Regular reader Alan Goldhammer wrote: I fully understand how tariffs work and know that the calculation for the reciprocal tariffs was something pulled out of a hat (or some malfunctioning AI tool). However, I don’t know if imports are fully modeled for how much they add to the US economy. Any small business that brings in Chinese products to sell, adds value by creating jobs and the money that they generate from sales goes to the Federal, State, and Local governments in the form of taxes. Why should not this added value be subtracted from the trade deficit? Isn’t this also added to the US GDP?  Maybe these are just naïve questions but, as you know I am not an economist. I told Alan by email that it’s not a naïve question and I do have answers. I won’t focus on the role, or not, of AI in calculating “reciprocal tariffs.” As is clear from his question, that’s not what Alan is asking about. Here’s his key sentence: Any small business that brings in Chinese products to sell, adds value by creating jobs and the money that they generate from sales goes to the Federal, State, and Local governments in the form of taxes. That’s all almost true. Some of the money from the sales of those products goes to governments. Most of it goes to the sellers, and they’re not chopped liver. We measure their gain by the difference between their revenues and their costs, assuming that all costs, and not just the costs of the Chinese inputs, are taken into account. Also, yes, those sales do create jobs, but the way we economists measure the gain to workers from those jobs is not those jobs per se. It’s not even the wages, salaries, and benefits that those workers get because counting wages, salaries, and benefits overstates their gain. They have an opportunity cost, namely, the next best job they would be in if they weren’t in their current jobs. So their gain is their wages, salaries, and benefits minus the wages, salaries, and benefits they would get in their next-best job. So far, I’ve left out a very important group: ultimate consumers of those goods. We economists call their gain “consumer surplus.” Consumer surplus is the maximum amount consumers are willing to pay minus the amount they do pay. Now to Alan’s 2 questions: Why should not this added value be subtracted from the trade deficit?  Isn’t this also added to the US GDP? The value is not subtracted from the trade deficit because the trade deficit was never intended to measure value: it measures money flows. The U.S. trade deficit with China is the difference between what we Americans spend on Chinese goods and services and what people in China spend on our goods and services. It says nothing about the amount of value we get from those goods and services from China, other than that the value must exceed what we spend or we wouldn’t buy those goods and services. In short, we gain from trade. In a way, Alan’s “naïve” question points to one of the key problems with even talking about a trade deficit. How bad can a trade deficit be when the values of those imports, to consumers, to producers, and to governments, exceed the amount we spend? I think, in other words, that Alan rightly sees these values and wonders, “What’s the big deal?” He’s right to wonder. Now to his second question: “Isn’t this [value] also added to the U.S. GDP?” The increment in wages, benefits, and salaries due to the imports IS part of GDP. GDP would be slightly lower if people were in less-productive jobs. The taxes that American governments at all levels get are not added to GDP because they’re first taken from American producers and consumers. Finally, the consumer surplus is not added to GDP. Remember that GDP measures product at market prices and so doesn’t include consumer surplus.   (1 COMMENTS)

Liberty Fund lost a great friend recently with the passing of Paul Lewis.  Paul was a professor of political economy at Kings College, London and had been on the faculty of Cambridge prior to that.  Paul was a great interpreter of economic thought and specific thinkers – so much so that Bruce Caldwell asked him to edit a volume of Hayek’s Collective Works.  He was in the middle of working on another volume when he tragically passed away at the far too young age of 53. Paul’s work was broadly at the intersection of philosophy and economics, but it was his macrolevel writings comparing the various schools that comprise much of classical liberal thought in the 20th century that established him as a first rate scholar among pro-liberty economists and philosophers.  He was “fluent” in Austrian economics, public choice, and the Bloomington School, and he published numerous papers with leading scholars in each field. He was also the king of great titles for his papers when he could.  A recent paper with John Meadowcroft in Constitutional Political Economy called Buchanan and Vincent Ostrom “Constitutional Artisans”.  