer months. The expectation that tariffs should have already shown up in prices is just one of several errors of those critical of the Federal Reserve’s patience in easing policy.

Is there a sound reason to expect higher tariffs to produce a continuing inflation? Or instead, should we expect a “one-time” increase in the price level without further complications? Tariffs could generate an ongoing inflation if accompanied by an increase in the rate of money growth, or at least enough money growth to create expectations of higher inflation. Thus, if the Federal Reserve seeks to “accommodate” tariffs by easing monetary policy, that might lead to more widespread inflation. That could be difficult to rein-in, to the extent that higher inflation gets embedded into expectations.

Tariffs are excise taxes, and while they put upward pressure on the prices of imports and import-competing goods, they may have a contractionary effect on economic activity. Tighter budgets might lead to softer prices in other sectors of the economy and moderate the impact of tariffs on the overall price level.

The Fed’s reluctance to ease policy has been reinforced by another development. It’s usually argued that tariffs will strengthen the domestic currency due to the induced reduction in demand for foreign goods (and thus the need for foreign currency). Instead, the dollar has declined more than 9% against the Euro since “Liberation Day”, and the overall U.S. dollar index experienced its steepest first-half decline in 50 years. A lower dollar stimulates exports and depresses imports, but it also can lead to “imported” inflation (in this case, apart from the direct impact of tariffs). Uncertainty regarding tariffs deserves some of the blame for the dollar sell-off, but the fiscal outlook and rising debt levels have also done their part.

The upshot is that Trump’s tariffs are likely to cause a one-time increase in the price level with possibly a mild contractionary effect on the real economy. So it’s a somewhat stagflationary effect. It won’t be disastrous, but the tariffs can be made more inflationary than they “need be”. That’s why Trump is foolish to persist in haranguing the Fed for not rushing to ease policy.

Indecorously Jaw-Boning an Unhurried Fed

21 Saturday Jun 2025

Posted by in Inflation, Monetary Policy

≈ 1 Comment

Tags

, , , , , , , , ,

President Trump engaged in one of his favorite pastimes on June 18 while the Federal Reserve Open Market Committee (FOMC) was concluding its meeting on the direction of monetary policy. He publicly called Fed Chairman Jerome Powell “stupid” for not having cut rates already, and later said the Fed’s board was “complicit”.

“”I don’t know why the Board doesn’t override this Total and Complete Moron!“

Trump also tagged Powell with one of his trademark appellations: “Too Late”. Yep, that’s how Trump says he refers to Powell.

Later that day, the Fed once again announced that it had decided to leave unchanged its target range for the interest rate on federal funds. Powell described the overall tenor of current Fed policy as mildly restrictive, but FOMC members still “expect” (loosely speaking) two quarter-point cuts in the funds rate by year end.

Of course, Powell and the FOMC really were far too late in recognizing that inflation was more than transitory in 2021-22. Now, with inflation measures tapering but still higher than the Fed’s 2% target, Trump says “Too Late” Powell and the Fed are again behind the curve. Of course, because the central bank is outside the President’s direct control, it makes a convenient scapegoat for whatever might ail the Trump economy, and Trump frets that unnecessarily high rates will cost the U.S. Treasury hundreds of billions in interest on new and refinanced federal debt.

The President has no appreciation for the value of an independent central bank, as opposed to one captive to the fiscal whims of Presidents and Congress. Despite his frequent criticism of inflationary sins of the past, Trump doesn’t understand the dangers of a central bank that could be bullied into inflating away government debt.

The day after the Fed’s meeting, Trump said rates should be cut immediately by a huge 2.5%! As the Donald might say, no one’s ever seen anything like it!

Trump, however, is delusional to think the Fed can engineer reductions in the spectrum of interest rates by aggressively slashing its fed funds target. The Fed does not control long-term interest rates, nor is that part of the Fed’s formal mandate. In fact, an aggressively large reduction in the fed funds rate is likely to backfire, feeding expectations of higher inflation and a selloff in credit markets.

Let me reiterate: the Fed does not control long-term interest rates. Short-term rates are more heavily influenced by the Fed’s rate actions, and by expectations of Fed policy, but the Fed is likewise influenced by those very expectations. In fact, the Fed often follows market rates rather than leading them. In any case, a general truth is that long-term interest rates go where market forces direct them, not where the Fed might try to push them.

