Thank goodness. Special thanks are owed to my GMU Scalia Law colleague Ilya Somin.
The truth is that President Donald Trump’s tariff hikes are hitting Americans in all sorts of ways. Some importers and other businesses are trying to eat the added cost of those taxes (which shows up in the form of reduced profits), while others are passing the tax along the supply chain. The tariffs are also discouraging investments, disrupting international mail services, and causing chaos in various markets.
While the exact contours of the tariffs’ impact might take many forms, the cost is ultimately borne by people—just like with any tax. The Yale Budget Lab estimates that the average American household will pay approximately $2,400 in tariff costs this year. That won’t show up as a lump sum like a property tax bill or be easily seen like the income tax withholdings on your pay stub, but the costs are still real, even if they are less obviously seen.
It’s an interesting story how economics came to be known as the dismal science. Many assume it’s because of too much mathematics, or boring theories that can make students fall asleep in class. But that’s not the true story. The phrase was coined by Thomas Carlyle because economists opposed slavery. They believed that all human beings share the same motivations — what Adam Smith called the “propensity to truck, barter, and exchange” — regardless of race or nationality. As Deirdre McCloskey put it: “The phrase ‘the dismal science’ was coined by Thomas Carlyle not because economics was gloomy or mathematical — but because economists opposed slavery. That made their science dismal — in Carlyle’s eyes.”
The basic facts of supply and demand weren’t pleasant to extremists then, and still aren’t. Carlyle first used the term in his essay Occasional Discourse on the Negro Question, where he mocked economics for explaining the world with such “simplistic” tools as supply and demand. Did he offer a better alternative? No — but he worried that a world governed by price theory would reduce “the duty of human governors” to “letting men alone.”
One may call it simplistic, dismal, or even cold, but the simple idea of price theory — letting people decide for themselves — has been a guardian of liberty from the time of Hume and Smith to today. And “letting men alone” has never pleased social engineers or those who want a “mission-driven” economy. Letting men alone to take their own decisions, make up their own minds, and conduct exchange with each other isn’t pleasant for those who think people aren’t smart, moral, and worthy enough to make their own decisions, so they need the visible hand of the state to guide them. This social engineering mindset that echoes itself in anti-economics rhetoric is closer to totalitarian ideologies than the idea of “letting men alone.”
My intrepid Mercatus Center colleague, Veronique de Rugy, notes the injustice of EV mandates.
Peter Earle writes wisely about economic statistics.
Wall Street Journal columnist Kimberley Strassel decries the vile practice of lawfare that was started by Democrats and accelerated and sharpened by Trump. Here’s her conclusion:
Generations of leaders understood the risk of criminalizing political acts and creating a prosecutorial race to the bottom. No longer. We’re there now. Congrats, D.C. What a skill to have honed.
John O. McGinnis is correct: “Universities need more reason — less ‘expression.'”
… is from page 4 of David Ricardo‘s July 4th, 1821, letter to Hutches Trower as this letter appears in volume ix of the 2004 Liberty Fund edition of The Works and Correspondence of David Ricardo:
I cannot but flatter myself with the hopes of a continuance of peace in Europe – the agitations which at present exist will I think subside, and we shall witness a general course of prosperity. When our purses are again filled indeed, we may as usual become quarrelsome, but I hope nations are becoming wiser, and are every day more convinced that the prosperity of one country is not promoted by the distress of another – that restrictions on commerce are not favorable to wealth, and that the particular welfare of each country, as well as the general welfare of all, is best encouraged by unbounded freedom of trade, and the establishment of the most liberal policy. I must do our ministers the justice to say that I believe they view these questions in their true light and would make great improvements in our commercial code if they were not thwarted and opposed by the narrow and selfish policy of the particular interests which are so powerfully exerted in the H. of Commons to check improvement and support monopolies.
DBx: Keep this quotation in mind when you next encounter insinuations offered by poorly informed pundits that economists’ enthusiasm for free trade is largely a 20th-century concoction.
Trump’s furniture tariffs won’t enhance national security; the U.S. doesn’t need to produce desks to defend itself. What they will do is further increase the cost of imported furniture and the cost of living for Americans. To the extent furniture tariffs succeed in reversing the industry’s downward trend, they will do so at the expense of American families and the misallocation of the country’s resources to less productive uses.
Scott Lincicome reflects on the socialization of Intel. Three slices:
The most obvious and immediate problems with the Intel deal rest with the company itself, which—despite all those subsidies—has struggled even more since we dug into its many longstanding problems a year ago and briefly reviewed its current situation in July.
…..
