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Bonus Quotation of the Day…

… is from pages 325-326 of the 1951 Augustus M. Kelly reissue of Frank Knight‘s 1935 collection, The Ethics of Competition; specifically, it’s from Knight’s December 1934 paper titled “Economic Theory and Nationalism” (footnote deleted):

Yet I must enroll myself among those who do not like the change from liberalism to nationalism, and who look with regret upon the passing of freedom as an ideal to be striven for, and to an important degree an actuality. There seems to be no room for doubt that commercialism, while it lasted, made for tolerance and humanity, and to a significant extent practised as well as preached the doctrine of “live and let live.” It encouraged friendliness and good humour, and the sense of a basic human equality, among men of divergent rank and station. This was surely true to a degree far beyond anything ever seen in any other type of culture. And this was in addition to its incomparable multiplication of the means necessary to a decent existence and the even more remarkable diffusion of these means among the masses.

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Some Links

The Editorial Board of the Wall Street Journal makes clear that Trump’s first-term steel tariffs hurt American consumers and producers. Two slices:

President Trump gave the economy another jolt of uncertainty on Monday when he signed executive orders imposing 25% tariffs on all steel and aluminum imports. His advisers say these tariffs are economically “strategic” rather than a bargaining chip for some other goal. Is the strategy to harm U.S. manufacturers and workers?

That’s what his first-term tariffs did, and it’s worth revisiting the damage of that blunder as he threatens to repeat it. In March 2018, Mr. Trump announced 25% tariffs on steel and 10% on aluminum under the pretext of protecting national security. Then, as now, most U.S. metal imports came from allies including Canada, Mexico, Europe, South Korea and Japan.

Mr. Trump said tariffs were needed to boost domestic steel and aluminum production. But U.S. production was already increasing amid a surge in capital investment unleashed by his deregulation and 2017 tax reform. U.S. steel capacity utilization climbed to 78.5% in March 2018 from 72.4% in December 2016.

The real goal of U.S. steel and aluminum companies that wanted the tariffs was to boost their bottom lines. Raising prices on foreign imports allowed them to charge more. The price was paid by U.S. secondary metal producers and downstream manufacturers.

…..

This is political rent-seeking at its most brazen, and it benefits the few at the expense of the many. None of this matters to Mr. Trump, whose dogmatic views on tariffs can’t be turned by evidence. But we thought our readers would like to know the rest of the story.

Nick Gillespie talks with Dartmouth’s great trade economist and economic historian, Doug Irwin, about Trump’s protectionism.

Eric Boehm explains that “trade wars that never happen still have costs.” A slice:

But tariffs that never materialize create costs too—and that’s something we know, in part, because of how Trump handled trade policy during his first term. Uncertainty created by Trump’s trade policies reduced aggregate U.S. investment by as much as $47 billion in 2018, according to a 2020 study in the Journal of Monetary Economics.

The authors of that paper wrote that “all measures suggest that uncertainty about trade policy has recently shot up to levels not seen since the 1970s.” They concluded that “both higher expected tariffs and increased uncertainty about future tariffs deters investment.”

Trump’s fans and allies try to justify his chaotic trade policies by arguing that the president is merely negotiating with other countries. That would make more sense if he wasn’t picking an unnecessary fight with two of America’s biggest trading partners, countries with which Trump literally negotiated a new trade deal during his first term.

Even so, there’s no negotiating with the reaction of the markets—which responded negatively to the tariff threats and now seem to be pricing in the uncertainty going forward.

GMU Econ alum Dan Mitchell offers lessons in Trade 101 for Trump and other protectionists.

Megan McArdle warns Trump supporters “not to develop their own variant of Trump derangement syndrome.” A slice:

For example, when Trump imposed tariffs on Canada, he claimed they were needed to halt the flows of fentanyl and illegal immigrants across our northern border. This seemed obviously a pretext to justify tariffs that he’s been promising for years, not because of security concerns, but because he thinks they’re good for the economy.

