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)

  Mercy has long been a hallmark of a just legal system.  Judges are often given considerable leeway in determining punishment for a crime (except in cases like mandatory minimums or “three-strike” legislation) for exactly this reason.  Extenuating circumstances can result in a lower punishment for some criminals than others who commit certain crimes, and so on.     Some claim that mercy is a weakness, however.  They want no mercy, at least for certain crimes.  So called “tough on crime” politicians, for example.  The list of crimes where mercy is a weakness is long and variable: illegal immigration, pedophilia, murder, rape, treason, drug dealing, prostitution, etc.  The idea is if you greatly increase the penalties (up to and including the death penalty), you get less crime.  The empirical evidence of deterrence is mixed and probably not going to be resolved any time soon.     But while total effects are important, what about the mix of crimes?  Could tough-on-crime legislation create a mix toward more violent crime even if the total crime rate is falling?  The economic way of thinking gives us reason to think so.   Let us assume that a criminal is economically rational.  That is, a criminal will only conduct a crime if the marginal benefit of the crime exceeds the marginal cost in their estimation.  The marginal cost of the crime will subsequently be the expected punishment and the marginal benefit is whatever benefit the criminal gets by committing the crime.  The expected punishment is the probability of getting caught times the punishment if caught.  By this assumption, we can see that a tough-on-crime stance could deter petty crimes.  For example, if the punishment for stealing $100 is a $10,000 fine, then even a 1.1% chance of getting caught would deter the rational criminal: marginal benefit = $100.  Marginal cost = 0.011*$10,000 = $110.  $110 exceeds $100, so the rational criminal would not commit the crime.  At 1%, the criminal is indifferent between committing the crime and not.   If the criminal does act and is caught, they face a choice: surrender and pay the fine, or resist and get a heavier sentence.  For the rational criminal, the relative cost for surrender is lower than that of arrest.  He will thus surrender.   But let’s change the scenario and have an extremely tough-on-crime policy.  Let’s say that the legislature, to combat crime, orders that all crimes are punishable by death.  One might think such a policy would deter crime.  After all, the marginal cost has dramatically increased.  But I argue not necessarily; it would change the mix of crime toward violent crime, since it reduces the cost of violent crime relative to that of lesser crimes.   Let us again look at the criminal who aims to steal $100.  He attempts to commit the robbery but gets caught by a police officer.  The criminal now faces a choice: he can resist arrest (say, by shooting the police officer) or he can submit to arrest.  If he resists, let us say there is a 10% chance he successfully escapes.  Under the tough-on-crime policy currently in place in this hypothetical, it is rational for the robber to resist arrest.  Let us see why:   Option 1: Submit to arrest   Marginal benefit: none Marginal cost: 100% chance of death Result: 100% chance of death   Option 2: Resist arrest   Marginal benefit: 10% chance of escape Marginal cost: none Result: 90% chance of death   Option 2 is the better option here for our criminal.  In the first option, he will die.  No ifs, ands, or buts.  In the second option, he has at least some chance of survival.  The cost of resisting relative to surrender has fallen when compared to the pre-tough-on-crime policy.  There is no marginal cost to the criminal as he faces certain death if he surrenders.  So, paradoxically, the tough-on-crime policy could encourage violent crime by reducing its relative cost.   So, from an economic perspective, there is a case to be made for mercy.  Mercy lowers the cost of surrender relative to resistance, encouraging more criminals to peacefully surrender.  Conversely, a tough-on-crime policy regime increases the cost of surrender relative to resistance.  Those poor people who are detected and caught are doomed; fighting their way out is the cheaper option now.   A tough-on-crime policy could reduce the total number of crimes committed.  On the margin, committing petty crimes is cheaper when compared to committing no crimes.  But once a crime is committed, the choice calculus changes to encourage more violent behavior.  A merciful policy could result in more crimes in total, but the mix would be less violent as the options to resist or commit more violent crimes are more expensive.  From an economic perspective, mercy is a good thing.  Thus, we are left with the question: is it better to have a (relatively) small number of violent crimes or a (relatively) large number of petty crimes? PS, there is a Japanese anime that deals with these issues called Psycho-Pass.  The basic plot is that a government system judges people’s “crime coefficients,” or how likely they are to commit crimes.  They are arrested, or if their crime coefficient is sufficiently high, executed even without committing a crime and without a trial.  In the first episode, a man with no criminal record is determined to have a high crime coefficient, so his arrest is ordered.  The man realizes this and decides to kidnap and attempt to rape a woman because he is going to jail either way.  In this case, the system designed to reduce criminality ended up increasing it. (0 COMMENTS)

