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… is from page 122 of the 1992 collection of some of William Graham Sumner’s finest essays, On Liberty, Society, and Politics (Roger C. Bannister, ed.); specifically, this quotation is from Sumner’s brilliant January 1881 Princeton Review essay, “The Argument against Protective Taxes”:

The people of the United States can compete with anybody in getting wealth. The high wages are a proof of it; but they cannot compete with everybody else in every form of industry. They have only a limited number of laborers and a limited amount of capital. The same man cannot be doing two things at once. The same capital cannot be employed in two uses. Hence it will be wise and necessary to choose the most profitable of all the profitable employments which are possible. It will follow that we cannot afford to compete in any industry which will not pay here as well as those which have special advantages here. If we cannot compete, it is because we cannot afford to compete. We are too well off. We cannot compete with “foreign paupers,” just because we are not paupers.

DBx: Humankind will enjoy the riches promised by protectionists on the same day that some alchemist turns lead into gold and some wizard mathemetician offers irrefutable proof that circles feature 90-degree angles.

Of course it’s possible that trade restrictions can revive this particular industry, expand employment at that particular firm, raise the wages of those particular workers, and increase particular kinds of employment opportunities. It’s even (barely) within the realm of possibility that protectionism can elevate the level of human happiness within the nation. What protectionism cannot do is increase the abundance of material goods and services available to the people of the nation. Protectionism can only decrease this abundance.

The chief reason protectionism is destined to fail to deliver on its promises of raising the general material standard of living within the country is grounded in two facts. The first and most fundamental is that, as Sumner notes in the quotation above, resources are and will always be scarce; using a particular plot of land and a particular group of workers to produce steel today means that whatever else that might be of value to human beings that that land and those workers could have produced will not be produced. Too many protectionists write, talk, and tweet as if any and all expansions of domestic output made possible by protective measures are free – as if increased production of these additional outputs does not result in decreased production of other valuable outputs.

The second fact that dooms protectionism to failure is that no human being (or group of human beings) can have sufficient knowledge and information about how to allocate resources in ways that consistently produce better outcomes than – or, even, outcomes that are as good as – the outcomes generated on free markets. The knowledge and information that is created by the decentralized competition of private-property owners, and then which is transmitted continually throughout the economy in prices and other market signals, cannot, as a practical matter, ever be bested by government officials.

To trust government officials using protectionist measures to outperform the market at allocating resources is akin to allowing a thief to seize your car under the pretense that he knows better than you where and how to drive – and then, as the brute takes control of the steering wheel after shoving you into the passenger seat, blindfolds himself, gulps down a bottle of moonshine, and hits the accelerator hard.

Happy travels.

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A couple of days ago I posted at Cafe Hayek this letter to a former student of mine. I believe this letter to be basically correct, but I realized after talking yesterday to Phil Gramm about the relationship between protectionism and inflation that I overlooked an important fact – namely, as we Americans import less we also export less.

Think of the extreme case in which all imports are kept out. As a result, the prices of domestically produced import-competing products will rise. But the resources once devoted to producing goods and services for export will now be reallocated to producing goods and services exclusively for domestic consumption. Some of these resources will be reallocated into the production of import-competing products, thus moderating, although not eliminating, the rise in the prices of these products.

Now here’s what I overlooked: Other of these resources will be reallocated into the production of non-import-competing products. The increased supply of these products will push their prices lower. It’s possible that this increased domestic supply of non-import-competing goods and services will be large enough to cause the nominal prices of these goods and services to fall far enough to offset the higher prices of the import-competing goods.

If we had inflation measures that were God-like in accounting for changes in quality, those measures would unambiguously show that the elimination of imports caused a one-time increase in the price level. The economic welfare contained in the bundle of goods and services available to Americans would, as a result of the trade restrictions, be lower than was the economic welfare in the bundle of goods and services available with free trade. We Americans would, in short, get less economic welfare in exchange for each dollar that we spend.

But inflation measures are not close to being this perfect. They are reasonably good at measuring quantities, but not very good at measuring qualities. It’s quite possible that in the real world the inflation measures would detect and report no increase in the price level as a result even of a total exclusion of imports from our market.

Now consider an even more extreme case: The government not only cuts us off from all commerce with non-Americans but also arranges for us to produce only bags of gruel and bottles of water. Nothing else. Clearly, our economic welfare would be severely diminished. But with a constant supply of dollars – dollars that can be spent only on bags of gruel and bottles of water (because that’s all that’s produced and sold) – the nominal prices of gruel and of water would have to reflect the supply of money. If the demand for money doesn’t increase – and if there continues to be full employment of workers and resources – the result must (?) be a price level that’s unchanged from what it was before the government cut us off from global commerce and arranged for us to produce and purchase only gruel and water.