As pretexts go, this one is pretty thin. In fiscal 2024, Customs and Border Protection caught 23,721 people trying to illegally cross from Canada into the United States, just 1.5 percent of total apprehensions — and for comparison, in 2023, more than 30,000 undocumented migrants crossed in the other direction. Similarly, the Drug Enforcement Administration seized 43 pounds of fentanyl coming across our northern border, compared to 21,148 pounds coming from Mexico. Canada is simply not a significant contributor to our fentanyl problem.

Nonetheless, once Trump said it, the right wing on X became very, very invested in the idea that Canadian fentanyl was a major problem that needed a drastic solution. Suggest that tariffs were a solution in search of a problem, and you’d be mobbed by people who were sincerely outraged by an issue they’d never heard of three days ago.

Peter Earle warns that government officials aren’t trustworthy stewards of people’s assets.

Brian Albrecht concludes that “DeepSeek shows there’s no AI monopoly.” A slice:

“The best of all monopoly profits is a quiet life,” observed the late British economist and Nobel laureate Sir John Hicks. But there’s no quiet life in artificial intelligence.

When Chinese startup DeepSeek recently demonstrated it could train world-class AI models using a fraction of the computing resources required by industry leaders, it revealed something crucial about competition in AI: dominance is more fragile than markets and regulators believed. Through clever engineering, DeepSeek claims to have achieved performance rivaling top firms OpenAI and Anthropic. And it did so while reportedly spending just $5 million on compute—a rounding error compared with the budgets of leading AI labs.

This type of breakthrough challenges conventional antitrust wisdom, which sees in AI markets a system of already-entrenched monopolies. Despite their massive scale, even the AI companies that once appeared unassailable now find themselves racing to keep up with breakthroughs from unexpected directions.

Here’s some good news reported by the Editorial Board of the Wall Street Journal: “School choice revs up again in the states.” A slice:

The number of private school choice programs in the country grew to 81 from 65 from 2020-2024, according to the education nonprofit EdChoice. But only 33 states have choice programs, which means there are many more children and parents to liberate from lousy union schools.

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Quotation of the Day…

… is from page ix of Weiying Zhang’s 2024 book, Re-Understanding Entrepreneurship:

The entrepreneur is the key player in the market. However, entrepreneurship is totally absent from mainstream market economics. Neoclassical economics is a market theory without entrepreneurship. This misconception of the market distorts our understanding of the real market economy, leading to a theory of market failure that forms the common foundation of various government interventions. Once entrepreneurship in the market is correctly understood, so-called market failure is nothing but a failure of market theory, and the foundation of government intervention is undermined.

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Lighthizer Continues to Deeply Misunderstand Trade

Although laid low with a wicked flu now for a week, I nevertheless know that I’ll be unable to sleep without writing some response to Robert Lighthizer’s lastest tendentious apology for protectionism. There’s much, much more to say in response, as his essay is stuffed with both factual and analytical howlers.

Editor, New York Times
620 Eighth Avenue
New York, NY 10018

Editor:

Conceptual problems galore infect Robert Lighthizer’s case that U.S. trade deficits are a problem in need of solution (“Want Free Trade? May I Introduce You to the Tariff.” Feb. 10). Not the least of these problems is evident when he writes that “in the last 20 years, we have transferred some $20 trillion of our wealth (in the form of equity in our companies, debt and real estate) to the governments and citizens” of foreign countries.

Mr. Lighthizer here does single-entry bookkeeping. When foreigners acquire dollar-denominated assets from Americans, Americans acquire valuable goods, services, or assets in return. Because each and every one of these exchanges is voluntary, every American party to these exchanges believed himself or herself to be made better off as a result. Who is Mr. Lighthizer to second-guess these decisions made by fellow Americans regarding their own property?

