Colin Grabow responds to Oren Cass’s error-laden recent essay in the Wall Street Journal. A slice:
But even if US manufacturing was in poor health, Cass’s prescription of increased tariffs is an odd elixir. As with many US industries, imported inputs play an important role in allowing manufacturers to keep costs down and stay competitive. Raising tariffs, and thus the cost of inputs purchased from abroad will only undermine the ability of US manufacturers to compete in the global marketplace.
After all, we’ve been down this road before. In 2020 economists Kadee Russ and Lydia Cox calculated that the increased cost of steel and aluminum—an important input for numerous manufacturers including automakers and machinery producers—due to tariffs imposed by President Trump led to approximately 75,000 fewer jobs in manufacturing. Notably, that figure does not count additional losses suffered by US exporters resulting from retaliatory tariffs imposed by other countries on US exports.
Oren Cass’s “Why Trump Is Right About Tariffs” (Review, Oct. 28) errs most fundamentally by assuming higher tariffs can—costs and corruption notwithstanding—reduce the U.S. trade deficit. Leaving aside whether said deficit is actually an economic problem (it isn’t), reams of evidence show that tariffs don’t offer a solution.
For example, a 2017 Peterson Institute examination of 183 countries found that those with higher tariffs tended to have larger trade deficits. The U.S. International Trade Commission, also in 2017, calculated that a 10% increase in U.S. tariffs would cause a small long-run increase in the trade deficit. And despite President Trump’s tariffs, the U.S. trade deficit in goods was a smidgen higher during his tenure (averaging 4.2% of GDP) than during President Obama’s last year in office (4%).
National trade balances are driven by macroeconomic forces—primarily national savings and investment patterns—that are immune to changes in trade policy. Without altering these, higher tariffs that reduce imports will also reduce exports, thanks to a stronger U.S. dollar, higher input costs and foreign retaliation. National welfare declines, but the trade deficit doesn’t.
Scott Lincicome
General Economics and Cato Institute
Raleigh, N.C.
David Henderson explains why industrial policy fails. Two slices:
There are two problems with industrial policy: information and incentives. Government officials don’t have, and can’t have, the information they need to carry out an industrial policy that creates benefits that exceed costs. Also, they don’t have the right incentives. If they spend literally billions of dollars of government revenue on buttressing an industry and the industry fails, they don’t suffer any personal wealth loss and don’t even lose their jobs. The only cost to them as individuals is their prorated share of tax revenues, which will typically be no more than a few hundred dollars. So what ends up happening is that subsidies and preferential treatment are given to the politically powerful, which reduces the amount of capital available for unsubsidized entrepreneurs and innovators.
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But there’s a still a large information problem. It’s true that even the best entrepreneurs make mistakes. But they have a good sense of what to look for. Their ears are to the ground in a way that a government official’s are not. And making the information problem even more lopsided against the government official is the role of incentives. Watch any episode of Shark Tank and you’ll see that the entrepreneurs seeking funding almost always have a huge percentage of their own wealth at stake. And while the sharks’ wealth at risk in any given investment is a tiny percent of their overall wealth, especially for billionaire Mark Cuban, they really do want to, in the words of Kevin O’Leary, “make me money.”
The incentive issue matters in another way also. As the Kenny Rogers song “The Gambler” goes, you need to “know when to hold ’em” and “know when to fold ’em.” When entrepreneurs and venture capitalists have their own wealth at stake, they’re much more likely to fold, and much quicker at folding, a failing venture than government officials with little of their own wealth at stake.
Under the guise of responding to natural disasters, the White House is pushing Congress to approve $56 billion in additional borrowing to fund a wide range of nonemergency spending like broadband internet and humanitarian aid.
Less than half of the $56 billion requested by the Biden administration would be directed toward disaster relief—and only $9 billion would “address ongoing disaster response and recovery efforts,” according to a breakdown published by the White House. The majority of the new spending would be aimed at what the White House calls “critical domestic priorities” like welfare programs, the war on drugs, and government-funded broadband internet.
In other words: nonemergency line items that could—and should—be decided as part of the regular budget process, not as a supplemental funding bill.