There was The Hand Behind the Invisible Hand, which explored the concept of the invisible hand across classical liberal thought, and the ironically titled Far from a Nihilist Crowd: The Theoretical Contribution of Radical Subjectivist Austrian Economics. Perhaps my personal favorite is Orders, Orders Everywhere…..On Hayek’s the Market and other Orders, which is a super title and a very interesting paper.  He could see linkages across the territory that many of the most influential classical liberal economists occupy and we are all the better for his research. I actually vividly remember the first time I met Paul. We were at Ockenden Manor in 2007. There was a lot that struck me about Paul including his scholarly and thoughtful approach to his work, his genuine and easy smile, along with his self-deprecating sense of humor. I also encountered him running through a field while I was quite slothfully walking through the countryside. You could tell he loved his life and what he did. Paul and I ended up working together regularly on a lot of Liberty Fund projects.  Paul and Liberty Fund weren’t necessarily always politically aligned, but he was aligned with our mission and especially our texts, which he took as seriously and honestly as anyone I have ever encountered in my work. He directed his first Liberty Fund conference with me in 2011 on Isaiah Berlin. I found the conference so interesting I ended up writing a paper on Berlin’s economics, which Paul then graciously invited me to present at King’s to a faculty and student group. In typical Paul fashion he chopped me to pieces kindly during the discussion part of the event and then bought me a really good dinner afterwards. We ended up working together on a lot of conferences that always made me think and challenged my priors. Our last was on the Hayek Collected Works volume he had edited, and it was a super event attended by Bruce Caldwell and an outstanding group. Paul contributed a lot to our conference program and we cannot ever fully repay him for his work on helping us promote conversation about the free and responsible society.  He will be very much missed. (0 COMMENTS)

It’s time for another round in the ongoing saga of “Kevin complains that economists are terrible at naming ideas.” Here, I propose that economists should consider rebranding “the trade deficit.” The reason people so badly misunderstand the term is right there in the name – deficit. Deficits sound bad. In most usages, deficits imply something along the lines of living beyond one’s means and accumulating debt. That would certainly be true if my household budget was in a deficit. If my monthly household budget was in a deficit, that would imply the difference is being made up by racking up credit card debt, or borrowing money from friends and family, or something along those lines. Households can run a budget deficit for a short while – maybe they were hit by unusually high expenses and had to put some things on a credit card to get through the month. If they cut back spending over the next few months until the credit card debt is cleared, then there’s no great cause for alarm. But if that situation were to repeat itself every month, for years on end, there’s no happy ending to that story. But a country running a trade deficit is not analogous to a household living beyond its means and racking up credit card debt. For example, Nintendo just announced a new video game console, the Nintendo Switch 2, currently priced at $449. (I say currently because it remains to be seen if drive that price up when it actually comes to market.) Suppose I decided I wanted to buy one. I go to Nintendo’s website and enter my debit card information, and send them $449 from my checking account and become the proud owner of a shiny new video game platform. In doing so, the trade deficit has increased by $449. But…there’s no debt involved in this process. Nobody is living beyond their means. There’s no cause for alarm here. If President Trump is to be believed, this transaction is evidence that Japan is “ripping us off” or “taking advantage of us” by selling me something I want at a price I’m willing to pay. But that’s clearly wrong – a mutually beneficial exchange has occurred, nothing more or less. So here’s my proposed rebrand for “the trade deficit.” It relates back to a previous post I wrote, on how to think about imports and exports. I pointed out that when a country runs a trade deficit, it becomes “a country where citizens get more goods and services from foreigners than those citizens send away for foreigners to consume.” So maybe instead of calling this situation a “trade deficit,” we should call it a consumption surplus. In 2024, the United States ran a trade deficit of about $918 billion. The United States sent about $3.2 trillion dollars worth of goods and services away to be consumed by foreigners, but was able to consume about $4.1 trillion dollars worth of goods and services from foreigners. We got the benefit of consuming $918 billion dollars more in goods and services than we had to give up in exchange! As President Trump likes to say, that’s a lot of winning. So much winning! (Note: the term “consumption surplus” is itself misleading, because as I mentioned in a recent previous post, over 60% of imports into the United States are inputs for production, rather than imports that are directly consumed. Still, it seems less misleading to me than the current terminology.) Of course, there’s another side of this coin. As Scott Sumner recently pointed out, “when all types of trade are taken into account (goods, services and financial assets) trade always balances.” That is, a trade deficit (or more precisely, a current account deficit) is always and everywhere balanced out by a capital account surplus, which tracks savings and investment rather than goods and services. So saying the United States had a current account deficit of $918 billion last year means the United States also ran a capital account surplus of $918 billion last year. This is because the money foreigners don’t spend on US-produced goods and services is instead used to support savings and investment – buying dollar-denominated assets, foreign direct investment in US companies, bond purchases, that sort of thing. (In fact, let’s assume an extreme case where instead of using those $918 billion dollars for investment in the United States, foreigners decide to convert it all into cash and then burn it. So in this case, that’s $918 billion that will never be used to buy American goods, services, or for investment. Even then, there’s no cause for alarm. All this bonfire would do is decrease the amount of US dollars in circulation, making all the dollars held by American citizens more valuable. So even in that extreme situation, the value represented by that $918 billion comes back by increasing the purchasing power of the remaining dollars.) So with this rebranding, US citizens not only get the benefits from a consumption surplus, but also experience an equally large investment surplus as well. I think this is a framing that would actually get through to President Trump – but sadly, he hasn’t returned any of my phone calls. Hopefully he reads this blog though! (0 COMMENTS)

Question: Some economists have argued that the Fed should raise its inflation target from 2 percent to 3 or even 4 percent. Why might the effect of a higher inflation target on the quantity of real money balances demanded be larger in the long run than in the short run?   Solution: Economists often treat price theory and monetary theory as conceptually distinct. Milton Friedman, for example, called this the major division in economics. Monetary theory, he argued, concerns the overall price level and fluctuations in output and employment; price theory, by contrast, explains how relative prices allocate scarce resources. In my view, the boundary between the two is not as sharp as Friedman suggested; price theory and monetary theory often intersect in fascinating ways. For example, a higher inflation target can distort comparative advantage by altering relative prices. It may also discourage capital accumulation if capital income taxes are not indexed to inflation. Both effects reduce output and, in turn, lower the demand for real money balances. These examples are worth noting, but they are not quite the effects I had in mind when I posed the question. Rather, I was thinking about how a higher inflation target would influence households’ decisions to adopt particular financial technologies. To that end, let us set aside the income effects of higher inflation and focus instead on this choice. Households have access to a wide range of financial technologies for saving—such as checking and savings accounts, certificates of deposit, money market accounts, and money market mutual funds, to name just a few. Some of these products, like money market mutual funds, are nearly as liquid as a checking account but offer significantly higher returns. However, taking advantage of those higher returns typically requires households to incur a fixed cost—whether in time, effort, or attention—to open and manage the account. The returns offered by these accounts typically rise with inflation. When inflation expectations increase, lenders demand higher nominal interest rates to preserve the real value of their savings. Without such an adjustment, they would be repaid in dollars worth less than those they lent, reducing their real return. When inflation is relatively low, these accounts offer little advantage over traditional chec king or savings accounts. As a result, many households may find that the fixed costs of opening and managing them are not worth incurring. While inflation may temporarily deviate from expectations, households are unlikely to adopt new financial technologies unless there is a sustained shift in its long-run trend. In short, households’ inflation expectations