Trump’s Tariffs—A Sad Realization

“Make America Great Again.” Americans’ visions as to what a “great America” would be vary “bigly.” In the interest of sorting out the variations in those visions, please forgive the following overstatement of the differences:

Some Americans envision a safe and caring place where everyone who happens to be here has equal access to all the goods and services the country produces; everyone has equal societal status and everyone is flourishing in becoming the person they dreamed of being; no one has to work too hard (or not at all if they did not want to work); and omniscient, benevolent, efficient, and effective government officials have unlimited authority to do good.

Other Americans envision a nation in a rough and tumble, dog eat dog world in which citizens have equal legal rights regardless of their race, religion, color, creed, or national origin, and equal opportunities to pursue happiness; and the nation is run by flawed, but constitutionally checked government officeholders who live up to their oaths to “preserve, protect, and defend” the Constitution as it was originally conceived—except for duly adopted amendments.[i]

Most Americans, however, envision an America with various combinations of milder versions of ideas from both extremes.

In rough approximation, many people projected onto Bernie Sanders the ideals of the first set of Americans described above, and other people projected onto Trump the ideals expressed in the second set. Because he had a long history as a senator, one could make some reasonable predictions as to what Bernie’s true political and economic beliefs and policy goals would be. What Trump’s true political and economic beliefs and policy prescriptions would be were (in possible contrast to what he said on the campaign trail because he thought his voting base wanted to hear those things) were a matter of speculation and credulity.

During the presidential campaign I would often ask Trump supporters a version of this question: How, given that 1) running a business is astoundingly different than running a government; and 2) Trump had no track record in public office to reveal what he believed, could anyone have any confidence that Trump has the beliefs he says he has or that he will know what economic policies would make America great again (or what his vision of a “great America” is). The answers I got were variations of the following theme:

Trump’s success in business shows that he is smart, a great leader, and good at identifying and recruiting talented people. With those characteristics he will surround himself with great people to advise him on issues outside his expertise and America will be great again before you know it.

When I followed up noting that there is little reason to believe that someone who has a nose for distinguishing between good and bad business people will also have a nose for distinguishing between good and bad government advisers with respect to issues about which he knows little (e.g., how would he discern the difference between a good economist and an economist who is willing to say whatever she must say in order to get a high level government job), I got either gibberish or crickets.

We now know much about Trump’s ability to pick advisers. The turnover rate for White House staff in the first year was 34%.[ii] That rate is both bad in absolute terms and is higher by far than the previous five presidents. Trump’s record at identifying the right people for government posts is spotty at best—though I would concede that he has picked some excellent policy advisers and judges.

All that would not be particularly important if, despite his hiring flubs, he was consistently getting great policy advice. March 1, 2018 was a sad day in American history on that count. On that day Trump revealed that he is either a consummate crony capitalist (read, “corrupt”), or he has a populist’s (read “clueless”) understanding of foreign trade and tariffs. [iii] That might not be so bad if trade policy was not so critical to a prosperous economy—and a prosperous economy was not so essential to middle and lower income wage growth, but it is—on both counts.[iv]

While scientific consensus is an oxymoron,[v] essentially every economist believes[vi] that free trade (as opposed to unfree trade, including “fair trade”) is the best policy. In other words, tariffs are bad for a country’s economy, jobs, and wage increases, regardless of the tariffs imposed by other countries on their imports.[vii] In short, tariffs do help the protected companies and their employees and investors, and the extra profit generated by those companies adds to the wealth of the nation. Typically politicians benefit politically when they impose tariffs. The sum of negative effects of tariffs on everyone in the country, however, is far greater than the sum of the positives that are created by tariffs.

The reasons why people, sadly those people include a few economists, were explained by Frederic Bastiat over 150 years ago:

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

When it comes to free trade most people only notice (“see”) the initial effect of jobs being saved in the protected industry. It appears that only economists are able to foresee the many more jobs that will never be created because of a tariff.

While I have already blogged about one of the most pernicious negative consequences of tariffs,[viii] the reasons why tariffs are net harmful to the country are too numerous and varied to survey here. To give you a glimpse, however, consider the following realities:

  1. A little under half of U.S. imports are raw materials or component parts of items manufactured in America. Higher costs attributable to more expensive materials and parts makes those manufacturers less competitive in the world market, and increases costs of goods to its customers.
  2. When U.S. consumers must pay more than is necessary for what they buy, they can afford to buy fewer things (i.e., their standard of living is less than it needs to be).
  3. Consumers buying less means U.S. retailers will make fewer sales, which means fewer jobs, which means slower wage growth.
  4. Foreign countries will retaliate by raising their tariffs or increasing their subsidies,[ix] which results in non-protected U.S. companies becoming even less competitive than they were before the tariffs were imposed due to higher costs and poorer customers.
  5. Once an administration reveals that it will grant companies that are sufficiently supplicant (read, “willing to help the president”), thereby making it harder for every other company in the country to profit and grow, it sends a signal to investors and business people that the future business environments is subject to sudden, unpredictable, and significant negative changes based on the unpredictable feelings of the president from day to day. This increase in the risk of the government doing things slows investment and business growth due to “Regime Uncertainty.”[x] The economy was booming as Trump took step after step that led people to believe that Trump was intent on making investing in America safer and more profitable. The imposition of tariffs signals to business people, “don’t be so sure of what the administration will do next.” That fact alone will cause investment and growth to be less than it otherwise would be.

We now have a clearer picture of Trump’s administration with respect to trade, and it is not a pretty picture. We can hope that with these new tariffs Trump has satisfied his urge to “do something about trade deficits” (which is another populist banality) and that all the other pro-business things he has done and will do (which are many and important) will offset a noticeable amount of the harm he has done by the imposition of tariffs. What we now know for sure, however, is that the economic engine will not be running on all cylinders so long as these tariffs remain.

[i] See, “Two Paths for America.”

[ii] See, “Trump Staff Turnover Hits 34%—a First Year Presidential Record.”

[iii] While I see no reason to believe that nothing given or promised to Trump by the aluminum and steel industries to get this deal, I do see a reason to believe that Trump thought it was in his personal best interest to get the publicity for having protected those industries from competition (it was a follow through on a campaign promise). That benefit alone put Trump in a conflict of interest that he exploited using other people’s money for his personal gain. On the other hand, there is little reason to believe that he is any less clueless than the average American about the net harm those tariffs will inflict on all Americans. He probably (mistakenly) believes the deal’s benefits to him personally were minuscule compared to the benefits he bestowed on America. If he were good at picking economic advisers, he could have avoided all of the negatives consequences of his tariffs.

Also see, “The Swamp Is Alive! It Is Alive!

[iv] See, “Tax Cuts and Employee Compensation.”

[v] See, “For Earth Day: Michael Crichton explains why there is “no such thing as consensus science””

[vi] See, “Economists Actually Agree on This: The Wisdom of Free Trade,” and “China threatens to retaliate against US metals tariffs.”

[vii] See, “2018 Economic Report of the President offers both insight and obfuscation on trade.”

[viii] See, “Tariffs Transfer Wealth From the Poor To The Rich.”

[ix] See, “The Latest: EU promises retaliation to Trump tariff plan.”

[x] See, In “Regime Uncertainty — Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War,” Robert Higgs noted: “the willingness of businesspeople to invest requires a sufficiently healthy state of “business confidence….”

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