The bottom line is that economically destructive policies such as protectionism can inflict great inefficiencies on the economy and commit people to much economic deprivation without these consequences showing up as inflation.

…..

UPDATE: The problem with the example of output consisting only of gruel and water is that it is tripped up by the law of diminishing marginal utility: people simply wouldn’t buy the stuff beyond a certain point and, if the government really and effectively prohibited the production and sale of anything else, unemployment would arise and persist. Q would fall and P would correspondingly rise.

But I think that if the example is loosened to allow the production of whatever is possible to produce domestically – gruel, water, hamburger, beer, shoes, MAGA caps, golden statues for the Oval Office, and on and on – then the resulting quantity (as in MV≡PQ) would be unchanged from before the trade restriction, showing no increase in the price level.

Of course, again, if the inflation measure could accurately account for changes in quality, the price level would rise enormously as a result of such a trade restriction.

I especially thank David Henderson, Bob Higgs, Roger Koppl, Liya Palagashvili, and my intrepid Mercatus Center colleague, Veronique de Rugy for their feedback – and pushback.

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Scott Lincicome and Alfredo Carrillo Obregon explain that the “tariff ‘inclusion’ process comes with high costs, absurd outcomes, and extra cronyism.” A slice:

At 4:00 p.m. on Friday, August 15, the Trump administration quietly announced that imports of more than 400 additional products—valued at almost $210 billion in 2024—would be subject to “national security” tariffs on steel and aluminum. The action is disturbing for many reasons.

For starters, many of the listed items can’t plausibly be considered “steel products,” or “aluminum products,” or otherwise related to actual national security. As bad if not worse, the administration gave US importers of these goods less than 24 business hours’ notice before their products’ steel and aluminum content would be taxed at a 50 percent rate, with no leeway for products already en route to the United States or for US companies that don’t have said content (and why would they?). And the administration used a “tariff inclusion” process it instituted last February to invite any US company to request import protection under the guise of “national security,” thus encouraging a flood of such requests (and a lobbying bonanza) in response.

All in all, it’s yet another example of how US trade policy has gone off the rails during the second Trump term.

Also from Scott Lincicome is this excellent essay in the Washington Post in which he decries that which the likes of Elizabeth Warren, AOC, and Zohran Mamdani are undoubtedly, if silently, cheering: the Trump administration’s partial socialization of Intel. Two slices:

President Donald Trump’s announcement on Friday that the U.S. government will take a 10 percent stake in long-struggling Intel marks a dangerous turn in American industrial policy. Decades of market-oriented principles have been abandoned in favor of unprecedented government ownership of private enterprise.

…..

The most immediate risk is that Intel’s decisions will increasingly be driven by political rather than commercial considerations. With the U.S. government as its largest shareholder, Intel will face constant pressure to align corporate decisions with the goals of whatever political party is in power. Will Intel locate or continue facilities — such as its long-delayed “megafab” in Ohio — based on economic efficiency or government priorities? Will it hire and fire based on merit or political connections? Will research and development priorities reflect market demands or bureaucratic preferences? Will standard corporate finance decisions that are routinely (and mistakenly) pilloried in Washington, such as dividends or stock buybacks, suddenly become taboo?

These risks are already evident, and not just in historically underperforming government-owned enterprises such as Amtrak or the U.S. Postal Service. Intel chief executive Lip-Bu Tan agreed to the deal only after Trump demanded he resign over benign investments in China. Trump’s description of their Aug. 11 meeting says it all: “He walked in wanting to keep his job, and he ended up giving us $10 billion for the United States.”

Molly Ball reports that Trump’s partial socialization of Intel is being, not silently, but explicitly praised by at least one famous socialist: Bernie Sanders. A slice from Ball’s column:

The announcement last week that the government plans to take a 10% stake in the troubled U.S. chip maker Intel prompted an outpouring of criticism from voices on the right, who accuse the administration of nationalizing industry. “Today it’s Intel, tomorrow it could be any industry,” Sen. Rand Paul (R., Ky.) said Friday. “Socialism is literally government control of the means of production.”

That was music to the ears of Paul’s self-described socialist colleague, Sen. Bernie Sanders (I., Vt.), who praised the move that he said mirrored legislation he had proposed. “Taxpayers should not be providing billions of dollars in corporate welfare to large, profitable corporations like Intel without getting anything in return,” Sanders said Friday, urging the administration to go still further.

Under the deal announced Friday, the U.S. government will become Intel’s largest shareholder as nearly $9 billion in grants awarded to the company by the 2022 Chips Act are converted to equity. Commerce Secretary Howard Lutnick said Friday the agreement would “both grow our economy and help secure America’s technological edge.”