The voluntary nature of these exchanges creates a powerful presumption that they’re in no need of being ‘corrected’ by protectionist interventions. Yet this presumption is only further strengthened by the data. In the third quarter of 2024, the real net worth of the average American household was, at $1,207,509, 55 percent greater than was the real net worth in 2004.*

If Mr. Lighthizer’s implication about U.S. trade deficits were correct, American households over the past 20 years would have suffered declining net worth. But in fact the opposite occurred – testifying that the foreign investments in the U.S. that generate U.S. trade deficits not only make the American economy more productive, but Americans themselves more prosperous.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Data on nominal household net worth are available here; I converted the 2004 dollars into 2024 dollars using this GDP deflator calculator. I then adjusted for the rise in the number of households by using these data.

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Some Links

The Economist offers an explanation of “why Donald Trump’s protectionist zeal has only grown.” Two slices:

Donald trump’s supporters celebrate him as a man who says what he means and means what he says. The trade crisis he ignited over the past week has provided more proof, if any was needed, that this reputation is undeserved. Yes, Mr Trump has been clear that he loves tariffs, but he is vague and even misleading about what this ardour means in practice. That has made for a remarkably chaotic start to his new administration, with businesses, investors and other governments all trying to figure out exactly what he wants—and most now bracing for more turbulence.

Not once in the lead-up to the election did he mention the possibility of tariffs aimed at both Canada and Mexico, America’s biggest trading partners. Yet his first move on trade after taking office was to announce hefty levies on the pair, threatening to blow up a North American pact renegotiated in his first term. As justification, he invoked an emergency on America’s borders from an influx of drugs and illegal migrants, only to then say that what really bothered him was America’s trade deficit. Meanwhile, his most radical campaign proposal—a universal tariff on imports—has, for now, been supplanted by talk of more targeted levies.

…..

Mr Trump’s new tariffs also arrived suddenly. In his first term he provided months-long notice to affected firms. This time, he announced the tariffs on February 1st, and importers were due to start paying the levies three days later. Mr Trump has also let it be known that he is far from done. He has said that he will “absolutely” implement tariffs on the European Union and has pledged to slap levies of as much as 100% on Taiwanese semiconductors. “He has come right out of the starting gate, going after our close friends and allies,” says Douglas Irwin of Dartmouth College. “He is so much more brazen.”

A second lesson is that Mr Trump is a true believer in tariffs, seeing them as a singularly effective tool for achieving multiple objectives. This is why there are so many different interpretations of his philosophy: they can all apply at different times. Mr Trump unquestionably views tariffs as leverage, and is not wrong that America, the world’s largest importer, has an advantage in any trade war. Consider the country’s relationship with its neighbours. Exports to America are worth roughly 20% of Canadian GDP and 30% of Mexican GDP. By contrast, American exports to Canada and Mexico combined are worth just 3% or so of American GDP.

Mr Trump believes that tariffs can be a large revenue source, too, helping wean America off income tax. Never mind that any reasonable estimate shows they would pay for only a fraction of federal spending. Mr Trump also thinks tariffs will prompt a manufacturing renaissance—another idea scoffed at by economists since tariffs raise input costs and shield inefficient producers. Mr Trump’s belief in tariffs can thus be said to be overdetermined.

Omar Barbiero and Hillary Stein examine the likely unhappy effects of Trump’s tariffs on prices.

Kristian Niemietz explains what should not – but, alas, what nevertheless today does – require explanation: “You cannot tariff yourself rich.” A slice:

The empirical evidence, of course, shows that a tariff is nothing like a tax on a foreign country. It is a tax on domestic consumers, because it does get passed on to them. But does it at least stimulate domestic industry?

Well, some industries, sure. But, as mentioned, it can only have that effect if it hits consumers where it hurts, thus making them poorer. These poorer consumers will now have to cut back on something else, so inevitably, some other industries will suffer. You cannot tariff yourself rich.

Phil Magness, at his Facebook page, is correct, at least insofar as protective non-national-security-related tariffs go:

There are no good arguments for tariffs, just as there are no good arguments for price controls.

They cause clear economic harm, they don’t achieve any of the things their supporters claim, and they are especially susceptible to special interest capture. There is no upside.