shape their decisions about whether to adopt particular financial technologies. As a result, their response to a temporary deviation in inflation will differ from their response to a permanent increase in the trend inflation rate. When the trend rate rises—as it would if the Fed adopts a higher inflation target—it may become worthwhile for households to incur the fixed cost of opening and managing a money market mutual fund account. Once they do, we can no longer assume that the household’s demand for real money balances remains constant. We can illustrate this idea with a simple diagram showing the relationship between the demand for real money balances and the nominal interest rate, i. In the figure below, the curve labeled D1 represents aggregate money demand under the current inflation target. When inflation deviates temporarily from this target, households move along D11 to point B, reducing their real balances to QSR in response to the higher nominal interest rate. If, however, the Fed permanently raises its inflation target, and households respond by adopting new financial technologies, the demand curve shifts leftward to D2. This new curve reflects a lower quantity of real money balances demanded at every nominal interest rate. As before, temporary fluctuations in inflation lead to movement along D2. But if the trend inflation rate shifts again, the entire demand curve shifts once more.  The long-run aggregate money demand curve, labeled DLR, connects D1 and D2. It reflects households’ full adjustment to a permanently higher inflation rate, including the adoption of financial technologies that help them economize on money holdings. The relatively flatter slope of DLR captures the idea that money demand is more sensitive to the nominal interest rate in the long run than in the short run. Households are unlikely to identify and adopt new financial technologies immediately. If the Fed raises its inflation target, households will begin to reduce their real money balances, but the full adjustment to the higher trend rate will take time. For this reason, the effect of a higher inflation target on the quantity of real balances demanded is larger in the long run than in the short run. (0 COMMENTS)

What motivates President Donald Trump’s chaotic, stop-and-go, incoherent tariff moves? On April 9, a few days after his “reciprocal tariffs” had come into force and after worrying cracks appeared in financial markets including the market for Treasurys, he announced a 90-day pause for most “reciprocal tariffs” over 10%. He explained that people were “getting … a little bit afraid.” “I thought that people were jumping a little bit out of line. They were getting yippy.” In the end, he said, the pause “was written from the heart.” (“Why Did Donald Trump Buckle?” Financial Times, April 9, 2025.) Interestingly, Venezuela’s dictator Nicolás Maduro, who has run his country into the ground, said something similar: “I act out of love” (“Nicolás Maduro, Venezuela’s Contested President,” Financial Times, August 2, 2024). If Trump’s apparent incoherence is not driven by love, is there some grand plan hidden behind it? Financial Times columnist Janan Ganesh argued that there is none: it is irrationality pure and simple. For example, he says, Trump pursues both the Maga goal of containing China and the “Liberation Day” goal of hitting imports from friendly countries (“The Hopeless Search for Trump’s Cunning Plan,” April 9, 2025). Ganesh concludes: In the end, there are just too many contradictions in the Trump worldview to warrant any talk of a grand plan. … If strategy means anything, it is having a sense of the connectedness of things. There is none of that here. The problem with this sort of hypothesis, although tempting in this case, is that it can explain everything and its contrary. It is safer—and more natural for an economist—to start with a rational choice framework, even if some qualifications are necessary. Like any individual in the ordinary course of life, Mr. Trump’s first goal is to further his own interest. This motivation is especially strong in politics. Mr. Trump’s preferences and interests incorporate an unusual need for recognition and a devouring lust for power. However, he appears to choose means that are ultimately inconsistent with his goals, that is, his instrumental rationality (as opposed to the logical coherence of transitive preferences) is defective. This is likely due to his deep ignorance of how society and the world work, something difficult to understand without economics. (If he becomes president for life, I will have to review my hypothesis of instrumental-rationality failures, and Gonesh will need to admit that the president did have a cunning grand plan.) Individuals do make mistakes in their private affairs, but they have strong incentives to correct them. If one reaches the summit of the state, the cost of his mistakes is mainly borne by others, and his