The Editorial Board of the Wall Street Journal reports on the damage that Trump’s tariffs punitive taxes on Americans’ purchases of imports and of import-competing products are having on the American manufacturer John Deere. A slice:

The farm equipment maker is an American manufacturer that Republicans say tariffs will help. Maybe not. The Moline, Ill., company is laying off 238 workers at three factories in Moline, East Moline, and Waterloo, Iowa, in the coming weeks.

This month the company reported a 26% drop in net income and 9% decline in sales, owing to lower commodity prices and higher tariffs. “Tariff costs in the quarter were approximately $200 million, which brings us to roughly $300 million in tariff expense year to date,” said director of investor relations Josh Beal.

Deere expects the pretax damage from tariffs to reach $600 million in the current fiscal year, up from a previous forecast of $500 million. The hits are coming from President Trump’s tariffs on India, the European Union and his 50% border tax on steel and aluminum. The costs hit Deere’s earnings and ultimately employment. What was that again about the New GOP and the working class?

This tariff damage isn’t surprising since many U.S. manufacturers rely to some extent on imports of components and raw materials. Caterpillar Inc., another great U.S. manufacturer, has said tariff-related costs could reach $1.5 billion in 2025, including as much as $500 million in the third quarter. Tariffs raise costs, and their uncertain implementation has customers of the equipment makers more cautious in their investments.

GMU Econ alum Caleb Petitt writes about NatCons’ – in particular, Oren Cass’s and Robert Lighthizer’s – incoherent accounts of manufacturing, trade, and trade deficits. A slice:

Apparently, no one at American Compass realized that the claims made in these two chapters were contradictory: one claiming the profit seeking has driven capital out of America, and the other claiming that America is oversaturated with capital from abroad. Whether capital is fleeing or flooding the country, the American Compass solution is barriers to trade.

America still has a robust manufacturing sector, has an incredible standard of living, and is a global hub for innovation. Americans are by and large thriving and living the American dream. That does not stop Cass and Lighthizer from peddling protectionism, even if the claims they make are contradictory.

Ken Girardin warns of the GOP’s new alliance with the Teamsters.

Writing at National Review, Phil Magness reviews George Selgin’s remarkable new book about the New Deal, False Dawn. Two slices:

George Selgin’s False Dawn: The New Deal and the Promise of Recovery, 1933–1947 attempts to make sense of these competing narratives by placing the New Deal under a microscope and asking whether it met its stated goal of economic recovery. Note that this objective was only one part of Roosevelt’s call for “relief, recovery, and reform,” although, as Selgin explains, it is the central question of the New Deal’s economic legacy. The other two objectives involve political values, whereas recovery can be measured empirically.

In taking up this charge, Selgin dives into a crowded academic literature that is largely pro-Roosevelt. In 2019, Senator Chuck Grassley (R., Iowa) sparked a firestorm in the history profession with a passing observation that the “New Deal in the 1930s didn’t work.” Several historians responded with indignation, proclaiming that there was a broad consensus over the alleged successes of Roosevelt’s recovery program. Few were more vocal in this assessment than Roosevelt biographer Eric Rauchway, a professor of history at the University of California, Davis. In a follow-up essay, Rauchway denounced claims about the New Deal’s failure as “myth,” “falsehood,” and an exercise in “bullsh**” uttered without regard for evidence or substance. Pointing to simple industrial-output data from the 1930s, Rauchway declared that “not only did the U.S. economy begin to grow during the New Deal; it grew rapidly.” Post hoc ergo propter hoc ensues, thus the New Deal simply must have been the cause of the recovery. Indeed, the only major fault Rauchway can bring himself to state about the New Deal is that it “should have been bigger, sooner,” thereby embracing the advice of John Maynard Keynes even more fully than Roosevelt is presumed to have done.

Selgin illustrates the folly of this narrative early on, though not by attacking it directly. Assessments by historians tend to speak of the New Deal as a cohesive whole — a sweeping economic vision, deftly enacted and with clear results. Selgin inverts this narrative by separating the New Deal into its component programs and asking how each, specifically, performed its stated objective of economic recovery in its respective domain.

Scalpel in hand, Selgin takes his reader through a chronological progression of programs and policies that we collectively know as the New Deal. An economic historian of money, he opens his inquiry with the banking crisis at the outset of Roosevelt’s term in 1933 — a suitable starting point, given that our best theories of the Depression’s origins pinpoint monetary mismanagement as the underlying mechanism. His study progresses through the Banking Act of 1933, the creation of federal deposit insurance, and Roosevelt’s decision to withdraw gold from private circulation. The New Deal’s famous “three letter” programs — the National Recovery Administration (NRA), the Agricultural Adjustment Act (AAA), and the Reconstruction Finance Corporation (RFC, which Roosevelt inherited from Herbert Hoover and greatly expanded) — are surveyed in depth next.