The Editorial Board of the Wall Street Journal looks at the latest U.S. jobs report. A slice:

The job losses in autos and chip-making are notable given the Biden Administration’s enormous subsidies. Mr. Biden claimed his force-fed electric-vehicle transition and industrial policy would create hundreds of thousands of auto jobs, but the job report dispels that fantasy.

The robust job growth in November and December may reflect the revival in animal spirits after Mr. Trump’s election as the threat of higher taxes and more regulation receded. But the slower growth in January is a warning to Mr. Trump to tread carefully on his tariff agenda.

Consumer confidence has recently slid amid worries about the tariff impact. The University of Michigan’s consumer survey for February showed inflation expectations for the next year increased to 4.3% from 3.3% in January. One risk is that businesses, especially manufacturers, will hold off investing and hiring amid continued uncertainty over tariffs.

Wall Street Journal columnist Mary Anastasia O’Grady separates fact from Trumpian fiction about the Panama Canal. Two slices:

Secretary of State Marco Rubio went on Fox last week to cite a “Hong Kong shipping vessel” in the Panama Canal as evidence that China is exercising “effective control” of the waterway. He was wrong on two fronts. First, the Panamanian-flagged ship belonged to a South Korean company. Second, the 47-year-old U.S.-Panama treaty governing “the permanent neutrality and operation” of the canal means ships from any country are allowed to use it.

Mr. Rubio knows this. He loudly denounced Cuba’s effort to sneak arms through the canal to North Korea in 2013. But ever since President Trump announced on Dec. 21 that he wants to tear up the treaty and reclaim the canal for Americans, fiction has ruled the U.S. narrative.

…..

China does present cyber threats to the canal, the ambassadors said. But such attacks “can be launched from anywhere in the world.” That’s why, “in the spirit of upholding the Neutrality Treaty,” the canal authority recently signed a cybersecurity agreement with U.S. Southern Command.

The antidote to China’s “creeping commercial expansion” in Panama, the ambassadors wrote, is greater “U.S. commercial interest and activity.” Instead, the Trump administration is making stuff up, swinging a big stick, and humiliating a friend. This is strengthening the anti-American left in the country. That’s not diplomacy. It’s insanity.

Andy Kessler is understandably bullish about the long-run economic consequences of AI. Here’s his conclusion:

As happened with operators, tellers, travel agents and so on, jobs lost are replaced by new and better-paying jobs in emerging industries. Every time. Yes, AI is now going after white-collar jobs with a vengeance, but that means freeing up capital to fund new technologies that don’t yet exist (laundry folding robots, please). McKinsey projects that “8 to 9 percent of 2030 labor demand will be in new types of occupations that have not existed before.” Eventually, AI will enable 25% and then 50% of productive but never-existed-before new jobs.

Arnold Kling continues to write importantly and wisely.

David Osborne reminds us that Trump’s pick for Labor secretary is a friend of Labor, not of workers.

Reason‘s Robert Poole offers sound advice on how to improve U.S. air-traffic control. A slice:

America’s air-traffic control system is decades behind those of Australia, Canada, Germany, Italy and the U.K. While these nations build safer, cheaper and more effective digital control towers that can be stationed off-site, the FAA continues to build the traditional towers of years past. While American control-tower staff share flight information with each other via paper flight strips, other countries use electronic flight strips with interactive displays and real-time data. Other providers subscribe to a global space-based surveillance system to track aircraft where there is no radar, such as over the oceans. The FAA doesn’t.

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Quotation of the Day…

… is from page viii of George Gilder’s Foreword to Rainer Zitelmann’s 2024 book, How Nations Escape Poverty:

The chief source of new wealth and growth is entrepreneurial disruption of incumbent wealth.

DBx: So few words; so much insight.

Progressives overlook this reality because they believe that wealth begets itself – that wealth is created by mysterious historical forces and grows more or less automatically. No human choices or genuine action are necessary.