Politicians’ incoherence is on the rise. The current war of the American government against international trade offers many examples. President Donald Trump has stated that the high tariffs he imposed on imported goods were both temporary and permanent (“Are Trump’s Tariffs Negotiable or Here to Stay? Amid Confusion, He Says It Can Be Both,” ABC News, April 7, 2025): Amid mixed messaging from top White House officials, President Donald Trump was asked directly on Monday whether his sweeping tariffs are negotiable or here to stay. “They can both be true,” Trump responded. “There can be permanent tariffs and there can also be negotiations because there are things that we need beyond tariffs.” He also said (“Calling Trump’s Bluff on ‘Reciprocal’ Tariffs,’” Wall Street Journal, April 6, 2025): To the many investors coming into the United States and investing massive amounts of money, my policies will never change He seemed to affirm both that he was waiting for a phone call from “China” to mollify him and pay homage and that his administration was already negotiating with them (“Dow Jones Jumps 1,300 Points On Trump Tariff News; Apple, Nvidia, Tesla Rally,” Investor’s Business Daily, April 8, 2025). This week, on Monday morning at 9:08, he wrote on his social media: China also wants to make a deal, badly, but they don’t know how to get it started. We are waiting for their call. But the same Monday morning at 11:14, he also wrote: If China does not withdraw its 34% [retaliatory tariff] increase … all talks with China concerning their requested meetings with us will be terminated! Slips of tongue, slips of mind, or innocent baby talk? Perhaps. But these are just examples of continuous incoherence. A is non-A, freedom is unfreedom, liberation is subjection, war is peace, and temporary is permanent. We know this is false or, more precisely, that we cannot rationally think and debate ideas without accepting the law of contradiction of classical logic. Other ways exist to approach reality such as poetry, music, and perhaps religion, but they cannot serve as the foundations of political philosophy and government policy. What we are now seeing in America, is a protectionist policy that is totally incoherent, economically illiterate, and properly clownish. “Trade wars are good, and easy to win,” Trump tweeted on March 2, 2018.  On January 31 of this year, he declared that “the tariffs are going to make us very rich and very strong.” On April 2, “Liberation Day,” Trump announced so-called “reciprocal” tariffs, calculated with a formula that has no foundation in economic analysis and simply assumes that the “tariffs” applied by foreign states are proportional to the trade deficit of America. Fraudulent advertising went as far as the president brandishing a thick report, the National Trade Estimate Report on Foreign Trade Barriers, published every year by the USTR and whose 2025 version had been submitted to Congress a few days before. The president’s theatrics suggested that the 400-page report was the basis of the “reciprocal tariffs” formula, while it merely provides a qualitative list of the tariffs and (presumed) non-tariff barriers of about 50 countries. The April 2 declaration named nearly 180 countries whose exports were subjected to “reciprocal tariffs.” (The EU counts for one country.) An explanation sheet of the “reciprocal tariffs” calculation was provided by the White House as the two-page “Executive Summary” of a document that is unfindable and probably does not exist. The few academic citations in the “Executive Summary” don’t provide a justification for the formula, and many of the papers’ authors took exception to how their work was used. And so forth. The arbitrary if not absurd determination of “reciprocal tariffs” is illustrated by St. Pierre and Miquelon, a small North-Atlantic archipelago that is not a country but a French territory where less than 6,000 people live. It is part of neither the French or European customs zone, and exports nothing to the United States. Yet, it was put in the category of the highest “reciprocal tariff,” that is, 50%. Another non-country supposed to have been abusing the United States is the Heard Island and McDonald Islands, an Australian territory occupied only by animals, mainly Penguins. “Don’t know what they did to Mr. Trump,” quipped the Australian trade minister speaking of the animals. (“A Tariff Whodunit: How a Tiny French Archipelago Became Trump’s Top Target,” Wall Street Journal, April 4, 2025; for the whole list of “reciprocal tariffs,” see “Where Trump’s Tariffs Stand Now,” Wall Street Journal, April 9, 2025.) No wonder why so many professional economists (and EconLog bloggers, including Jon Murphy) and economic journalists found the whole exercise absurd. A few days after these events, Trump intensified the trade war against China—which mainly means against Americans, who pay the tariffs—while announcing, for the countries that behave, a 90-day pause on the tariffs over 10%. In other words, he partially backed off under the likelihood of a serious economic crash, a drop in the dollar, and high