Economic Ignorance 101

by Don Boudreaux on September 29, 2019

in Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to the Washington Post:

Editor:

President Trump and his supporters continue to offer evidence of their utter ignorance about international trade. A recent example is supplied by your columnist Henry Olsen writing in support of Sen. Tom Cotton’s proposal for the government to rebate tariff revenues to taxpayers (“How Tom Cotton could completely change the politics of tariffs,” Sept. 28).

Mr. Olsen commits many errors, including when he writes that “Economically, giving the revenue back to average Americans offsets the expected rise in prices they will face as a result of the tariffs. Consumer spending, which was feared would decline in response to the price hikes, would now likely stay high: Why cut back in spending when you’re not losing any money? That would keep the economy strong.”

As every first-year economics student learns, the amount of spending power lost by consumers as a result of protective tariffs exceeds whatever tariff revenues are reaped by the government. So Mr. Olsen is simply wrong to declare that Sen. Cotton’s scheme would result in consumers “not losing any money.”

That the wealth of the domestic economy is necessarily reduced by protective tariffs is confirmed by the fact that the very purpose of these tariffs is to artificially increase the amounts of resources that domestic citizens must sacrifice to acquire any given quantity of protected goods and services. For any quantity of protected goods and services acquired, therefore, protective tariffs artificially reduce the amounts of resources available to domestic citizens for the acquisition of other goods and services.

In short, protective tariffs make domestic citizens as a group poorer because such tariffs reduce the amounts of real good and services they acquire in exchange for their work effort and other resources. Regardless of the size of government ‘tariff rebates,’ they cannot possibly unshrink a tariff-shrunken economic pie.

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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