Economic nationalists, in contrast, bemoan entrepreneurial disruption and believe that government can choose how to ‘optimally’ trade-off entrepreneurial disruption (and material wealth) for whatever goodies – more manufacturing jobs, more static communities, more stay-at-home moms, a more god-fearing populace, whatever – the particular economic nationalist in question happens to fancy the country needs more of.

Neither progressives nor economic nationalists have any idea of the complexity of the economy and economic forces that they lash out against.

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Oren Cass Preaches the Gospel of Intervention

I challenge Oren Cass to tell the world how the government agents he would empower to superintend and override market signals will get the detailed knowledge they must have in order to have any hope of success at improving human welfare.

Mr. Yascha Mounk

Mr. Mounk:

In his discussion with you (“Oren Cass on the Case for Tariffs,” February 8) Oren Cass says about the case for free markets that

it puts excess faith in markets to always deliver the best possible outcome, and defines that outcome almost entirely in terms of consumer welfare. We embraced this quite formal economic model that said the goal of markets is to let people consume as much as possible, and the less work you have to do in order to consume, the better. And the way we’re going to get that is to just get the government out of the way and let markets rip because markets always accomplish that.

This description reveals deep misunderstanding.

First, the case for free markets is emphatically not the straw-man insistence that they will “always deliver the best possible outcome.” Instead, it’s the recognition that markets over time generally deliver better outcomes than does government.

Second, the case for free markets isn’t grounded in “faith” but in facts and theory. Consult history: more-free economies deliver higher standards of living to their denizens than do less-free economies. And sound economic theory reveals the reasons why. We’ve a well-established and credible theory of how individuals, as producers and consumers, in free markets are both informed and incited by prices and other market signals to adjust their actions to the physical realities of resource scarcities and to the preferences expressed by their fellow human beings – adjustments that tend over time to produce more human satisfaction out of inherently scarce resources.

In contrast to those of us who Mr. Cass derisively dismisses as “market fundamentalists,” it is Mr. Cass and Co. who rest their policy recommendations on faith – faith that government officials can acquire the detailed knowledge they must possess to intervene productively, and faith that these officials will act in the public interest.

Scour all that Mr. Cass has written – and he’s written volumes – in search of even an attempt to explain how the politicians and bureaucrats who he would empower to superintend and override market signals will acquire the detailed knowledge necessary for his schemes to succeed. You’ll find nothing. Zero. It doesn’t even occur to him that there’s a ‘knowledge problem’ that must be addressed if the interventions he proposes are to have any hope of working. That government agents will improve on market processes is a proposition that he takes simply as a matter of faith. (Mr. Cass might respond that the economic theory of resource allocation is marred by this or that flaw, but at least we have a theory – one quite well-tested – of how markets allocate resources in welfare-enhancing ways. He, in contrast, has literally nothing along these lines other than, well, faith.)

As for Mr. Cass’s allegation that the case for free markets is about maximizing consumption and minimizing production, that, too, is a ridiculous straw man – but this letter is already too long.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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Some Links

Douglas Irwin recounts “the historic significance of Trump’s tariff actions.” A slice:

The McKinley and Fordney-McCumber tariffs were substantial additions to the already high existing tariffs. But their economic impact was much smaller because imports were a relatively small share of GDP. One of the biggest differences between a century ago and today is the growth of global supply chains and international production networks. These factors make trade, and particularly trade in intermediate goods and components, a much more significant part of the US economy today than in the distant past and tariffs a much greater disruption to the economy.

Max Boot – with whom I rarely agree – hits the nail squarely on the head when criticizing Trump’s use of tariff threats as an all-purpose tool. Two slices:

In short, the United States under Trump is acting a lot like China under President Xi Jinping. This is an unbecoming position for a liberal democracy that has long championed the rule of law and a rules-based international system. But, even assuming Trump has no moral qualms about imitating China’s bullying behavior, he should still have some practical misgivings. As noted in a 2023 report from the Center for Strategic and International Studies, China’s economic coercion is “not very effective.”

