A tariff is a tax on imports. The tax is paid by the importer, with the cost passed along to the customer.
Historically,
if I have this right, less-developed nations (like the US in its first
century) imposed tariffs to increase the cost of imports. That makes
domestic products more competitive and helps the domestic economy grow.
In
Trump's case, I don't see how the US benefits by imposing tariffs --
other than revenue gain for the federal government. He doesn't seem to
say. I don't imagine he thinks making imports more expensive will make
anyone happy. The tariffs could eventually be good for domestic
employment -- something I never hear on CNN -- but certainly not before a
four-year term has expired.
I cannot imagine that such a benefit would
arise quickly. An improved employment picture will not begin to
emerge until the effects of tariff policy become clear. So far, the only
effect we've seen is a shocking increase in uncertainty.
As
a general statement, my tidy observation is that tariff policy is
mercantile economics, and certainly not modern economic thinking. That's
the reason Trump's econ seem so strange, so alien to us today.
It
has been said that Adam Smith and his 1776 book moved economic thought
away from the mercantile focus on accumulating gold and silver -- which
mercantilism tried to achieve by improving the balance of trade by means
of tariffs -- and moved economic thought to a focus on wealth being the
output produced and enjoyed by business activity and its customers.
Where Trump is taking our economy remains to be seen.
Domestic
inflation (for which labor unfailingly gets the blame) increases prices
of US products at home and abroad. Inflation prices us out of foreign
markets and is largely responsible for the US trade deficit. So if Trump
wants to improve the balance of trade, he will want to keep domestic
wage increases to a minimum, to keep US product prices down in foreign
markets.
Meanwhile, the Trump tariffs will increase the price of imports, and reduce the volume of imports that we in the US buy.
I
don't see how these policy outcomes will be beneficial to the US
economy or to US labor. The effect on US business, it is too soon to say.
And, again, the Trump tariffs will boost tax revenue to the federal
government, at our expense.
The problem with the Trump plan is that it is
at best only vaguely related to the central economic problem of our age
which is, in the words of the American economist Vladimir Simkhovitch, labor cannot support life.
The
trade deficit is certainly one problem. But it cannot be that
excessively high wages caused the inflation that priced US output out of
foreign markets. If wages were high enough to create our trade deficit,
we would all be thrilled with our paychecks. But that is surely not the
case.
I am not a fan of globalization. I believe we must learn to provide ourselves with full employment by our domestic policy. But tariffs on imports are not domestic policy. And the media is already talking "trade war".
As
I understand Trump's economic thinking, using tariffs to boost the
prices of imports will increase domestic purchases of domestic output.
But to the extent that we have been buying imports for the cost savings,
if the tariffs get us to buy American we will be paying higher prices
anyway. Because of the tariffs. Yes, we'll be buying American, but at
prices we avoided in pre-tariff days. Trump is not solving our economic problem.
If we are paying more,
without more income, then we will have to be buying less, or saving
less, or both. If we are buying less, demand is down and the economy
gets a little slower and unemployment tends to go up. Not a good
outcome.
Perhaps the tariff revenue will allow Trump to cut taxes
on wages, and boost take-home pay. Perhaps this boost will be enough to
offset the higher prices we are paying to buy domestic rather than
imports. Perhaps it will be enough to prevent a slowdown of the US
economy. Perhaps the shift toward more domestic purchasing will be
enough to boost the growth of our economy -- which to me seems a central
part of Trumpian economics. (But then, I always focus on growth. And
really, I have no idea what Trump is thinking.) Eventually, perhaps, the
resulting growth of domestic output will boost employment. Eventually, and perhaps.
Stagflation? Stagflation has been in the news
lately. Stagflation is inflation in a stagnant economy: inflation and
stagnation at the same time. Or, as the definitions describe it these
days: high inflation and high unemployment, at the same time.
This surprises me. Granted, inflation doesn't want to come down to 2 percent. But it did stabilize at 3 percent, as of June 2023.
That's not good enough for the Federal Reserve. They want 2 percent. I
think the economy changed during the Biden inflation, and the economy
now wants 3 percent. And in a battle with the economy, I don't think the
Fed can win. I've been concerned for a while now that by insisting on 2
percent, the Fed is slowing the economy enough to create a recession.