interest rates (“America’s Financial System Came Close to the Brink,” The Economist, April 10, 2025). But this pause can itself be paused or canceled at the pleasure of one man. And if tariffs and personal power are so good, why doesn’t Mr. Trump impose a universal tariff of, say, 254% (some meaningless formula could be adumbrated to produce that figure), and then pause it for 90 days on what’s imported from countries whose producers sell to Americans something politically sensitive for him? One headline in The Economist of April 10 reads along with its subtitle: Trump’s incoherent trade policy will do lasting damage Even after his backtracking, the president has done profound harm to the world economy A government significantly restricting the freedom to trade of its own citizens and residents and running a propaganda machine to push related lies on the populace must represent an advanced case of the Trade Derangement Syndrome. Perhaps we can view that as the prefiguration of an utopian mix of Orwellian vicious rulers and an addicted and smiling populace à la Huxley. The observation that previous governments have brought their own stones to the building of Leviathan’s palace is correct as well as useful for a project in constitutional political economy: chaining the occupant or occupants of the palace. But it also risks becoming a partisan diversion that understates the present danger. ****************************** An Orwellian-Huxleyan family (6 COMMENTS)

Last September, I discussed the strange bidding war for a federal property called “the ziggurat”.  At the time, the bids had risen to $154 million.  A few weeks later the property sold for $177 million, despite failing to achieve a single bid in a previous auction where the minimum price was $75 million, but where buyers were forbidden to demolish the property. So all’s well that ends well?  Not quite.  At the time, I was worried that the new developer would face lots of red tape, and that it would take years to get approval for any sort of project.  But even I didn’t anticipate what came next: A U.S. government agency has canceled the sale of the iconic Ziggurat federal office building in South Orange County to the original auction winner and awarded it to Hoag Memorial Hospital Presbyterian, which had submitted the second-highest offer, Hoag and the other bidder said Wednesday, April 2. Hilco Development Services of Long Beach, which made the winning $177 million bid last fall, issued a statement Wednesday saying the General Services Administration decided last month to rescind its purchase after Hoag sought an injunction to stop the sale. . . . Hoag had complained in its lawsuit that a Hilco partner violated terms of the auction by seeking to collude on the price of the sale. Hilco argued in court filings that no collusion occurred and that nothing improper took place during the auction. Hilco attorney Todd Theodora said in a statement that the firm will challenge the GSA’s decision, saying the firm “is confident that, ultimately, the GSA will be held to its original determination.” That’s right, six months later the auction remains unresolved. Our legal system is one of the biggest obstacles to new development.  Even after this particular case is finally resolved, the developer will be required to jump through all sorts of hoops to get approval for any sort of new development.  When that approval is finally granted, local community groups will immediately sue to block the development. There are reasonable arguments as to whether elected representatives or the courts should determine what gets built.  (I’d prefer neither—let property owners make the determination.)   But the worst possible system is one where no single layer of government can effectively approve a project, and multiple layers of government can block it. There is one legislative proposal that would at least slightly reduce the barriers to construction: A new bill by Oakland Democratic Assemblymember Buffy Wicks would exempt most urban housing developments from the 55-year-old California Environmental Quality Act. If it passes — a big if, even in today’s ascendent pro-building political environment — it would mean no more environmental lawsuits over proposed apartment buildings, no more legislative debates over which projects should be favored with exemptions and no more use of the law by environmental justice advocates, construction unions and anti-development homeowners to wrest concessions from developers or delay them indefinitely. This won’t completely solve the problem–many other barriers to construction would remain–but it would at least slightly reduce the so-called “Nimby” problem in California, which largely explains why people are leaving the state. PS.  There was one time where California sort of lucked into an effective housing policy.  Then look at what happened: (1 COMMENTS)