incentives to correct them are lower ceteris paribus. The more power he has, the more costly mistakes he can afford—or at least he thinks so. The grand plans of states are typically nothing but what is in the rulers’ self-interest. A ruler’s self-interest requires that he rewards his more useful supporters, which are typically special interests and electoral contributors. A ruler’s need to satisfy the interests of useful supporters will often give his policies the appearance of incoherence. Moreover, a populist ruler tends to make his decisions “intuitively,” as Trump said he would do before he made exemptions for some electronics (“Trump Excludes Smartphones From Reciprocal Tariffs After Market Rout,” Financial Times, April 12, 2025). After all, the populist leader knows the truth in his guts, which are the guts of “the people” that he embodies. So much for the glorified state’s planning rationality. Yesterday, less than two days after pausing most of his tariffs for 90 days, Mr. Trump announced that the pause may not last that long anyway (“US Tech Tariff Exemption Will Be Temporary, says Trump,” Financial Times, April 13, 2025). “This is starting to look more like stand-up comedy that ‘tariff policy,’” says Jose Pablo, a businessman and investor who frequently comments on this blog. The idea that the current president’s trade spasms aim at making “deals” in favor of “his” people illustrates his ignorance of both economics and the minimal ethics required to maintain a free society. Imposing tariffs on another country amounts, in reality, to imposing a tax on one’s fellow citizens. When Trump repeats “What they charge us, we charge them,” he is really saying “What they charge their citizens or subjects, I charge mine.” He seems to intuitively recognize this when he makes exceptions. The moral error resides in the kidnapper’s deal: he kidnaps you and then offers you a deal, a ransom against your freedom. This “art of the deal” has been practiced by unchained Leviathans against their citizens, foreigners, or both. Why don’t voters see all that or take so much time to discover it? One major explanation proposed by public choice theory lies in voters’ “rational ignorance.” Since the individual voter has no influence on an election result, he has no incentive to spend time and other resources gathering and analyzing political information (see also my Regulation piece “Mencken’s Theory of Democracy”). The libertarian and classical liberal ideal mainly aims at constraining rulers and preventing them from doing harm. What has saved us for a few hundred years in many Western countries were the many strong institutions (“institutions” in the sense of both sets of rules or “norms,” and powerful countervailing groups) that ensured the decentralization of power. A widespread belief in individual liberty reigned. These factors protected us, even if imperfectly, against the will and whims of the people and its demagogues. ******************************   (1 COMMENTS)

How can we explain the world’s underlying order? How does consciousness emerge? And why do people from such different cultures have such similar near-death experiences? Listen as Ross Douthat, New York Times columnist and author of the new book Believe: Why Everyone Should Be Religious, argues that these and other unanswerable questions underscore his argument for the rationality […] The post Rational and Religious (with Ross Douthat) appeared first on Econlib.

I’ve noticed that many people reflexively blame trade for the decline of the Rustbelt.  Here’s one example: Apologists for the outgoing trade regime often ignore that its impact was felt most acutely in particular regions, like the American Midwest. Researchers John Russo and Sherry Linkon describe how the closure of a steel mill in Youngstown, Ohio – the first of a wave of closures in the region – undermined the sense of worth and optimism among residents. Many can still recall better days, when employment was high, jobs paid well, workers were protected by strong unions and industrial labour provided a source of pride – not only because it produced tangible goods, but also because it was recognised as challenging, dangerous and important. But is that true?  Does trade explain the decline of steel employment from roughly 190,000 to 84,000? If trade explained the loss of employment in steel mills, then you would expect to have seen a precipitous decline in domestic steel production.  In fact, there’s been very little change in steel output during a period where employment has plunged sharply: This is not to deny that imports have had some impact on employment in manufacturing.  But the primary cause of job loss has been automation.  And with AI set to revolutionize manufacturing, employment in manufacturing will continue to decline sharply over the next few decades even if we were to entirely eliminate all imports. PS.  This post does a nice job of explaining why bringing back manufacturing jobs is harder than it looks. (0 COMMENTS)