Today the Fed is attempting to walk a line between precipitating divergent and potentially negative outcomes. It wants to see clear evidence that inflation is settling down at roughly the 2% target. Also, the Fed is wary that Trump’s tariffs might generate a near-term spike in prices. Under those circumstances, prematurely easing policy could rekindle more permanent inflationary pressures. It seems clear that the Fed currently judges inflation as the dominant risk.

At the same time, the real economy shows mixed signals. Clear signs of a downturn would likely prompt the Fed to cut its fed funds target sooner. After the latest meeting, the Fed announced that it had reduced its own forecast for real GDP growth in 2025 to just 1.4%. Recent employment gains have been moderate, but jobless claims are trending up. The unemployment rate is low, but the labor force has declined over the past few months, which incidentally might be putting upward pressure on wages.

Policy uncertainty was a major theme in the Fed’s June rate decision. Tariffs loom large and would be a threat to continued growth if producers, facing weak demand, were unable to pass the cost of tariffs through to customers, undermining their profit margins. Prospects for passage of the budget reconciliation bill create more uncertainty, providing another rationale to stand pat without cutting the funds rate.

Again, Jerome Powell says that Fed policy is “modestly restrictive” at present. In fact, estimates of the “policy neutral” Fed funds rate are in the vicinity of 2.75%, well below the current target range of 4.25-4.50. However, the money supply (M2) has drifted up over the past year and by May was up 4.4% from a year earlier. That would be consistent with 2% inflation and better than 2% real growth, the latter being higher than the FOMC’s expectation.

Another consideration is that the Fed has nearly ended its quantitative tightening (QT) program, having recently trimmed the passive runoff of maturing securities in its portfolio to just $5 billion per month. This leads to less downward pressure on bank reserves and less upward pressure on the fed funds rate. In other words, policy has already shifted toward greater support for money growth. But out of caution, the Fed wants to defer reductions in the funds rate to avoid undermining the central bank’s inflation-fighting credibility.

Jerome Powell and the FOMC probably could not care less about Trump’s exhortations to reduce interest rates. For one thing, it is beyond the Fed’s power to force down rates that could spur housing and other economic activity. And Trump should be grateful: such a reckless attempt would risk great harm to markets and the economy, not to mention Trump’s economic agenda. Better to wait until near-term inflation risks and policy uncertainty clear up.

Trump can jawbone as aggressively as he wants. He cannot fire Powell, though he keeps saying he “should”. However, no matter what actions the Fed takes, he will almost certainly not reappoint Powell to lead the Fed when Powell’s term expires next May. Sadly, Trump will try to appoint a replacement he can rely upon to do his bidding. Let’s hope the Senate stands in his way to preserve Fed independence.

A Cooked-Up “Crisis” In U.S. Manufacturing

05 Monday May 2025

Posted by in Liberty

≈ 1 Comment

Tags

, , , , , , , , , , , , , , ,

Supporters of President Trump’s hard line on trade make so many false assertions that it’s hard to keep up. I’ve addressed several of these in earlier posts and I’ll address two more fallacies here: 1) that the U.S. manufacturing sector is in a state of crisis; and 2) that tariffs played a key role in promoting economic growth in the U.S. during the so-called gilded age of the late 19th and early 20th centuries.

Security

First, let’s revisit one tenet of protectionism: national security demands self-sufficiency. This undergirds the story that we must produce physical “things”, in addition to often higher-valued services, to be a great nation, or even to survive!

Of course, protecting industries critical to national security might seems like a natural concession to make, even for those supportive of liberalized trade. Ross Douthat says this:

“I think trying to reshore some manufacturing and decouple more from China makes sense from a national security standpoint, even if it costs something to G.D.P. and the stock market.“

Unfortunately, this kind of rationale is far too malleable. There is never a clearly defined limiting principle. Someone decides which goods are “critical” to national security, and this deliberation becomes the subject of much political jockeying and favor-seeking. But wait! Economic security is also cited as an adequate excuse for trade protections! And how about data security? Health security? Job security? Always there is insistence that “security” of one sort or another demands that we provide for our own needs. For definitive proof, take a look at this nonsense! Give them an inch and they’ll take a mile.

Pretty soon you “protect” such a wide swath of industries in a quest for self-sufficiency that the entire economy is unmoored from opportunity costs, comparative advantages, and the information about scarcities provided by market prices. Absolute “security” comes at the cost of transforming the economy’s productive machinery into a complacent hulk rivaling the inefficiency of Soviet industrial planning. Competition is the solution, but not limited to firms under the same set of protective trade barriers.

