The Editorial Board of the Wall Street Journal decries the cronyism of Trump’s protectionism. Three slices:
Tariffs are advertised in the name of helping American workers, but what do you know? They turn out to favor the powerful and politically connected. That’s the main message of President Trump’s decision to exempt smartphones and assorted electronic goods from his most onerous tariffs.
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The Trump exemptions carry several lessons that vindicate tariff critics. One is a rebuttal of the fantasy pitched by Commerce Secretary Howard Lutnick to CBS News that an “army of millions and millions of human beings screwing in little, little screws to make iPhones, that kind of thing is going to come to America” and be automated.
Guess not. As CEOs and these columns have argued, there aren’t nearly enough American workers who could do that work. And even if there were, most of the economic value-added doesn’t come from final-stage assembly. It comes from design and higher-end component supply. It is no credit to the Trump Administration to have a Commerce secretary who knows so little about modern commerce.
The exemptions also expose the fiction that foreign exporters pay the bulk of tariff costs. If that were true, China would absorb the cost and U.S. consumers wouldn’t pay more. No exemptions would be needed. Mr. Trump wants the exemptions to avoid the political blame for rising prices on high-profile products
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All of this exposes the arbitrary political nature of tariffs. Some industries benefit but others don’t. Too bad if you make shoes, or clothing, or thousands of other consumer products that must pay the tariffs but lack the political or market clout to win exemptions. Too bad, too, if you’re a small manufacturer that relies on a component from China but can’t afford a high-priced K Street lobbyist.
Rich Lowry is right: “The level of incoherence in the Commerce secretary’s [Howard Lutnick’s] case for Trump’s tariffs has been off the charts.” A slice:
It’s not just that Lutnick was out there saying after liberation day, “I don’t think there’s any chance that President Trump’s going to back off his tariffs” (it’s not his fault he didn’t have any idea what Trump was going to do); his substantive case for the tariffs has been scattershot and unmoored from reality or any rational economic theory.
Your reaction to what a government official says in public might be, “Well, that’s reassuring,” or, “He can’t possibly believe that,” or, “Oh, no — that’s crazy.”
With Lutnick, the most appropriate reaction very often is, “Huh?”
Trump’s trade math ignores exports from the sector that contributes nearly 80 percent of U.S. GDP.
Faisal Saeed Al Mutar is correct: “Tariffs failed in the Middle East—America shouldn’t make the same mistake.” A slice:
Take Egypt: In 2016, facing fiscal pressure and public dissatisfaction, the government raised tariffs on hundreds of imported goods—everything from electronics to household furniture. The stated goal was to protect domestic industries and reduce reliance on foreign goods. The outcome? Inflation soared, local industries remained stagnant, and Egyptian consumers were left paying more for lower-quality products. The government hoped tariffs would nurture innovation; instead, they strangled competition and punished ordinary people.
Kevin Clark’s letter in yesterday’s Wall Street Journal is spot-on:
Regarding your editorial “Trump and His ‘Little Disturbance’” (April 4): People who worked with Steve Jobs described him as having his own personal “reality distortion field” by which he could convince people to see things his way. President Trump apparently has the same power. The difference is that Jobs used his to produce the iPhone while the president is using his to wreck the economy.
My GMU Econ colleague Vincent Geloso explains that “Protectionism is an economic poison, and its lingering side effects weaken the economic body over time.” A slice:
But protectionism — the broader policy goal tariffs are meant to serve — does produce a trend shock by slowing long-run growth. This is because protectionism functions like a disease on institutions, undermining their effectiveness over time.
Industries seeking protection have reasons to do so – they profit even if the wider society is made poorer. They must, however, overcome two problems. The first one is to successfully organize politically to lobby for protection. Members of the industry are not always perfectly aligned and may disagree. They also have to expend considerable fixed costs to set up the lobbying operations and develop contacts with politicians and their staff.
The second is that they must be able to find politicians who will act on their behalf – in exchange for some political rewards (or outright bribes). This process, developed by Anne Krueger and Gordon Tullock and known as rent-seeking, is essentially one where resources are expended to lobby to redistribute wealth without creating any. In fact, there is a net loss in the process.
My intrepid Mercatus Center colleague, Veronique de Rugy, suggests three sound reforms to simply America’s messy tax code. A slice:
To illustrate all of this, my colleague Jack Salmon and I produced a website that categorizes America’s 170-plus tax expenditures. There are those we would keep, those we would eliminate, and those that may be too politically hard to eliminate, for which we offer reform ideas.
You’d be stunned by how much revenue can be found to offset Trump’s tax cuts and other popular spending programs. For instance, as the Cato Institute’s Adam Michel has noted, ending just two Inflation Reduction Act tax breaks—the production tax credit and the investment tax credit, both given to special interests with low return on investment—could pay for all of the best tax cuts.
Here’s GMU Econ alum Dominic Pino on Vernon Smith on Joseph Stiglitz. A slice:
Smith writes that Stiglitz basically critiques markets for falling short of the abstractions used in economics textbooks. Perfect price competition is a theoretical construct based on a series of unrealistic assumptions. One is that buyers and sellers all have perfect information about the market. “Because information is in fact asymmetric and imperfect,” Smith writes, Stiglitz finds that “market economies have failed everywhere, the evidence for which he searches, and finds, by these interpretations.”
This is a sort of circular reasoning whereby economists create a model based on intentionally unrealistic assumptions, then critique reality for not fitting the model. Smith is one of the top economists who, starting in the 1960s, pioneered a different approach. He began to run experiments with volunteers that simulated markets.
When these experiments began, economists expected them to find that markets wouldn’t clear very well, for precisely the reason Stiglitz suggests: the volunteers were real-life people who didn’t have perfect information. But the experiments found exactly the opposite. As Smith writes, “The assumption of complete information and any of its variants with asymmetric information was not necessary because people in the experiments were able to discover equilibrium prices by trial and error while possessing only private dispersed information.”
Then, Smith ran experiments comparing people with complete information with people with incomplete information, and he found that the people with incomplete information got to the market equilibrium faster “because people in the market could identify better outcomes for themselves than their respective imputations in competitive equilibrium outcomes.”