Someone asked recently what would change as a result of the world being plunged into a trade war by the Rose Garden tariffs. I quipped that either Adam Smith would be proved wrong or we’d all get poorer. (This is also true of the scaled-back tariffs, which still leave American tariffs higher than they’ve been in a century.) In response, as sometimes happens, they brought up Adam Smith’s arguments for tariffs. These arguments come from Book 4, Chapter 2 of Wealth of Nations. They’re a red herring, as we’ll see. But let’s look at how they apply. There are two instances in which Smith says you can always justify managing trade, and two cases in which managing trade can’t be automatically condemned. Restrictions on imports can always be justified (1) in shipping because it’s tied to military defence, and (2) by taxing imports at the same rate that domestic goods are taxed to create a level playing field. Trade restrictions shouldn’t be automatically condemned when (A) they are retaliatory tariffs, or (B) free trade is being phased in. So what’s the big deal? Retaliatory tariffs are right there in the list. Why would the Rose Garden tariffs vex Adam Smith? Smith is very specific about when retaliatory tariffs are appropriate. “There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of.” (IV.ii.39) In other words, retaliatory tariffs are good if they secure freer trade. Israel’s elimination of tariffs against the United States did not spare them. When Vietnam and the European Union offered to eliminate all tariffs, the administration rejected these offers as insufficient. If these were meant to be retaliatory tariffs, they’ve failed. But the Rose Garden tariffs were never retaliatory. They were not based on how much other countries tariff the United States. They are not even based on estimates of non-tariff barriers. The White House confirmed that the method used to calculate the tariffs was the trade deficit divided by U.S. imports from that country, then divided again by 2 (Unless a country does not run a trade deficit with the United States, in which case the tariff was set to 10%). So it’s not about retaliation, but—at best—a negative trade balance. And we all know what Adam Smith said about the balance of trade, right? “Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false.” (WN IV.iii.a) But anyway, Adam Smith’s arguments about tariffs are a red herring if we want to know what Adam Smith would think of these tariffs. The effect of the tariff announcement in the Rose Garden was not simply to raise the price of international trade. As Thomas Sowell observed, the tariff announcement also introduced uncertainty that makes foreign investment and globally integrated supply chains more vulnerable—more risky—at the same time as the tariffs themselves make international trade more expensive. The overall effect of these policies is the effect of all trade restrictions: they effectively shrink the global market. Exchanges that would otherwise make sense become more expensive and they don’t happen. Adam Smith’s core economic insight, the one from which all other arguments in the Wealth of Nations follows, is that the wealth of nations is a product of the division of labour (Book 1, Chapter 1), of cooperation facilitated by our natural propensity to truck, barter, and exchange (Book 1, Chapter 2). The division of labour is limited by how many people we can divide labour between, what Smith calls the “extent of the market” (Book 1, Chapter 3). If we will not be poorer because the tariff announcement in the Rose Garden shrunk the number of potential trades, and with them the extent of the market, then the division of labour is not the source of the wealth of nations. If the Rose Garden tariffs won’t make us all poorer, then Adam Smith was wrong about everything. If Smith was wrong about everything, who cares when he says tariffs are good?   Related content: CEE Entries: Protectionism, Mercantilism WealthofTweets: Book 4, Chapter 2 WealthOfTweets: Book 4 Chapter 3 Jon Murphy, The Political Problem of Tariffs   (0 COMMENTS)

Applied to Protectionism On his CafeHayek blog today, Don Boudreaux gave a great quote from a book by William Graham Sumner. The book is titled Protectionism: The ‘Ism Which Teaches that Waste Makes Wealth. You can access that book for free on Liberty Fund’s site here. Here’s the quote: If, now, it was possible to devise a scheme of legislation which should, according to protectionist ideas, be just the right jacket of taxation to fit this country to-day, how long would it fit? Not a week. Here are 55 millions of people on 3½ million square miles of land. Every day new lines of communication are opened, new discoveries made, new inventions produced, new processes applied, and the consequence is that the industrial system is in constant flux and change. How, if a correct system of protective taxes was a practicable thing at any given moment, could Congress keep up with the changes and readaptations which would be required. The notion is preposterous, and it is a monstrous thing. That insight reminded me of a section of Robert Nozick’s Anarchy, State, and Utopia titled “How Liberty Upsets Patterns.” Nozick points out that if the distributionists get their way so that everyone has the ideal amount he or she should have (ideal based on their standards), this won’t last long. Some people will start spending money on seeing, say, Wilt Chamberlain, playing basketball. Actually, many people will do this. As a result, Wilt Chamberlain will get rich and he won’t have the initial distribution he was allowed: he will have more. And some of the people paying to see him play basketball will have less than the initial ideal distribution. In short, liberty upsets patterns. Similarly, let’s say Trump gets his way, whatever that is, and we get the ideal trade balance with each country. (That’s a huge assumption, because Trump seems to want a zero trade balance with each country, which would necessarily lead to a reduction in foreign investment in the United States or an increase in U.S. investment in other countries. But let’s assume it.) Now someone in the United States decides he wants to buy more clothing from Vietnam. He wears it and other people notice it and want to buy more. Within a few months, the trade balance with Vietnam goes negative. We are buying more from them than they are buying from us. That’s not a problem. But to life arrangers like Donald Trump, it is a problem. Liberty upsets patterns, including trade balances. (0 COMMENTS)