Manufacturing Is Mostly Fine

Trade warriors, including members of Trump’s team, insist that our decline as a nation is being hastened by a crisis in manufacturing. However, value added in U.S. manufacturing is at an all-time high.

There has been a long-term decline in manufacturing employment, but not manufacturing output. In fact, manufacturing output has doubled since 1980. As Jeff Jacoby notes, “the purpose of manufacturing is to make things, not jobs.” If our overarching social goal was job security, we’d have revolted long ago against the tremendous reduction in agricultural employment experienced over the past century. We’d rely on switchboard operators to load web pages, and we’d dig trenches and tunnels with spoons (to paraphrase Milton Friedman).

The secular decline in manufacturing employment is a consequence of growth in manufacturing productivity. Economy-wide, this phenomenon allows real income and our standard of living to grow.

Take That Job and …

It’s also significant that few Americans have much interest in factory work. It’s typically less dangerous than in times past, but many of today’s factory jobs are still physically challenging and relatively risky. Perhaps that helps explain why nearly half-a-million jobs in manufacturing are unfilled.

Jacoby describes the transition that has changed the face of American manufacturing:

“… US plants have largely turned away from making many of the low-tech, labor-intensive consumer items they once specialized in — sneakers, T-shirts, small appliances, toys. Those jobs have mostly gone overseas, and trying to bring them back by means of a trade war would be ruinous. Yet America remains a global manufacturing powerhouse — highly skilled, highly innovative, and highly efficient.“

And yet, even as wages in manufacturing have grown, many factory jobs do not pay as well as positions requiring far less strenuous toil in the services sector. It’s also true that the best manufacturing jobs in the U.S. today require high-level skills, which are in short supply. These factors help explain why manufacturers believe finding qualified workers is one of their biggest challenges.

Isolating Weak Sectors

There are specific sectors within manufacturing that have fared poorly, including textiles, furniture, metals, and low-end electronics. The loss of competitiveness that drove those sectoral declines is not a new development. It has, however, devastated communities in the U.S. that were heavily dependent on these industries. These misfortunes are regrettable, but trade barriers are not an effective prescription for revitalizing depressed areas.

Meanwhile, other manufacturing sectors have enjoyed growth, such as computers, aerospace, and EVs. While we’ve seen a decline in the number of manufacturing firms, the performance of U.S. manufacturing in the 21st century can be described as mixed at the very worst.

The author of this piece seems to accept the false notion that U.S. manufacturing is moribund, but he knows tariffs aren’t an effective way to strengthen domestic goods production. He has a number of better suggestions, including a commitment to infrastructure investment, reforms to education and health, and reconfiguring certain corporate income tax policies. Unfortunately, his ideas on tariffs are sometimes as mistaken as Trump’s,

The Gilded Age

Finally, the other false assertion noted in the opening paragraph is that tariffs somehow spurred economic growth in the late 19th and early 20th centuries. Brian Albrecht corrects this protectionist fallacy, which lies at the root of many defenses of Trump’s tariffs. Albrecht cites favorable conditions for growth that were sufficient to overwhelm the negative effects of tariffs, including:

“… explosive population growth, mass European immigration, rapid technological innovation, westward expansion, abundant natural resources, high literacy rates, and stable property rights.”

While cross-country comparisons indicate a positive correlation between tariffs and growth during the 1870 – 1920 period, those differences were caused by other forces that dominated tariffs. Cross-industry research discussed by Albrecht indicates that tariffs on manufactured goods during the gilded era reduced labor productivity and stimulated the entry of smaller, less productive firms. Likewise, natural experiments find that tariffs allowed inefficient firms to survive and discouraged innovation.

Conclusion

The U.S. manufacturing sector is not in any sort of crisis, and its future growth won’t be powered by attempts to restore the sort of low-value production offshored over the past several decades. What protectionists interpret as failure is the natural progression of a technically advanced market-based civilization, where high-value services account for greater shares of growing total output. Of course, low-value production is sometimes “crowded out” in this process, depending on its trade-ability and comparative advantages. The logic of the process is encapsulated by Veronique de Rugy’s recent discussion of iPhone production (HT: Don Boudreaux):

“Then there’s [Commerce Secretary Howard] Lutnick, pining for a world where Americans flood back into massive factories to assemble iPhones. This is nostalgic industrial cosplay masquerading as economic strategy. Yes, iPhones aren’t assembled by Americans. But this isn’t a failure; it’s a feature of smart economic specialization. We design the iPhone here. That’s the high-value, high-margin part. The sophisticated chips, software, architecture, and intellectual property are all created in the U.S. The marketing is done here, too. That’s most of the value of the iPhone. The lower-value labor-intensive assembly work is done abroad because those tasks are more efficiently performed abroad.“

There is certainly no crisis in U.S. manufacturing. That narrative is driven by a combination of politics, rent seeking, and misplaced nostalgia.