…..

In keeping with the book’s even tone, Selgin is charitable to the historians he engages. It is difficult to avoid the conclusion, though, that he has upended many long-standing conventions, and decisively so. Rauchway’s attempts to vindicate the New Deal’s economic performance come across as the amateur musings of a pundit when compared with the methodical analysis of False Dawn. In similar fashion, Rauchway’s portrayal of Roosevelt as a consistent economic theoretician, often operating in dialogue with Keynes, emerges as a battered wreck. The difference in both cases comes from Selgin’s stronger command of the underlying economic theory and greater attention to historical detail, even when they lead him to conclusions in tension with his own distinctively non-Keynesian outlook.

Nick Gillespie visits his ancestral homeland.

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… is from David Hume’s essay “Of Commerce” (here from page 263 of the 1985 Liberty Fund collection of some of Hume’s essays, edited by the late Eugene Miller, Essays: Moral, Political, and Literary) (original emphasis):

[R]easoning will let us see the advantage of foreign commerce, in augmenting the power of the state, as well as the riches and happiness of the subject. It encreases the stock of labour in the nation; and the sovereign may convert what share of it he finds necessary to the service of the public.

DBx: Because trade restrictions – even ones sincerely imposed exclusively for purposes of national security – reduce the wealth of the nation, the national-security exception to the case for free trade must be used prudently. Otherwise the resulting slowing of economic growth might well prove over time to be itself a danger to national security. Unfortunately, politics is a profession that encourages imprudence.

…..

Hume died on this date, August 25th, in 1776.

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Jeff Jacoby eloquently argues that “the convictions that count are the ones that sometimes sting.” A slice:

What makes this problem worse is the increasingly common belief that only those who agree with us are legitimate participants in American life. Too many on the right write off their opponents as anti-American, while too many on the left see theirs as irredeemably bigoted or authoritarian. If you begin from the premise that dissenters are not merely wrong but illegitimate, then there is no reason to extend to them the rights or freedoms you claim for yourself.

But that mind-set drains principle of all meaning. Defending free speech only for your allies is like championing religious liberty only for your own faith: That’s not upholding a principle — it’s wielding a partisan cudgel, something that has become endemic in contemporary American life. So much of what bedevils our civic discourse these days, Goldberg writes, begins with “the premise that America is defined by our politics and, therefore, the people with the wrong politics are not Americans.”

Reason‘s Eric Boehm reports on the new U.S.-E.U. trade deal – yet another of Trump’s deals that leaves us Americans worse off than we were before he announced his drastic hikes in tariffs punitive taxes on Americans’ purchases of imports and of import-competing products. A slice:

The framework of a much-anticipated trade deal between the United States and the European Union was made public on Thursday. The deal locks in the 15 percent tariffs that Trump has imposed on most European goods imported into the U.S., but it also serves as a promise from the Trump administration not to target European goods with product-specific tariffs that could be announced in the coming weeks or months—including potentially huge new tariffs on pharmaceuticals, something the White House has been teasing for months. The deal also creates a pathway for the United States to reduce its tariffs on European cars to the 15 percent threshold, once the E.U. reduces some of its own tariffs on American industrial goods.

The international-trade economist Richard Baldwin appropriately excoriates Trump’s trade ‘policy.’ (HT David Levey) Two slices:

America is running a bold economic experiment. Call it “Economic Trumpism.” Its simplicity is breathtaking:

• Step 1: Put tariffs on everything from everywhere.
• Step 2: Hope the economy thrives.

No elaborate industrial policy. No bothersome planning. None of that old-fashioned stuff. Just a big, beautiful tariff wall to shield America from rapacious foreign competition.

Best of all? According to the administration, it costs not a penny! Just the opposite: it shovels billions into the Treasury’s coffers.

Now you know why President Trump thinks “tariff” is the most beautiful word in the dictionary.

Why didn’t anyone think of this before? Oh wait — they did. Economic Trumpism is not new. It has been tried before. And it has failed before. Not in recent times, but in ways that are well-documented.

Today’s Factful Friday argues that we shouldn’t think about Trump’s tariffs in the usual way. For half a century, tariffs have been used to protect particular sectors. The Trump tariffs, by contrast, stifle foreign competition across the entire goods-producing sector of the American economy. That difference matters. Tariffs that try to protect all sectors should not be thought of in the same way as a tariff that is aimed at protecting one sector.

…..

That brings us back to 2025. Unlike the developing nations of the 1960s and 70s, the US is already a fully industrialised, high-income economy. It does not need to “force” industrialisation behind tariff walls. Quite the opposite: it relies on global supply chains, advanced services, and integrated capital markets. Walling off the entire goods-producing sector is not just unnecessary, it is counterproductive. Especially harmful is the way the US is raising the cost of imported inputs like steel and aluminum. I’d guess that the US is now the most expensive place on the planet to manfacture many types of goods. The US is in the process of hobbling its own factories, raising prices for its own consumers, and pushing investment and innovation offshore.