Most countries bullied by Beijing have turned against China and found alternative markets. In a Pew Research Center poll last year, 85 percent of Australians and 71 percent of South Koreans expressed unfavorable views of China. That is a massive turnaround from about a decade ago, before China launched trade wars against those countries. In 2015, Pew found that 57 percent of Australians and 61 percent of South Koreans had a favorable view of China.

…..

“Countries will get tired of this very quickly,” [Douglas] Irwin predicted, referring to Trump “constantly going up to the brink, threatening to impose tariffs, then going back, and returning to the brink again.” Such behavior, Irwin pointed out, “raises uncertainty for business, and business doesn’t like uncertainty.” Eventually companies will turn to other markets, and countries will turn to other trade partners. China is likely to be the beneficiary of Trump’s tariff tamper tantrums, which will convince many countries that the United States is no more reliable than Beijing as a trade partner.

Ryan Bourne and Marcos Falcone applaud the success of Javier Milei’s abolition of rent control.

Jack Butler wisely counsels that, to the extent that the swamp is cleared of its current creatures, let’s keep it cleared rather than stock with new and different creatures. A slice:

For the first time in decades, the Swamp could face a genuine threat, as I hoped just before Trump’s second presidency began. That threat could be not just from a hostile president, but from a resurgent legislature and even from a public that now realizes the extent to which the federal government is misusing taxpayer dollars and abusing its powers.

But with my hope came a concern: that some figures, claiming to speak for the people, or even for Trump himself, would look upon the Swamp and rather than see something that needed draining would just see a host of new tenants. They would argue that “Republicans have been insufficiently enthusiastic about making themselves comfortable in the Beltway” in their unwillingness to make peace with the engorged state there.

Jacob Sullum reports on the lawlessness of Trump’s attempt to end birthright citizenship.

John Phelan reflects on the change in economic policy that began in the late 1970s.

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Quotation of the Day…

is from page 11 of Johan Norberg’s excellent 2023 book, The Capitalist Manifesto:

It is always popular when someone promises us the world, bailouts and free stuff. But it just does not work. Still doesn’t. There are no free lunches, and wealth has to be created before it can be distributed. Sooner or later you always run out of other people’s money, as Thatcher put it, and if you print more then sooner or later you’ll ruin its value.

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Trade “Policy” as Thuggery

Here’s a letter to a first-time correspondent.

Mr. K__:

Thanks for your e-mail.

You allege that I “underestimate the value of President Trump’s tariff threats for getting pro-American concessions from foreigners.”

With respect, you misdiagnose the nature of – and underestimate the dangers of – such trade “policy.”

Forget that neither Canada nor Mexico really conceded much in exchange for Trump agreeing to postpone the tariffs. Forget that much of what Trump seeks from other governments as concessions are moves that would harm Americans. (For example, if the Canadian government takes steps to reduce Canada’s so-called “trade surplus” with the U.S., we’ll suffer as a result of having less capital than otherwise on our shores.) Forget that the on-again, off-again, Trump-will-put-them-on-again-at-his-whim use of tariffs creates uncertainty for investors here and abroad – uncertainty that, by discouraging investment, diminishes our industrial capacity. And forget that such bullying tactics weaken other government’s confidence in the trustworthiness of the U.S. government, thus lowering the probability of productive mutual cooperation on military and diplomatic fronts.

Instead focus on the fact that every time Trump threatens tariffs he uses as bargaining chips the wealth and opportunities of you and me and other ordinary Americans. How is this ethical?

Suppose you and I are neighbors who frequent a local restaurant. One day you take a dislike to one of the waiters. To get the waiter fired, you announce to the restaurant manager that, unless she fires the waiter, you’ll point a loaded gun at me and other restaurant patrons in order to prevent us from dining at the restaurant. The waiter gets fired. You “win.”

Do you deserve applause? Are you some sort of genius negotiator who should be commended for cleverly holding innocent people hostage to achieve an end that you have somehow divined should be achieved? No. You’re a thug, pure and simple.

Trump’s trade “policy” is thuggery, pure and simple. And it’s thuggery not only or even mainly against foreigners; it’s thuggery chiefly against Americans.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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