Letting Protectionist Nations Tax Themselves

22 Tuesday Apr 2025

Posted by in Comparative advantage, Protectionism, Tariffs

≈ 3 Comments

Tags

, , , , , , , , , , , ,

First, a few more comments re: my speculative musings that Donald Trump’s tariff rampage could ultimately result in a regime with lower trade barriers, at least with a subset of trading partners. Arthur Laffer and Stephen Moore suggested last week that the White House should propose reciprocal free trade with zero barriers and zero subsidies for exports to any country that wishes to negotiate. A more cynical Ben Zycher scoffed at the very possibility, noting that Trump and his lieutenants view any trade deficit as evidence of cheating in one form or another. Zycher is convinced that Trump lacks a basic understanding of the (mostly) benign forces that drive trade imbalances.

I’ve said much the same. Trump’s crazy notions about trade could scuttle negotiations, or he might later accuse a trading partner of cheating on the pretext of a bilateral trade deficit (he’s done so already). And all this is to say nothing of the serious constitutional questions surrounding Trump’s tariff actions.

The mistaken focus on bilateral trade deficits also manifests in certain proposals made during trade negotiations: “Okay, but you’re gonna have to purchase vast quantities of our soybeans every year.” This sort of export promotion is a further drift into industrial planning, and it’s just too much for Trump’s trade negotiators to resist.

This might well turn out as an exercise in self-harm for Trump. However, I’ve also wondered whether his trade hokum is pure posturing, especially because he expressed support for a free trade regime in 2018. Let’s hope he meant it and that he’ll pursue that objective in trade talks. Please, just negotiate lower trade barriers on both sides without the mercantilist baggage.

Which brings me to the theme of this post: it would probably be simpler and more effective for the U.S. to simply drop all of its trade barriers unilaterally. There should be limited exceptions related to national security, but in general we should “turn the other cheek” and let recalcitrant trade partners engage in economic self-harm, if they must.

Okay, Wise Guy, What’s Your Plan?

I have a few friends who bemoan the lack of “fair play” against the U.S. in foreign trade. They have a point, but they also hold an unshakable belief that the U.S. can be just as efficient at producing anything as any other country. They are pretty much in denial that comparative advantages exist in the real world. They are seemingly oblivious to the critical role of specialization in unlocking gains from trade and lifting much of the world’s population out of penury over the past few centuries.

Furthermore, these friends believe that Trump is justified in “retaliating” against countries with whom the U.S. runs trade deficits. If tariffs are so bad, they ask, what would I do instead? Again, here’s my answer:

Eliminate (almost) all barriers to trade imposed by the U.S. Let protectionist nations choke themselves with tariffs/trade barriers.

Before getting into that, I’ll address one fact that is often denied by protectionists.

Yes, a Tariff Is a Tax!

Protectionists often claim that tariffs are not really taxes on U.S. buyers. However, tariffs are charged to buyers of imported goods (often businesses who sell imported goods to consumers or other businesses). In principle, tariffs operate just like a sales tax charged to retail buyers. Both raise government revenue, and they are both excise taxes.

In both cases, the buyer pays but generally bears less than the full burden of the tax. That’s because demand curves slope downward, so sellers (foreign exporters) try to avoid losing sales by moderating their prices in response to the tariff. In both cases, sellers end up shouldering part of the tax burden. How much depends on how buyers react to price: a steep (inelastic) demand curve implies that buyers bear the greater part of the burden of a tariff or sales tax.

People sometimes buy imports due to a lack of substitutes, which implies a steep demand curve. Consumer imports are often luxury items, and well-heeled buyers may be somewhat insensitive to price. Most imports, however, are inputs purchased by businesses, either capital goods or intermediate goods. In the face of higher tariffs, those businesses find it difficult and costly to arrange new suppliers, let alone domestic suppliers, who can deliver quickly and meet their specifications.

These considerations imply that the demand for imports is fairly inelastic (steeper), especially in the short run (when alternatives can’t easily be arranged). Thus, import buyers bear a large portion of the burden in the immediate aftermath of an increased tariff. By imposing tariffs we tax our own citizens and businesses, forcing them to incur higher costs. Correspondingly, if demand is inelastic, an importing country tends to gain more than its trading partners by unilaterally eliminating its own tariffs.