National Review‘s Dominic Pino masterfully reveals some of the hidden damage done by Trump’s tariffs. Two slices:

Tariffs are a particularly destructive form of taxation that distorts market efficiency, raises prices, and reduces output. As you’ve no doubt heard many times by this point in Donald “Tariff Man” Trump’s presidency, economic theory demonstrates each of these effects clearly.

But maybe you think economists don’t know what they’re talking about and all those supply-and-demand graphs are witchcraft. What nonmarket reasons are there to oppose tariffs?

For one, they feed the swamp. Tariffs are a full-employment program for Washington attorneys and lobbyists. Analysis of lobbying disclosure forms by Advancing American Freedom (AAF) found that spending on tariff lobbying surged from $1.3 million in the second quarter of last year to $8.8 million in the second quarter of this year. That’s on top of $4.9 million in spending on tariff lobbying in the first quarter of this year, suggesting that more people are realizing that lobbying can pay off.

The number of tariff-lobbying disclosures has more than tripled since last year, AAF found. The average value of a tariff-lobbying contract has more than doubled. Cha-ching for D.C. steakhouses.

Who can afford to pay lobbyists? The big businesses that are probably going to make it anyway. If politicians create a system where a business can potentially make a $10 million or $100 million tax expense go away by paying some lobbyists $400,000 to knock on officials’ doors, the businesses that can afford it will do so. That’s a bargain, if you have the money, and worth a try even if it has a low probability of success. If your tax expense is only $400,000 to begin with because you buy far less than larger companies do, lobbying wouldn’t help.

What does help is being politically connected to Trump. A 2025 paper in the Journal of Financial and Quantitative Analysis found that during Trump’s first term, companies that donated to Republicans were more likely to receive tariff exemptions. It also found that companies that hired revolving-door lobbyists who had worked in the first Trump administration were more likely to receive exemptions.

If you care about manufacturing, you should care about small businesses. Ninety-eight percent of manufacturing companies in the U.S. have fewer than 500 employees, according to the Small Business Administration. They employ 4.8 million workers and are concentrated in the Midwest. Many of them import inputs for domestic production.

…..

The emergency that Trump claims as justification for tariffs is the existence of the trade deficit. Never before in American history has a national emergency been declared over a national accounting statistic. Even if you think tariffs are great, this is not a good way to do them.

If national accounting statistics can be national emergencies that unlock presidential powers, future Democratic presidents are going to have a lot of fun writing executive orders to lower the Gini coefficient, a measure of income inequality. There’s plenty of economic research to back up claims that income inequality is harmful to the country (much of it is bunk, but it nonetheless exists) — far more than there is research that says the same about the trade deficit. A presidentially decreed wealth tax or inheritance tax could follow the model of Trump’s presidentially decreed import taxes.

Taxes also interact with other taxes, especially in the United States, where every citizen lives in more than one tax jurisdiction. The spring 2025 Fiscal Survey of States, a report by the National Association of State Budget Officers, noted that many states revised their revenue estimates downward for fiscal year 2026 in part as a result of Trump’s tariffs. Trying to predict exactly how the tariffs will affect state finances is basically guesswork, as the tariffs have changed so frequently and are at levels not seen in nearly 100 years. But they certainly aren’t going to help.

Slower economic growth hurts state revenue across the board. Tariffs can hurt state corporate-tax collections by reducing profits. They can hurt state income tax collections by reducing jobs or hindering wage growth. They can hurt sales tax collections by reducing consumption.

Arnold Kling is correct:

William Baumol did many good things as an economist. But “Baumol’s Cost Disease” is a too-clever name for a matter of basic arithmetic: when productivity increases faster than demand in an industry, prices fall. And when demand increases faster than productivity in another industry, prices rise. It is simple arithmetic of relative prices, not a “disease” and not a profound discovery.

In reporting on California’s government-created sky-high (and getting sky-higher) gasoline prices, Brittany Bernstein makes clear that even for Californians reality isn’t optional. A slice:

California gas prices could jump to $8 per gallon in 2026 thanks to the planned closure of two oil refineries in the state, according to an estimate by the University of Southern California.

Valero’s Benicia Refinery near San Francisco and Phillips 66’s Wilmington Refinery near Los Angeles are both slated to close in the coming year.

In explaining the company’s decision to close its Benicia refinery, Valero CEO Lane Riggs said on an earnings call that California’s tough “regulatory enforcement environment” was the main factor driving the closure of the state’s sixth-largest refinery.