Charlie Munger once said that “it’s not the bad ideas that do you in, but the good ones.” While some have taken this quote to mean that people get stuck too easily on their good ideas, even if they don’t work. But you can also consider this to mean that poorly implemented “good” ideas can have dangerous consequences for these ideas, perhaps even more so than people never taking your ideas seriously in the first place. At least as currently implemented, I’m afraid that this is where the Department of Government Efficiency (DOGE) is. But first, I’d like to give DOGE some credit. They are at least bringing about a conversation, or a “vibe shift” in the necessity of a seemingly never-ending increase in government spending. This is at least a start to the conversation of how much government should be spending. For example, federal government spending is still nearly $1 trillion over pre-pandemic levels, totaling $6.75 trillion in 2024.  Many in the classical liberal tradition share similar values to DOGE and its supporters: government spending is out of control. However, the process in doing so is just as important. Thus far, DOGE actions have been sporadic and “transparent” but incredibly misleading. There have been many instances of numerous generous accounting practices and just plain mistakes that make their cost savings seem higher than it actually is.  There are now court cases questioning the legitimacy of DOGE’s actions. In large part, this deals with Congress having the constitutional authority over the “power of the purse.” It is not clear if the President can retroactivity not spend money that Congress allocated via spending bills. If this is deemed kosher, what is to stop future Presidents from adding to government spending without congressional approval.   Even Ayn Rand, who is by no means a pro-government ally, argued that the process of cutting government matters, not just reducing the scope of government. She warned about the dangers of repealing controls and spending overnight arbitrarily would have tremendous consequences. She suggested, and I agree, that there should be “sufficient notice to readjust and reorganize.” This allows markets to better allocate scarce resources under this new institutional environment.  There is also just a simple accounting problem associated with DOGE. While they have made strides in cutting some useless spending, this is in large part a drop in the bucket of their promises. Elon Musk and short-lived member of DOGE Vivek Ramaswamy stated they could “easily” cut $1-2 trillion from waste, fraud, and abuse. As I stated in a previous piece, the vast majority of government spending is not really on the board to cut without drastic fundamental changes.  My fear about DOGE and their sporadic nature is that they will make true spending reforms more difficult going forward. Clearly, something needs to be done about the fiscal state of the U.S. government, where the debt has grown at an alarming rate in the 21st century. However, if DOGE is not as serious about the process as they are about cutting government, there will not be the political will to undertake the true spending reforms that can open up the economy to its full potential. There is still time for DOGE to work within the constitutional framework to address spending reforms before their reputation is permanently damaged, making us classical liberals even less likely to make headway in reducing and size and scope of government in our lives.    Justin Callais is the Chief Economist with the Archbridge Institute and Co-Editor of Profectus Magazine. He has a Substack on economic prosperity called Debunking Degrowth. (0 COMMENTS)

  Benjamin Anderson (1949): The Crowning Financial Folly of the Hawley–Smoot Tariff by Alan Reynolds, Cato at Liberty, April 8, 2025. Excerpt: “There came another folly of government intervention in 1930 transcending all the rest in its significance and in its baleful consequences. In a world staggering under a load of international debt, which could be carried only if countries under pressure could produce goods and export them to the creditors, we, the greatest creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of June 1930 was the crowning financial folly of the whole period from 1920 to 1933… “Once we raised our tariffs, an irresistible movement all over the world to raise tariffs and to erect other trade barriers, including quotas, began. Protectionism ran wild over the world. Markets were cut off. Trade lines were narrowed. Unemployment in the export industries all over the world grew with great rapidity, and the prices of export commodities, notably farm commodities in the United States, dropped with ominous rapidity. Farm prices in the United States dropped sharply through the whole of 1930, but the most rapid rate of decline came following the passage of the trade bill. “The dangers of this measure were so well understood in financial circles that, up to the very last, the New York financial district retained hope that President Hoover would veto the tariff bill. But late on January [sic: Anderson says January]15, it was announced that he would sign the bill. This was headline news Monday morning. The stock market dropped 12 points in the New York Times averages that day, and the industrials broke nearly twenty points. The market, not the President, was right.” DRH note: The 12 point drop was a drop of approximately 5%.   