Gary North – December 14, 2018
Conservatives who defend tariffs as job-creating government interferences with the free market do not understand basic economic theory. They surely do not understand the consequences of taxation.
President Trump’s recent imposition of tariffs, which are sales taxes on imported goods, has created some curious consequences. They are not curious for economists, but they are curious for defenders of tariffs, who do not have a clue as to the logic of economics. There are millions of these people.
Reason magazine offers some data-confirmed insights regarding the consequences of a specific group of tariffs: tariffs on aluminum imports.
Those 300 new jobs didn’t just spring up out of nowhere because the president said some magic words—they are the result of businesses shifting resources and strategies in an economic environment where imported aluminum has suddenly been subjected to a 10 percent tax increase. In other words, the trade-offs (in this case, the higher taxes) matter.
And the trade-offs are huge. Since the aluminum tariffs were imposed on June 1, American companies have paid about $690 million in tariffs to the federal government, according to data from The Trade Partnership, a pro-trade nonprofit, and Tariffs Hurt the Heartland, which is lobbying for Congress and the administration to remove those tariffs.
Do the math. That means those 300 jobs have cost about $2.3 million each.
This kind of logic makes no impact on people who defend the tariffs. They are as blind to the effects of government taxation as the supporters of President Obama were with respect to the effects of subsidies to industry after industry, especially the solar panel industry. Obama collected tax money from the general public in order to waste on companies that were not economically sustainable in the free market, and therefore needed subsidies from the federal government. Conservatives delighted when some of these companies went bankrupt. They saw this as part of some movement toward socialism in America. I had some fun with this myself. Back in 2012, I published this article: Obama’s Green Energy Stimulus: $1.6 Million Per New Job. I have reprinted it here.
Now the political shoe is on the other foot: the right foot. President Trump is pursuing policies that Adam Smith said would make a nation poorer back in 1776. The heart of Adam Smith’s intellectual revolution and his free-market economic analysis was his attack on tariffs. But big-government conservatives have rejected this logic ever since 1776. They have favored government intervention of many kinds. There is a tradition that began with Alexander Hamilton in 1791, which extended to Sen. Henry Clay in the 1830’s, which extended to Abraham Lincoln, which culminated in the Republicans increase in tariffs in the Smoot-Hawley tariff of 1930. The story is always the same: (1) the government collects taxes, (2) prices rise for the now-taxed imported goods, (3) prices rise for domestic production, and (4) consumers pay more. This receives the cheers of tariff-supporting mercantilists in the Hamilton – Clay – Lincoln – Hoover tradition.
The millions of voters who elected Trump because he promised to increase tariffs, which meant that he promised to raise American prices and decrease the wealth of consumers, have not changed their minds. They will vote for him again in 2020 if he decides to run. After all, he did what he promised with respect to tariffs. He hiked tariffs, which have led to tax revenues, higher prices, and restricted consumption.
There are no free lunches. This includes lunches at the federal commissary. Somebody pays for the free lunches enjoyed by those who eat lunch in the federal commissary. Mostly, the people eating lunch at the commissaries are CEOs and senior managers of companies in the industries benefited by decreased competition from abroad. Some of the people are employees of these companies, but they are not the ones who get the stock options, the raises, the bonuses, and the perks associated with senior management.
Services sectors are hit the hardest for several reasons. First, as the largest component of the U.S. economy, services are key inputs into the output of every U.S. sector. As manufacturing, agriculture and energy output decline, so too do services output and related jobs. Second, consumers reduce spending when they are hit by higher costs (of a new car, a new washing machine, etc.) and, for many, lost wages from unemployment. As a result, households pull back on spending; services like education, entertainment and even healthcare are on the front lines of the spending reduction impacts, with additional attendant job losses.
Finally, Table 3 shows that every U.S. state will experience a net job loss as a result of the tariffs and retaliation. California, Texas, and New York are heaviest , but there are large net employment losses in the states where the steel and aluminum sector s figure prominently: Illinois ( – 15,38 9), Indiana ( – 5,777), Michigan ( – 11,365), Ohio ( – 13,042), Pennsylvania ( – 14,084) and Wisconsin ( – 7,657).
As I have said for years, tariffs are the taxes that masochists delight in.
Conservatives never call tariffs “taxes.” They literally do not have a sufficient understanding of economic cause-and-effect that would enable them to understand that a tariff is a sales tax. They literally cannot follow the logic. They may read a critique of raising sales taxes, i.e., increase tariffs, but all they do in response is to say this. “Tariffs save American jobs. They are good for the economy. They are good for the nation.” These are impervious to the logic of economics. This is not a new phenomenon. It has been going on since 1776.