Tariffs impose a disadvantage on importers, raising a product’s domestic price above what is offered internationally. The added cost to businesses and consumers functions, effectively, as a subsidy for less efficient economic arrangements. Michael argues that foreign companies may not truly be more efficient producers, as they are often subsidized or protected by their own governments. But given the unknowable multitude of factors that go into prices, which Michael notes in his references to Hayek, it is impossible to disentangle the effects of foreign economic policies from real comparative advantages, and therefore impossible to correctly offset distortionary policies with tariffs.
(Regardless, the opportunity cost of preventing lower international prices for Americans is the same no matter the cause. Imagine if China did not subsidize manufacturing whatsoever, but was still able to make phones and footwear at a lower cost thanks to its staggering economies of scale. It would undercut U.S. manufacturers all the same, allowing us to shift labor and capital to more valuable uses. Protectionism draws those resources back into lower-value industries.)
By stifling access to foreign markets, tariffs reduce the competitive pressure that Michael says is essential to developing cheaper production methods. I agree that tariffs do not “abolish competition,” as domestic producers still must deal with one another. But just as dissolving the National League would not abolish competition in baseball, it would surely diminish it!
Markets do not become more competitive with less competition. Once insulated from global price pressures — which factor in all the efficiency discoveries that happen abroad — domestic companies have far less incentive to innovate or invest in cost-saving measures themselves. Consequently, their prices remain higher than what businesses and consumers would otherwise be free to pay.
This is not mere theory. Many industries in the United States today meet Michael’s qualifications for stable, predictable trade protection that long predates the current Trump administration: shipping and shipbuilding, steel and aluminum, sugar and lumber, food and apparel, light trucks and solar panels. In none of these industries have production costs fallen below what they are abroad. Hence, in none of these industries have domestic prices fallen below international levels. Americans pay significantly more in all cases, decades and even centuries into these protectionist experiments. Steadily coddled, our “infant industries” never grew up to fare for themselves.
The one example Michael cites of protectionism ultimately reducing prices is South Korea’s burgeoning manufacturing sector in the 1960s and 70s. Certain firms were undoubtedly boosted by industrial policy, but not through tariffs. That period of development was marked by export promotion after South Korea turned awayfrom its previous strategy of import substitution, which had failed to spark industrialization. The country succeeded by thrusting its manufacturers into global competition, not by shielding them from it. It was that competitive pressure that yielded greater productivity, innovation, and efficiency — the same competitive pressure that tariffs suppress.
Here’s the abstract of a new paper by Benjamin Jaros and Joshua Rauh:
This paper examines the revenue and migration impact of the 2026 California Billionaire Tax Act, a one-time 5 percent tax on the worldwide net worth of individuals exceeding $1 billion. Using data from the Forbes Billionaire List, news reports detailing the residential real estate holdings of California billionaires, and public announcements of billionaire departures from the state, we estimate the behavioral response and associated revenue loss to this new tax using several different methodologies. Even before accounting for reductions in other tax bases such as the income tax, we estimate that the Act will collect approximately $30 billion (range $28 to 36 billion), less than a third of the $100 billion projected by Galle et al. (2025). This range accounts for the publicly confirmed taxpayer migration that has already eliminated nearly 30 percent of the Act’s wealth tax base, applies a litigation-survival discount to the remaining base, and is validated by the wealth tax base elasticity literature. We estimate that California’s billionaires contribute $3.3–5.8 billion annually in state income taxes. The present value of permanently lost income tax collections from departures more than offsets the one-time wealth tax revenue, yielding a net present value of negative $38.9 billion. Across 100,000 simulated revenue and discount rate combinations, 85 percent of plausible outcomes produce a negative net present value of state revenues.
Isabella Weber of the University of Massachusetts at Amherst saw earlier than many economists how politically toxic unexpected inflation could be. Her new book, “Anti-Fascist Economics,” even argues that this political combustion helped Trump specifically and boosted “the extreme right around the world.”
The fact that Trump himself is now underwater on the cost of living suggests it is incumbents presiding over inflation who face the backlash. But let’s grant Weber’s premise. If high inflation breeds authoritarianism, understanding what causes it becomes a democratic imperative. This is where her book is unconvincing.
She starts with a half-truth. Pandemic shutdowns snarled supply chains, Russia’s invasion of Ukraine drove up food and energy costs, and the Iran conflict delivered another oil price spike recently. Negative supply shocks in these “systemically significant sectors,” she writes, raise prices of basics, hitting the poor hard and making production more difficult, thereby raising aggregate inflation.
The difficulty begins when Weber turns this partial mechanism into a general theory. These transitory cost shocks, she argues, gave firms the “perfect opportunity” to raise prices beyond their now-higher costs. Executives’ boasts about “pricing power” prove it — in Weber’s telling, profit-seeking sellers exploited the very real shocks to raise inflation yet higher.
Most economists doubt this theory. If firms could profitably raise prices at will, why await a cost shock? Why would competitors and entrants not undercut firms raising prices above the fundamentals? And where did customers find the money to pay all these higher prices? If gas stations gouge consumers while household spending power is fixed, families have less money left to spend at restaurants or furniture stores. One price — gas — rises, but it is offset by demand and price pressure falling elsewhere. Broad inflation can persist without collapsing sales only when aggregate spending rises, too.
That theory alludes to a simpler explanation for inflation. Between February 2020 and March 2022, the money supply grew by $6.2 trillion. Washington ran huge budget deficits while the Federal Reserve held rates near zero and bought trillions in assets. By mid-2022, all this stimulus meant nominal gross domestic product — total dollar spending — was growing at 10 percent a year, instead of its pre-pandemic trend of 4 percent per year. This excess demand, not greed, was the underlying cause of price increases.
Explaining high prices and profits doesn’t require tacit collusion by firms. Overseas shocks shifted demand toward American substitutes, raising their prices; the broader spending boom allowed other prices to rise across industries, given that more money was chasing goods and services. Because retail prices adjust faster than costs fixed by contract, such as wages or existing inventory, profit margins widened temporarily in many sectors.
Yet Weber credits all the stimulus for the rapid recovery while largely absolving it of the ensuing inflation. The same dollars, apparently, could stimulate production but not prices — a convenient distinction for which the book supplies no explanation.
This diagnosis affects Weber’s analysis of the options the United States had in dealing with inflation. In her telling, economists on “Team Wait-and-See” correctly anticipated that supply chains would heal without monetary tightening but were too indifferent to near-term suffering. “Team Austerity” would raise interest rates, causing unemployment to bring inflation down. Her alternative — price caps, commodity reserves, antitrust and public provision — would “target the specific prices that drive inflation,” until supply recovered. One camp is callous, another cruel and hers, conveniently, humane and “anti-fascist.”
Alex Tabarrok busts the myth – a myth embraced by, among others, Paul Krugman – that data centers are crowding out other, better investments. Here’s his conclusion:
Bottom line is that I think a more plausible story is that two things are happening at once: tariffs, uncertainty, and other forces including the fading of Biden-era CHIPS and IRA subsidies have weakened investment outside AI-tech. The AI boom in contrast has supported overall investment. In other words, rather than datacenters and AI investment “crowding out” other investment, my interpretation is that AI investment is a bright spot in what would otherwise be a more negative economy.
Daniel Hannan decries the intense risk-aversion today of so many of his fellow Brits.
GMU Econ alum Stephen C. Miller ponders AI and higher education.