The 51st State by C. Bradley Thompson, The Redneck Intellectual, April 8, 2025. Excerpt: One of his [Thompson’s] great hopes is that the long-suffering Canadian people will one day liberate themselves from their soft tyranny (gift wrapped in the famous Canadian niceness and politeness) and become a free country again, free of the creeping socialism that has been slowly destroying Canada since April 20, 1968, when the charismatic and charming Pierre Trudeau was first elected Prime Minister. Canada was once a free society, particularly in the decades before World War II. (By the way, the great early twentieth-century American classical-liberal writer, Albert Jay Nock, once wrote a wonderful essay “Why Nature’s Way is Best”, American Magazine, July 1911 in which he suggested that the Canadian Province of Alberta was one of the freest places in the world.) DRH comment: Brad is a fellow Canuck. I’ve had the same impression of the older Trudeau that he had. He did one good thing as Justice minister before becoming Prime Minister: legalizing homosexuality. I hadn’t known about Alberta, but it’s plausible. In 1969, when Trudeau was getting Medicare, Canada’s single-payer system, going, Alberta was the province with the most resistance.   The Nonsense of the “Tariff Men” by Phillip W. Magness, Quillette, April 9, 2025. Excerpts: This confusion is the result of an ideological battle being fought inside the White House. Although Trump assembled an economic team of like-minded “tariff men” to enact his policies, his advisers seem to be at odds over what the tariffs they favour are supposed to achieve. The chaotic implementation of the past two months reflects their competing goals, which include classical protectionism, revenue generation, and a sweeping scheme to devalue the dollar and “reset” the international economy. Instead of forming a cohesive tariff agenda, they vie for the president’s ear and lead him down conflicting paths. At present, there appear to be about five different tariff camps within the Trump administration. Since the economics profession overwhelmingly rejects tariffs, almost all of Trump’s “tariff men” hail from the fringes of the discipline. But these peripheral perspectives do not agree with each other as a brief survey of the tariff landscape will reveal. And: The burdens of Navarro’s statistical contrivance will nonetheless impose profound and adverse effects on most Americans. Contrary to the classical protectionists’ claims, the costs of a tariff are inevitably passed on to consumers—either through price increases used to absorb the tax itself or by importers shifting procurement to “protected” domestic firms, which then raise their prices to a level that corresponds with the tax. And far from reversing trade deficits, tariffs of this type ultimately impose self-defeating penalties on US exporters. First, because exporters are price-takers on a global market and must therefore absorb any increased costs to their raw material inputs caused by tariffs. And second, because tariffs tend to trigger retaliatory trade wars abroad, in which other countries target US exporters with punitive levies, thereby cutting them off from the international market.   It’s Tax Season—Five Charts on Who Pays and What’s at Risk by Adam N. Michel and Joshua Loucks, Cato at Liberty, April 11, 2025. Excerpt: Despite persistent political narratives, IRS data show that the federal tax system is not only highly progressive but has become more so over time. High-income Americans pay a disproportionately large share of federal income taxes and face the highest average rates across the entire tax code. Already facing high tax rates, top earners can’t cover the cost of the ever-expanding government alone. The experience of the European welfare states illustrates that, eventually, everyone has to pay for big government. With annual deficits nearing $2 trillion, the real problem isn’t too little tax revenue—it’s too much spending.     (0 COMMENTS)