Tariffs on imports also trigger price hikes by import-competing producers. Sometimes this is opportunistic, but even these producers incur higher costs in attempting to meet new demand from buyers who formerly purchased imports. (See this post for an explanation of the costly transition, including a nice exposition of the waste of resources it entails.)

Other Forms of Blood Letting

Beyond tariffs, certain barriers to trade make it more difficult or impossible to purchase goods produced abroad. This includes import quotas and domestic content restrictions. These barriers are often as bad or worse than tariffs because they increase costs and encumber freedom of choice and consumer sovereignty.

Another kind of trade intervention, export subsidies, must be funded by taxpayers. Subsidies are too easily used to protect special interests who otherwise can’t compete. Currency manipulation can both subsidize exports and discourage imports, but it is often unsustainable. The common theme of these interventions is to undermine economic efficiency by shielding the domestic economy from real price signals.

Let Them Tax Themselves

Suppose the U.S. simply turns the other cheek, eliminating all of our own trade interventions with respect to country X despite X’s tariffs and other interventions.

To start with, the existence of barriers means that both countries are unable to exploit all of the benefits of specialization and mutually beneficial trade. Both countries must produce an excess of goods in which they lack a comparative advantage, and both countries produce too few goods in which they have a comparative advantage. Both incur extra costs and produce less output than they could in the absence of trade barriers.

Unilateral elimination of U.S. tariffs and other barriers would reduce high-cost domestic production of certain goods in favor of better substitutes from country X. But Country X gains as well, because it is now able to produce more goods and services for export in which it possesses a comparative advantage. Therefore, the unilateral move by the U.S. is beneficial to both countries.

On the other hand, U.S. export industries are still constrained by country X’s import tax or other restraints. These would-be exporters are no worse off than before, but they are worse off relative to a state in which buyers in country X could freely express their preferences in the marketplace.

What exactly does country X gain from tariffs and other trade burdens on its citizens? It denies them full access to what they deem to be superior goods and services at an acceptable price. It means that resources are misallocated, forcing abstention or the use of inferior or costlier domestic alternatives. Resources must be diverted to relatively inefficient firms. In short, the tariff makes country X less prosperous.

Empirical evidence shows that more open economies (with fewer trade barriers) enjoy greater income and productivity growth. This study found that “trade’s impact on real income [is] consistently positive and significant over time.” See this paper as well. Trade barriers tend to increase the income gap between rich and poor countries. The chart below (from this link) compares real GDP per capita from the top third and bottom third of the distribution of countries on a measure of trade “openness”. Converting logs to levels, the top third has more than twice the average real GDP per capita of the bottom third. And of course, the averaging process mutes differences between very open and very closed trade policies.

The chart also shows that countries more “open” to trade have more equal distributions of income, as measured by their Gini coefficients.

An important qualification is that domestic production of certain goods and services might be critical to national security. We must be willing to tolerate some inefficiencies in that case. It would be foolish to depend on a hostile nation for those supplies, despite any comparative advantage they might possess. It’s reasonable to expect such a list of critical goods and services to evolve with technological developments and changing security threats. However, merely acknowledging this justification leaves the door open for excessively broad interpretations of “critical goods”, especially in times of crisis.

Setting a Good Policy and Example

Here’s an attempt to summarize:

  • Tariffs are taxes, and non-tariff barriers inflict costs by distorting prices or diminishing choice
  • Trade barriers reduce economic efficiency and produce welfare losses
  • Trade barriers deny the citizens of a country the benefits of specialization
  • Both countries gain when one trading partner eliminates tariffs on imports from the other
  • The demand for imports is fairly inelastic, at least in the short run. Thus, the gain from eliminating a tariff will be skewed toward the domestic importers
  • Both countries gain when they agree to eliminate any and all trade barriers
  • Across countries, trade barriers are associated with lower incomes, lower income growth, and more unequal distributions of income

The U.S. has a large number of trading partners. Every liberalization we initiate means a welfare gain for us and one trading partner, who would do well to follow our example and reciprocate in full. Not doing so foregoes welfare gains and leads to incremental losses in income relative to more trade-friendly nations. Across all of our trading relationships, a unilateral end to U.S. trade barriers would almost certainly convince some countries to reciprocate. Those that refuse would suffer. Let them self-flagulate. Let them tax themselves.