Since then, the Wall Street Journal’s behind-the-scenes tick-tock of the events leading up to the announcement confirmed that the 5 percent bump provision was forced on Intel to “dissuade the company from fully exiting the manufacturing segment.” The report also revealed that Intel’s “panicked” board of directors was effectively coerced into the deal because of Trump’s CEO threats, in a scene right out of The Sopranos: “In return for Trump’s support [for Intel’s CEO], the administration proposed taking an equity stake in the company.”
Nice company you have there …
This pressure, of course, came before the U.S. government had an actual stake in the company—and thus in its success (or failure). It’d be downright foolish to think the Trump administration’s leverage (and incentive/willingness to use it) won’t be even stronger now that Washington owns a big chunk of the company and Trump has put his own “businessman dealmaker” reputation on the line. No surprise, then, that Intel explained in a brand new SEC filing on the equity deal that the government’s stake “reduces the voting and other governance rights of stockholders and may limit potential future transactions that may be beneficial to stockholders.” It also says the government may vote “as it wishes” (and against the board) under certain express conditions, including if Intel ever tried to change or terminate “the Company’s or its subsidiaries’ relationship with the US Government.”
In other words, yes, Trump and the rest of the federal government will have influence and may even call some shots—at shareholders’ and/or Intel’s expense.
That incentive gets to the next clear problem that the equity stake raises: the potential to distort other U.S. companies and industries.
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Then there are the potential harms for Intel’s possible customers, who may suddenly look to buy from the company—not because it makes the best products but “to curry favor with or avoid being targeted by an administration that has a direct financial and political interest in Intel’s financial success.” This risk also appears to be materializing already: Minutes after I wrote my op-ed, we learned that Samsung was reportedly “exploring partnerships with American companies to ‘please’ the Trump administration and ensure that its regional operations aren’t affected by hefty tariffs.” And this “exploration” included “a deal with Intel [that] would allow the Korean giant to see an elevated status in the eyes of President Trump, mainly since Intel has become an important factor for the current US administration.”
George Will is correct: Policies aimed at artificially increasing student enrollments in college are harmful. [DBx: These policies enrich me and other college professors; our salaries are higher, and our workloads are easier, than these would otherwise be. Thank you very, very much! But these policies, in both monetary and non-monetary ways, unjustly harm most other Americans.] A slice from Will’s column:
Economist Arnold Kling says that despite the limited “natural demand” for college education (“students who are excited by academic subjects”), graduate schools continue to churn out more PhDs (almost 60,000 in 2022) than the growth of undergraduate enrollment justifies. So, artificial student demand must be stimulated. Kling says “colleges adapt by offering dumbed-down courses and grade inflation.
And by teachers teaching less. Hess and Richard B. Keck, also of AEI, say light teaching loads have become badges of professional status — and require schools to rely on teaching by graduate students or part-time adjunct instructors. Tenured or tenure-track professors teach less and less. Most are on nine-month contracts requiring them to teach 13 weeks in each semester, or 26 weeks of the approximately 40 covered by the contracts — often about 15 hours a week each semester.
Congress is subject to a simple, macroeconomic constraint: All government outlays, including interest payments, must ultimately be financed by some combination of taxes, borrowing or monetary policy. When interest payments rise, the burden will be carried somewhere. If Congress won’t collect more tax revenue or exercise more spending and borrowing restraint, that leaves monetary policy, which means suppressing interest rates or tolerating higher inflation to erode the real value of our debt.
So, those who only care about Trump’s public browbeating of Fed Chair Jerome Powell miss the most crucial point: The pressure on the Fed will continue to exist no matter who occupies the Oval Office thanks to the fiscal trajectory that was locked in years ago and Congress’ refusal to do anything about it.
I don’t blame Cracker Barrel for this sorry state of affairs. The company is a victim of the internet’s endless search for something to be mad about. During L’Affaire Sausage, I pointed out that very few people were actually mad that Cracker Barrel had added a meat substitute to its offerings; copy-hungry journalists had scoured the company’s Facebook page and plucked a few lunatics out of the much larger number of vegetarians thanking the company for catering to their needs. I reminded people that you can always find a few fringe souls on the internet who are angry about anything. I begged them to ignore the shouting, just as they would if people were doing it on a random street corner.
… is from page 401 of the 2011 Thomas Sowell Reader:
Some ideas sound so plausible that they can fail nine times in a row and still be believed the tenth time. Other ideas sound so implausible that they can succeed nine times in a row and still not be believed the tenth time. Government controls in the economy are among the first kinds of ideas and the operation of a free market are among the second kind.
