Recently on this blog, I have been discussing debt, deficits, and inflation.  Not only is our national debt, at $36 trillion, much too high and growing very fast, with annual spending deficits in the range of $2 trillion, but deficit spending also tripped off inflation in 2021 which has, in turn, forced the Federal Reserve to raise short-term interest rates substantially, harming the economy.

The Trump Administration is addressing this problem well by setting up the Department of Government Efficiency (DOGE), headed by Elon Musk, to eliminate waste and inefficiency throughout the federal government.  Steady progress is being made.

Unfortunately, Trump is also imposing tariffs on other countries at breakneck speed. This is a bad idea for many reasons.  Consider:

• Global trade has made us richer.  Real wages are up 74% since the 1970s. In the 1950s, the typical American household spent more than a third of its income on food, clothing, gasoline and basic energy.  By the 1970s it was still more than a quarter.  By the 2000 aughts it was down to 13.5%.  Globalization is a large part of the story.
• Example. It pays $12 an hour to work in a T-shirt plant in South Carolina. It pays much more to work down the street at Amazon or Costco.  So why not purchase T-shirts from Guatemala where T-shirt manufacturing pays good wages?
• Manufacturing. The United States today is the second-largest manufacturing nation in the world. But we don’t have a lot of manufacturing workers because our workers are the most productive manufacturing workers in the world.  Since American manufacturing is dependent on open trade, it needs access to lower-cost raw materials and parts.
• Example: Canada. The U.S. Defense industrial base includes Canada.  To slap tariffs on stuff from Canada doesn’t make sense.
• Example: Mexico. https://humanprogress.org/scott-lincicome-an-update-on-the-trump-tariffs/ We get food from Mexico.  Does it make sense to tariff these imports and impoverish our own citizens?
• Example: China. Increased trade with China starting in 1999 caused about a million U.S.manufacturing jobs to be lost. But there were also jobs gained from lower import prices in manufacturing, jobs gained from services, and jobs gained from exports to China.
• Will tariffs raise a significant sum of revenue?  Imports make up $4 trillion toward our annual consumption of $25 trillion.  This means that tariffs will never be a broad-based consumption tax.  If tariffs are too high, there will be no imports at all.  Tariffs could bring in a maximum of $400 billion a year, whereas individual income taxes bring in $2.5 trillion a year.
• Recession? Trump’s on-and-off tariff strategy is causing much consternation around the world, especially with our democratic allies.  A recession could result, doing great damage.  A continued decrease in the consumer price index down to the desired level of 2% would be attractive if this can be accomplished without tripping off a full-blown recession.

Conclusion.  Tariffs should only be used sparingly to occasionally protect fragile domestic industries.  If Trump is going to use them as a bargaining tool, he must be very careful not to overplay his hand.  Otherwise, he will do much damage to global trade, greatly impoverishing the whole world, including the U.S.

For my Email Newsletter
Follow me on Facebook
Follow me on Twitter