The April announcement came six months after regional and state air regulators fined the company $82 million for exceeding toxic emissions standards for more than 15 years.

Meanwhile, Phillips 66 announced the closure of its Los Angeles refinery, the seventh largest in the state, just 72 hours after California passed ABX2-1, which requires refiners in the state to hold additional inventories of finished gasoline stock. The company attributed the closure not to any specific California policy but due to “long-term uncertainty” around the future of the refining business in the state.

Megan McArdle decries America’s escalating lawless lawfare, which is bipartisan. A slice:

This is a crisis for American democracy, because even if charges bear out in this case [against John Bolton], the fact remains that we cannot trust our officials to impartially administer justice. And if we can’t count on that, we are vulnerable to their punitive whims — a motivated prosecutor can usually find something to prosecute, even if they’re unlikely to win a conviction.

Those who believe in the value of neutral institutions must do everything they can now to protect the rule of law — and I’m afraid that doesn’t mean condemning just Trump. It also requires us to condemn Democrats who have violated norms of institutional neutrality in their zeal to get Trump.

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… is from page 209 of Art Carden’s and GMU Econ alum Caleb Fuller’s excellent new book, Mere Economics [footnotes deleted; links added]:

Pillage and plunder cannot explain why the average Briton, Belgian, or American is spectacularly wealthy by historical standards. The slave trade means lower incomes today in countries where it happened. Despite claims that we prosper because of the legacies left by our ancestors’ sins, slavery, imperialism, and colonialism made us poorer. Of the 10 to 16 million slaves brought to the New World, between 60 to 70 percent were shipped to Brazil or the Caribbean. Relatively few – 6 percent – landed in what is now the United States. If slavery could cause a Great Enrichment, it would have happened in Portugal and Brazil, not England and the United States. What’s more, until the nineteenth century, slavery existed virtually everywhere, and more Europeans were sold into slavery in North Africa than there were Africans transported to North America. Slavery did not spark a Great Enrichment 5,000 years ago or at any time.

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Here’s a letter to a former student of mine.

Eric:

Thanks for your email.

You write that you “understand tariffs raise some prices and lower others which is why economists don’t call tariffs inflationary. Instead economists say tariffs reduce the economy’s productivity and the number of goods consumers can buy. But if the supply of money doesn’t change, we get the same amount of money chasing fewer goods. Inflation should happen.”

Your confusion is nothing to apologize for. We economists (including me) often are unclear on this front.

Part of the problem is ambiguity about what is meant by “inflation.” If what is meant is a sustained, on-going rise in the price level, even the most draconian tariffs will not be inflationary, even though they might cause a noticeable rise in the price level. That rise, however, would not be sustained. It would be a one-time event.

Consider the extreme case of tariffs set so high as to block all imports into the U.S. The result would be a noticeable one-time rise in the price level (although, practically, official data might take two or three months to fully capture this reduction in the dollar’s purchasing power). This inflation wouldn’t be the month after month after month, running into years, sort of price hikes that Americans experienced in the 1970s and that most people still think of as inflation. This latter, familiar sort of inflation is caused by the monetary authority issuing new money in excess of the demand to hold money. This is the inflation that Milton Friedman had in mind when he wrote that “inflation is always and everywhere a monetary phenomenon.”

An important difference between price-level increases that are caused by monetary mismanagement and those that are caused by tariffs is that, at least in principle, when inflation that’s caused by excess money creation ends, that inflation leaves all relative prices unchanged: the price of a cup of coffee at Starbucks rises from $3.00 to $3.30, the price of the Camry rises from $30,000 to $33,000, the price of the condo rises from $300,000 to $330,000, and the worker’s hourly wage rises from $30.00 to $33.00. Not so with tariffs, which permanently raise the prices of protected goods relative to the prices of unprotected goods and services. Indeed, this change in relative prices is a chief reason why protective tariffs cause economic inefficiency.

One might insist that, because protective tariffs do indeed reduce the purchasing power of the currency, they should be called inflationary. Two good reasons counsel against this labeling. The first is that any economically harmful government intervention – of which there are many – reduces productivity and the quantity of outputs available for people to buy. Yet we don’t slap the label “inflationary” on the likes of high taxes, occupational-licensing restrictions, land-use regulations, or antitrust interventions, all of which make businesses less efficient. These and countless other government interventions inflict economic damage very much like that which is inflicted by protective tariffs. But because none of these interventions results in a sustained, on-going fall in the dollar’s purchasing power, they are understandably not labeled “inflationary.”

Second, trade in the U.S. directly makes up less than one-fifth of our economy, and the statistical techniques for measuring inflation are unavoidably imperfect. As a result, conventional inflation measures are unlikely to accurately detect the positive difference between the prices that rise as a result of the tariffs and the prices that fall as a result of the tariffs. That difference will be real and in the actual economy, but it will be mixed in with all the many other changes in the economy. The measurement tools are simply too crude to isolate the effects of the tariffs and detect this difference.