The recent announcement by President Gustavo Petro regarding the 2025 minimum wage increase in Colombia, with a 9.54% hike, has sparked intense debates in economic and labor circles. While the measure aims to improve workers’ quality of life, especially amidst high inflation, its implications extend far beyond the immediate perception of its beneficiaries. Although the minimum wage is designed as a tool to protect workers, it often ends up harming those it seeks to help the most. In economies like Colombia’s, where approximately 55.6% of workers operate in informal markets, a substantial minimum wage increase may exclude more people from formal employment. Small businesses, facing higher labor costs, are forced to reduce hiring, resort to informality, or even cease operations. For instance, a significant minimum wage increase in South Africa in 2019 led to a contraction in formal employment, particularly in labor-intensive sectors such as agriculture and manufacturing. This phenomenon not only limits job opportunities but also exacerbates inequalities in the labor market. The Inflationary Effect and the Cost of Welfare The inflationary impact is another critical aspect. As labor costs rise, businesses pass those costs on to consumers in the form of higher prices, reducing purchasing power even for those not earning the minimum wage. In Colombia, experts like Carolina Soto, former co-director of the Central Bank, have already warned that this increase could prolong high interest rates and hinder inflation reduction, exacerbating the cost of living for most Colombians. A historical example is Venezuela, where drastic and frequent minimum wage increases, unaccompanied by corresponding productivity gains, contributed to hyperinflation that devastated the economy and further impoverished citizens. Without Minimum Wage: The Case of Denmark Some economies have opted not to establish a legal minimum wage, relying on alternative mechanisms to regulate the labor market. Denmark, for instance, lacks a legislated minimum wage. Instead, wages are negotiated through collective agreements between employers and unions, resulting in competitive pay and favorable working conditions. This model allows wages to adjust flexibly according to workers’ skills and productivity, promoting significant economic efficiency. Moreover, Denmark’s long-term unemployment rate is currently around 0.9%, reflecting one of the lowest unemployment levels in Europe and a high quality of life—indicators that support the success of this approach. However, the absence of a legal minimum wage requires a robust institutional framework and strong unions to effectively represent workers’ interests. This demonstrates that this model is not a universal solution but an opportunity to structure more efficient labor markets aligned with the principles of economic freedom. While some argue that the minimum wage is necessary to ensure a decent standard of living, others view its implementation as an obstacle to economic growth and job creation. The real solution may lie in a middle ground: policies that strengthen productivity, reduce informality, and encourage individual negotiations between employers and employees. An innovative example could be the implementation of sector-specific “negotiated wages,” where each industry sets minimum wages based on its unique conditions. This practice, used in countries like Germany, balances worker protection with the flexibility needed to maintain business competitiveness. The Role of Productivity The relationship between minimum wage and labor productivity is complex and varies across economic contexts. In economies without a legal minimum wage, such as Denmark, wages often reflect workers’ productivity more directly. This approach incentivizes employers to hire efficiently and workers to develop skills that increase their market value. Conversely, in systems with high minimum wages, businesses may struggle to retain less productive employees, particularly in low-skill sectors, potentially leading to higher structural unemployment. However, a moderate minimum wage can also incentivize workers to achieve higher productivity levels to justify their employment. This contrast suggests that productivity is inherently tied to labor market design. The existence or absence of a minimum wage should be evaluated by considering its impact on innovation, human capital investment, and overall economic efficiency. Toward a Sustainable Future Colombia’s minimum wage increase, although well-intentioned, offers a limited solution to deep structural issues such as informality, low productivity, and inequality. The country needs an open discussion about alternatives that respect economic freedom and promote general welfare, avoiding the adverse consequences that have historically accompanied poorly planned wage hikes. Colombia can learn from international experiences and adopt innovative solutions that enable workers to thrive in a dynamic, competitive, and less regulated market. Only then can the nation build a sustainable path toward true prosperity.   Omar Camilo Hernández Mercado is a law student at the Universidad Libre de Colombia, Senior coordinator of Students for Liberty in Colombia, and a seminarist in “The Austrian School of Economics” at the International Bases Foundation.  (0 COMMENTS)