Before last week’s expanded tariff announcement, experts were sounding the alarm on the effect that Trump’s trade war could have on America’s power grid. The new list has industry leaders worried again about what lies ahead. “The updated trade policies have clearly added complexity and cost,” Ted Simpson, vice president of marketing at Hammond Power Solutions, the largest manufacturer of dry-type transformers in North America, told tED Magazine. “While we’ve developed a solid understanding of the new measures, we’re still progressing along the learning curve.” Simpson did add that he’s “confident” in his company’s ability “to adapt quickly.”
Vance Ginn explains “why Americans should fear Washington in Intel’s boardroom.” A slice:
Some conservatives defend these arrangements as “strategic.” They argue that America cannot afford to rely on foreign suppliers for semiconductors, rare earths, or steel. National security, they insist, justifies extraordinary measures.
But once government crosses the line into equity ownership, the game changes. It’s no longer about setting fair rules of the road—it’s about Washington joining the race as a participant. That undermines competition, politicizes corporate decisions, and exposes taxpayers to risks they never agreed to take.
It’s a good thing we have President Donald Trump and his administration to stop the spread of Mamdani’s socialist agenda. Instead of having the government take greater control of private companies the way Mamdani wants, the administration is having the government take greater control of private companies the way Trump wants.
In the spring, Trump negotiated “golden shareholder” status for the government in U.S. Steel in exchange for approving its takeover by Nippon Steel. With the golden share, the administration has the power to outvote all other shareholders on the issues of relocation, transferring production or jobs outside the United States, closing or idling plants, employee salaries, and sourcing raw materials outside the United States.
It’s a free market as long as U.S. Steel executives and board members get a permission slip from the president. Then they’re perfectly free to do whatever he wants.
…..
Remember, Mamdani wants the government to intervene in the decision-making of private corporations in the bad ways, but Trump wants the government to intervene in the decision-making of private corporations in the good ways. Mamdani wants to control the means of production; Trump just wants to be the largest shareholder in the means of production. It’s totally different!
Some conservative thinkers about economics, who are usually big Trump fans, are having a hard time with the Intel deal. Stephen Moore joined Larry Kudlow’s Fox Business show on Friday, and when Kudlow asked, “How about the U.S. government owning 10 percent of Intel?,” Moore threw his head back and erupted in laughter.
“I hate corporate welfare!” Moore said. “That’s privatization in reverse! We want the government to divest of assets, not buy assets! So terrible, one of the bad ideas that’s come out of this White House.”
Kudlow concurred: “I am very, very uncomfortable with that idea.”
But remember, Republicans: We’ve got to stop Mamdani because he’s a socialist — because the last thing we need is someone in power calling for even greater government intervention in the private sector. People might start to get ideas.
We know from history what happens to central banks that become arms of politicians. See inflation in Turkey under President Recep Tayyip Erdogan and in Argentina for decades. Richard Nixon jawboned then Chair Arthur Burns to keep monetary policy easy, and the result was the 1970s great inflation.
Mr. Trump doesn’t even need this legal brawl because he is already getting his way on interest rates. Mr. Powell signaled as much Friday in his Jackson Hole speech. The Fed has made many policy mistakes—not least being too late to raise rates when inflation heated up during the pandemic—and this is one reason it is politically vulnerable to Mr. Trump’s attack.
But if he wants to change the Fed, Mr. Trump has ample opportunity through appointments to the board, including a successor for Mr. Powell as chair next year. That doesn’t seem to be enough for Mr. Trump, who in his afflatus thinks he can run monetary policy. Has he considered what a politically malleable Fed might do when the progressive left takes charge under another President?
Burke Smith explains that “price controls are not the answer to high drug costs.” A slice:
But his May 12 executive order, which pledged to take “aggressive action” against high-charging drug firms, may not deliver on that promise. The order directs the Department of Health and Human Services to communicate to drug manufacturers the administration’s desire that they target most-favored-nation (MFN) pricing in the United States. That means that they must align U.S. prices with the lowest offered in “comparably developed nations.” If companies don’t make “significant progress” toward that goal, the order directs HHS to propose regulations “to impose most-favored-nation pricing.”
The White House hopes the order will cause other countries to raise prices, responding to drug-company pressure. Research suggests that if each drug had a single price across all high-income countries, U.S. prices would fall by half, while other countries’ prices would rise by between 28 percent and over 300 percent. But there are practical reasons to think that this may not happen.
First, the Trump administration is on shaky legal ground. During Trump’s first term, HHS promulgated an interim final rule to impose MFN-style price caps that was struck down in the courts due to noncompliance with notice-and-comment rules. Additionally, HHS may not have the statutory authority to impose price controls, particularly in private markets outside of Medicare, Medicaid, and CHIP.