Apologies for the length of my reply, but your question is an excellent one that deserves a careful and full response. I hope this helps.

Sincerely,
Don

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Here’s a letter to a new correspondent.

Mr. P__:

Thanks for your email.

You ask if my “antagonism to President Trump’s tariffs is softening in the light of his winning for us better trade deals.”

No. Not only has he, in carrying out his trade policy, further eroded the rule of law by abusing powers delegated to him by Congress, U.S. tariff rates today are multiple times higher than they were in January. According to the Yale Budget Lab, Trump’s belligerent trade policy raised “the overall US average effective tariff rate to 18.6%, the highest since 1933.” This rate is nearly eight times higher than it was when Trump was sworn in to his second term.

Because U.S. tariffs are overwhelmingly taxes on Americans – and because I oppose high taxes (especially ones that are as discriminatory as his tariffs) – I count this massive tax increase as a major loss. The fact that this tax rate hasn’t (yet) risen as high as Trump initially threatened to raise it is hardly reason to cheer it as a win when this rate is compared to the far lower rate of taxation that prevailed before he took office.

Put another way: Trump thinks that we Americans win whenever our exports increase by more than our imports. He believes that the measure of America’s trade success is the size of our net sales. But he’s got matters backwards. In reality, Americans win (if we must analyze trade to sports) whenever our imports increase by more than our exports. The true measure of America’s trade success is the size of our net receipts of goods and services that contribute to our standard of living.

Although he’s unaware of the logic of what he’s doing, the fact is that Trump is putting Americans last by arranging for us to work and sweat to supply foreigners with as many goods and services as possible and to have foreigners do as little as possible in return for us. Were Trump’s trade policy carried to its logical conclusion, he would – as he demands adulation for allegedly winning for us the ultimate victory – in truth have turned us Americans into the rest of the world’s slaves.

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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David Henderson laments the deeply unfortunate reality that a large number of Americans today – including many in the highest offices of government – enthusiastically embrace some of the worst ideas that motivate the Chinese state. A slice:

In 1899, William Graham Sumner, a sociology professor at Yale University, gave a speech titled “The Conquest of the United States by Spain.” Why the timing? In 1898, the US government, under President William McKinley, had attacked Spanish forces in both Cuba and the Philippines. Was Sumner getting the attacker and the “attackee” backwards? No. Sumner maintained that the US government was imitating those Spanish governments by engaging in its own conquests. In other words, the US government had given up on its non-imperialist tradition and had, therefore, imported a Spanish idea that was totally antithetical to traditional American ideals. To the extent the US government acted on this new interventionist approach, it was giving up on the ideas that had animated the Revolution that had formed this great country. It was being “conquered.”

We are seeing something similar today in President Donald Trump’s dealings with both China and domestic US companies. China’s government intervenes massively in the Chinese economy, with so-so results. So how does Trump respond? By imitating China’s government. He lets a Japanese company take over US Steel, but only on condition that the federal government gets a “golden share” that gives Trump say over that company’s decisions. He gives Nvidia permission to export to China, but only on condition that the federal government gets 15 percent of the revenues. A similar deal was reached with Advanced Micro Devices (AMD). In short, Trump has given up on the US tradition of relatively free markets. Admittedly, past administrations, both Republican and Democrat, have also gone against the free-market tradition. Think of George W. Bush bailing out General Motors or Barack Obama violating the property rights of Chrysler bondholders. But Trump has considerably upped the ante.

In a similar vein, Steven Greenhut describes Trump’s economic policies as Peronist. [DBx: Collectivism comes in all sorts of different wrappers, every one of which promises that its contents are singularly delicious and nutritious – and every one of which peddles poison.]

Writing in the Wall Street Journal, former U.S. Senator Phil Gramm (R-TX) accurately describes Trump’s antitrust policies as being “as bad as Biden’s.” A slice:

Starting in the 1890s, Progressive antitrust regulators targeted what Justice Louis Brandeis labeled the “Curse of Bigness.” In the ideal Progressive world, only government should be big. Progressive Era regulation rose as improved transportation and the growth of nationwide markets allowed economies of scale in production at levels never before achieved. Such efficiency not only increased wages and delivered a cornucopia of increasingly affordable goods and services, it also unleashed a wave of creative destruction as small, inefficient producers were rendered noncompetitive. By attempting to protect noncompetitive producers, Progressive regulation stifled technological change, raised prices and hurt consumers.