So
yeah, I guess, inflation is too high and I worry about unemployment
rising, so this sounds like stagflation. I don't see it as stagflation. I
see it as bad policy. If inflation comes down rapidly to the 3 percent
level and then stays there despite the Federal Reserve, I don't see that
as high inflation. I see it as a change in the economy. And as I see
things, it is the job of economists (and of hobbyists like me) to notice
changes and try to understand them. Try to understand the cause of the change.
If
the Fed wants to bring inflation down from a "natural" target of 3
percent to the Fed's target of 2 percent, the Fed needs first to
understand the problem the economy has with 2 percent.
Far as
I'm concerned, the Fed is scolding the economy for failing to behave as
the Fed wants. I don't think the Fed can win that battle. I think the
Fed should stop barreling forward, and start re-thinking its
understanding of the economy. But hey, that's just me.
With a
correct understanding of the economy, of the economic problem, the
Federal Reserve, together with Congress and the President, could easily
solve the economic problem. Easily. But I do not mean the inflation and
unemployment problem. For the economy, inflation and unemployment are
not problems. For the economy, they are solutions to the problem that
disturbs our economy.
Inflation and unemployment are problems for
people. In order to solve these problems, we have to give the economy
what it wants, so that it will stop creating inflation and unemployment.
But hey, that's just me.
Yes, stagflation has been in the news a lot, lately. I did a Google search for the word stagflation, set the "Tools: Any time" option to different time periods, and jotted down the estimated number of results:
| Start Date | End Date |
Results
|
|---|
| Jan 1, 2022 | Dec 31, 2022 | 53,300 |
| Jan 1, 2023 | Dec 31, 2023 | 58,600 |
| Jan 1, 2024 | Dec 31, 2024 | 289,300 |
| Mar 31, 2024 | Mar 31, 2025 | 1,710,300 |
The first three results are by year; the last is for the most recent 12-month period as of this writing.
Myself, I have not been predicting stagflation. I do see
stagflation as a likely result of the Trump tariffs, but not from
general economic conditions.
Yes, the tariffs. Tariffs increase
prices. Without a corresponding increase in the quantity of money, and
in wages, we will have to buy less simply because we don't have the
money. Yes, we could all borrow more and spend the borrowed funds and
then everything would be fine -- but not really. Private-sector debt is already so
high that the economy struggles to achieve even the bare minimum of
growth. Solving the tariff-cost problem by borrowing more is an unsatisfactory solution to a problem that should never have been created.
Too much of the money we spend goes to pay for the money
we spend, instead of to pay for the products we buy. Excessive debt, excessive
private-sector debt is the real, underlying problem. I think the Fed's
inflation target, the 2 percent target that maybe should now be 3
percent, I think that purposefully shooting for an inflation rate above
zero is the only thing that keeps our economy growing at all. And we
need that extra money in the economy every year because interest and
principal absorb so much of our disposable income.
Labor cannot afford to live because wages have not kept up with costs.
How did this happen? It happened because our reliance on credit tends
to increase until the economy gets in trouble. Interest, yeah, a
problem. But interest rates go up and down. Debt goes up and up, and
doesn't come down until it comes crashing down in a time of economic
crisis, as it did in 2008 and for much of the next decade.
By the way, debt
came down -- or actually, debt grew, but very slowly -- during the
Savings and Loan crisis from the mid-1980s to the mid-1990s. Slow
borrowing meant a slow increase in the Q of M, which would slow the
economy. So the Fed permitted an unusually large increase in the
quantity of M1 money, transaction money.
What happened was our
reliance on interest-free money increased while our reliance on borrowed
funds decreased. The net effect was a decrease in the cost of using
money. And that difference was enough to allow excellent economic growth
in the latter 1990s. It's simple. And as I said, it's easy. And by the
way, in the latter 1990s the federal deficit was briefly reduced to
nothing. We should do more of that, reducing our reliance on credit and
replacing that costly money with cash. With greenbacks. With income. To make it happen, policies need to change.
Or, you know, we can opt for primitive, mercantile policies like tariffs and stir up trouble with neighboring nations. It's your call.
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