Tariffs. What libertarian Economists don't grasp and more.

This is going to be long.

Economists are abandoning some of their most basic analytic principles. In particular, Libertarian Economists often quoted here. Some of which praise, with enthusiasm, carbon taxes. Taxing carbon would make many things more expensive for consumers, but economists embrace it as an elegant way to reduce emissions.

Their first mistake is to consider only the costs of tariffs, and not the benefits. The basic premise is that domestic production has value beyond what market prices reflect and they ignore it.

They believe that manufacturing does not matter in the scheme of things. As the fallout from globalization has illustrated, manufacturing does matter. It matters for national security, ensuring both the resilience of supply chains and the capacity of the defense-industrial base. It also matters for growth.

Manufacturing drives innovation. As the McKinsey Global Institute has noted, the manufacturing sector plays an outsize role in private research spending. When manufacturing heads offshore, entire supply chains and engineering know-how follow. The tight feedback loop between design and production, necessary to improvements in both, favors firms and workers positioned near the factory floor and near competitors, suppliers, and customers.

Production in the physical economy, whether manufacturing or agriculture or resource extraction, also has an outsize effect on economy-wide productivity growth. It anchors local economies in a way that personal services cannot. It preserves economic balance, so that trade is genuinely trade, instead of a lopsided exchange of cheap goods for financial assets.

One of the sources used over and over here is a report by the Tax Foundation in 2018. Another is from the University of Michigan economist Justin Wolfers. According to Wolfers, “Trump raised the tariff on washing machines by about 9%-pts and the price of laundry equipment rose by about 9%,” demonstrating that the tariff “was an impressively destructive policy.” Neither address the whole picture. They stop short of it.

When economist take a look at the whole picture, that changes drastically. Researchers at UCLA studying tariffs imposed on China in 2018 estimated that higher import prices were costing the U.S. economy $51 billion annually. But with a “general equilibrium” model that attempted to account for the economy’s response, that estimate fell by 85 percent and became statistically indistinguishable from zero. “We find substantial redistribution from buyers of foreign goods to U.S. producers and the government,” they concluded, “but a small net effect for the U.S. economy as a whole.”

Let's go back to the washers and dryers. Some posters on the PT used them as an example of the horror of tariffs. They used 2018 data from places that are not pro tariffs who happened to leave out data from 2019. Why? Maybe it's because in 2019, the higher prices completely vanish.

Now why would that happen? Go back to the very beginning of this thread. Read it again. Samsung and LG brought U.S.-based factories online after the tariffs took effect, expanding domestic supply. The same thing happened when the Reagan administration negotiated import quotas on Japanese automobiles. The built plants in the south and prices dropped.

Matt Yglesias (look him up) stated that tariff revenue simply disappears. “If a million people each pay $5 extra in tariffs to save one factory job, that’s $5 million per job,” and the Tax Foundation echoed that line of thought.

If 1 million consumers each pay a $5 tariff, $5 million has not been set on fire—it has moved from their pockets to the U.S. Treasury. The nation is not necessarily any richer or poorer. Some other tax could be reduced by $5 million. The $5 million could be rebated to consumers. It could be invested in some other activity—say, building a new bridge—that might have benefits greater than the cost.

As the cases of laundry machines and Japanese cars underscore, when firms have incentives to invest in the United States, American workers prove every bit as capable as foreigners of producing efficiently and driving costs down. The standard anti-tariff narrative ignores all of this.

Nobel laureate Paul Samuelson argued aggressively for free trade. His book written in 1948 is still used today. Even he agreed that tariffs do work however. In “Beggar-Thy-Neighbor Policies,” he listed the many ways that policies like “protective tariffs” could help “create a favorable balance of trade.”


Oren Cass, conservative economist, is in part the source of some of this. I think he stated it best:

quote:

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Whether America should focus more on domestic or global prosperity, on the lowest possible prices or on long-term growth and industrial strength, are questions on which reasonable minds may differ. They are not, however, questions that economists can answer. In fact, they are precisely the sorts of questions best left to politicians and the voters who elect them.

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