As America’s postwar dominance in heavy manufacturing faded in the 1970s, President Jimmy Carter and Sen. Ted Kennedy led a comprehensive effort to promote American competitiveness by lifting the regulatory burden that Progressive Era regulation had imposed on the economy. The Carter deregulation unleashed competition in transportation and communications while focusing antitrust enforcement solely on consumer welfare. Efficiency improved dramatically, prices fell, and the American economy to this day dominates the world in transportation and technology.

The Biden administration rejected the consumer-welfare standard as the test for monopolistic behavior, empowering the FTC and the Justice Department to target tech companies for the crime of being successful. Unconstrained by any need to show that consumers were being harmed as a condition for antitrust intervention, the government was given a license to engage in industrial and social policy under the guise of antitrust enforcement. In addition to opposing bigness, FTC Chairwoman Lina Khan chose labor, environment and social-justice goals as her objectives for regulatory policy.

Since Ms. Khan left, things haven’t gotten much better. Chairman Andrew Ferguson’s views on antitrust echo hers. He has said: “The antitrust laws do not address censorship or political power directly. But by protecting the welfare of consumers and workers, the antitrust laws address economic power.” In a regulatory agency founded to preserve competition in the American economy, Mr. Ferguson used the FTC’s power to prevent political bias just as Ms. Kahn used it to promote a labor, environmental and social-justice agenda.

Congress never granted the FTC authority to set the nation’s censorship, political, labor, environmental or social-justice policies. Once you abandon consumer benefit as the guiding star of antitrust action, antitrust can be used to harm the consumer and the economy, and any president can use it to implement industrial policy, pick winners and losers, or settle political scores. In the process, unbridled antitrust authority threatens both democracy and economic growth.

Richard Reinsch makes clear that, with the current size of the U.S. government, it’s wishful thinking to suppose that the taxation of imports can replace the taxation of incomes.

Wall Street Journal columnist James Freeman is correct:

All Americans should want a reduction in gargantuan federal deficits, but it should happen via spending cuts to a government that has grown far too large. Federal spending has settled at a new nonemergency height of more than 23% of GDP, far above federal revenue.

New burdens on commerce, whether income taxes or tariffs, stunt the growth that generates taxable activity in the first place. We will never climb out of the fiscal hole politicians have dug in Washington without a prosperous economy. Mr. Trump should be leading the campaign to stop digging. Yet the CBO director makes clear that the projected Trump tariff tab has lately been rising sharply.

…..

A virtuous cycle of trade tax reductions could turbocharge the Trump economy. This year’s tariff hikes suggest we’re puttering our way to mediocrity.

Writing at National Review, John Puri decries “Trump’s incredible expanding tariffs.” A slice:

In February, President Trump imposed a 25 percent tariff on all imported steel and aluminum from all countries, hiking the rate to 50 percent in June. There was never a good reason for these tariffs, which have raised input prices for countless domestic manufacturers and builders, but at least they applied only to those two metals. Not anymore. Now, those “steel and aluminum” tariffs apply to pretty much anything you can think of that contains, or could be used to produce, either substance.

The Trump administration announced earlier this week that it had expanded the tariffs to include 407 additional categories of products. Because of America’s incredibly complex tariff schedule of over 17,000 categories — which far predates Trump’s trade war, by the way — the official list of added products is indecipherable. But, according to CNBC, the tariff list “now covers products such as fire extinguishers, machinery, construction materials and specialty chemicals that either contain, or are contained in, aluminum or steel.”

My intrepid Mercatus Center colleague, Veronique de Rugy, warns that inflation is still a serious problem (and not because of tariffs). A slice:

It is tempting to pin today’s price pressures on the new round of tariffs. After all, import taxes raise costs, and history shows they feed into consumer prices. But the data makes it clear that this explanation is far too narrow. Inflation is accelerating even in areas untouched by trade policy. The stickiness of service-sector prices, combined with the lagged way housing costs show up in the Consumer Price Index, demonstrates that inflationary momentum runs comes from more than just tariff pass-throughs. Tariffs add fuel, but they are not the spark.

The more fundamental driver is fiscal policy, and more crucially, the consolidated government budget constraint. As my colleague David Beckworth explains it in this excellent post, at the end of the day “Uncle Sam ultimately has to cover his real obligations. There is no free lunch.” The requirement for the government to pay off its debts must hold one way or another whether through higher taxes, lower spending, more borrowing, or through the inflation tax. This is why today’s inflationary pressures are not just about tariffs, energy prices, or Fed missteps. They are about fiscal pressure and the fiscal dominance they result in.

Fiscal dominance occurs when the government’s financing needs constrain the Federal Reserve’s ability to control inflation. Another way to think about it – fiscal dominance is a situation where the Federal Reserve is tasked with keeping the growth of the debt under control—a role usually reserved to the fiscal authorities.

Megan McArdle talks with the good people at Reason about Trump’s militarization of policing in D.C.