Further, the MFN model may not actually lower prescription drug costs. The pharmaceutical industry could respond to the president’s order in several ways to mitigate the impact. Its options include limiting supply or manipulating prices in foreign countries, pursuing U.S.-only drug launches, and adjusting rebate agreements with middlemen. Agreements between drug manufacturers, private payers, and pharmacy benefit managers can be adjusted to change rebate structures, raising out-of-pocket costs with higher premiums and copays to make up for price reductions.
The order fails to anticipate dynamic market responses. Companies could delay foreign launches to avoid setting low reference prices, manipulate pricing across markets, or engineer artificial shortages. Most importantly, for the White House to enforce the order, it would need to master the intricacies of global pricing, fluctuating currencies, divergent policy frameworks, and varied health systems. Policing international pharmaceutical prices is nearly impossible—and only invites firms to game the system.
David Splinter looks at the taxes paid by the “top 400” richest Americans. (HT Tyler Cowen)
… is from page 177 of Steven Landsburg’s excellent 2009 book, The Big Questions:
An executive’s job is to maximize profit, and usually the best way to do that is to produce goods and services that people value. Unfortunately, some executives seek profits by lobbying for subsidies, tariff protection, and import quotas, all of which are socially destructive. If you’re that kind of corporate executive, I hope you’re ashamed of yourself.
Michael Strain is correct: “Trump’s Intel deal is a threat to US economic liberty.” A slice:
Trump’s recent deal with chipmakers Nvidia and AMD, however, suggests security concerns are being used by the president as a fig leaf for rank corporate shakedowns. In that deal, Trump agreed to allow Nvidia and AMD to sell H20 and MI308 AI chips to China in exchange for the Treasury receiving 15 per cent of the revenue. Security is clearly not the president’s motivating concern.
Troublingly, the government might have its eye on equity stakes beyond Intel. Commerce secretary Howard Lutnick is reportedly exploring government stakes in other semiconductor manufacturers that received Biden-era Chips Act subsidies, such as TSMC and Samsung.
This all strikes me as not so much a strategic embrace of state capitalism as an opportunistic attempt by Trump to “get the best deal” in one-off situations. The existing deals are worrying enough. But Trump’s actions also create a troubling precedent.
Expanded state involvement will create serious challenges for the companies on the receiving end of it. Diverting time and energy from competing in the market to pleasing the president might work in the short term, as Intel’s increasing share price has indicated. But the need for political support could make it harder for the chipmaker to enact needed changes to stay competitive, including politically unpopular moves like closing plants and laying off workers. The pace of innovation will decelerate. Over the long term, this will be a bad deal for the taxpayer.
Reason‘s Joe Lancaster is understandably dismayed by Trump’s finagling for the government an equity stake in Intel. Two slices:
President Donald Trump negotiated a deal last week for the U.S. government to take a substantial ownership stake in an American company. Despite his assurances, Trump’s socialistic transaction is a terrible deal not only for the parties involved, but for the entire U.S. economy.
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Every part of this transaction flies in the face of any sincere interpretation of free markets, including the Biden administration’s original sin to approve billions of dollars for a struggling company. It is perhaps telling that as Reason‘s Eric Boehm noted last week, the idea that the U.S. government should take a piece of Intel in exchange for CHIPS Act funding was first floated by Sen. Bernie Sanders (I–Vt.). Trump and his allies are now issuing talking points that could have come from the socialist senator himself.
If the U.S. government insists upon dishing out taxpayer money to private companies, is there any reason it shouldn’t, as U.S. Secretary of Commerce Howard Lutnick put it to CNBC, get “a piece of the action”?
There are many reasons, in fact. “The most immediate risk is that Intel’s decisions will increasingly be driven by political rather than commercial considerations,” Scott Lincicome of the Cato Institute wrote Sunday in The Washington Post. “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.”
Vermont’s socialist U.S. Sen. Bernie Sanders only likes markets when they’re broken. Therefore his support for President Donald Trump’s foray into the semiconductor industry is the clearest sign yet that the federal government owning a piece of chip maker Intel is bad news for U.S. technology. Most of the value in the chip industry is not in making chips but in designing them—the part of the industry the U.S. dominates. But will U.S. firms continue to dominate amid a Trump-Sanders intervention?
Cato’s Walter Olson blasts “Trump’s blast of hot air on flag burning.”
Jeffrey Blehar makes clear that Trump cannot use executive orders to federalize election laws.
David Henderson and Scott Sumner are leaving EconLog.
… 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.
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.
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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.