There are some concepts that seem so obvious as to need no explanation. But once in a while I discover that not everyone views the world in the same way, and the obvious may require a bit of explanation.Let’s start by considering a world with no money, relying on barter. Suppose Australia wishes to buy some big Caterpillar tractors and Boeing jets. Unfortunately, the US is not particularly interested in buying the stuff that Australia exports, such as iron, coal and beef. We already have plenty of those commodities. So no trade occurs.Now let’s introduce money. Australia can pay for those US exports with money. The US can use that money to buy clothes, consumer electronics and home appliances from China. China can then take that money and buy iron, coal and beef from Australia. The use of money facilitates a three-way trade that would have been almost impossible under a system of barter. You might also notice that each of the bilateral trade relationships is unbalanced, with one country in deficit and one country in surplus.  But for the world as a whole there’s no obvious problem. Those bilateral deficits and surpluses are no more meaningful than if I had a deficit with my grocery store and a surplus with the students I taught.  Individuals, cities, states and entire nations always have lots of bilateral deficits and surpluses.  That’s what it means to move beyond barter. Some are now advocating that we move back closer to barter, that we try to balance every bilateral trading relationship.  Well, not every relationship, but at least every trading relationship between countries.  Although no serious economist worries about bilateral trade imbalances, a few do worry about the overall trade deficit.  Of course when all types of trade are taken into account (goods, services and financial assets) trade always balances.  But we may end up selling more of less of one particular type of good than we buy.  The Trump administration has recently begun worrying about bilateral trade in goods, while ignoring services and assets.  They worry that this hurts manufacturing. Instead of focusing on the overall trade balance, they decided to focus on our bilateral trade balance (in goods only) with our trading partners.  They decided that each bilateral trade balance should move to zero, i.e., that we should move closer to a system of barter.  As we saw from the three-way trade example above (which could not occur under barter), that’s not the most efficient way to organize international trade.  Indeed, even if the goal were to achieve a zero overall trade balance between the US and the rest of the world, there would be no obvious reason to focus on eliminating bilateral trade deficits. Part of the confusion revolves around the myth that bilateral deficits reflect “unfair trade practices”.  That’s clearly not true, and at a certain level the administration understands that it is not true.  If it were true, the trade problem could be quickly resolved by negotiating an end to all trade barriers, including both tariffs and non-tariff barriers.  But the Trump administration is strongly opposed to free trade agreements, even to free-trade agreements negotiated by Trump himself (such as USMCA). So how did we end up in this mess?  I suspect the problem relates to the interrelationship of three facts: All wars (including trade wars) require the demonization of the enemy.  To enlist the public in a long painful campaign it is necessary convince voters that America is being taken advantage of by nefarious foreigners.  No one wants to be told that we need tariffs because we are losing the competitive race in foreign trade due to the fact that we just aren’t as good at it as our competitors. The unfair trade myth leads to a set of tariff rates that are far from optimal.  If these tariffs begin to hurt the economy, the administration faces several choices, none of which are pleasant. They can maintain them indefinitely, but the slower growth and higher prices will tend to make tariffs less popular with voters. Another option is to “negotiate” with foreign countries, and eliminate the high tariffs in exchange for token concessions.  But that approach fails to address the trade balance, as the trade deficit was not caused by foreign unfair trade practices.  A political win, but an approach that throws the administration’s mercantilist supporters under the bus. At some point an administration must decide between being popular and sticking to the plan.   Ironically, as I was writing these final words, I saw a story that the administration was changing course.  So 5 minutes after completion, this post is already out of date.  Welcome to the world of 2025! (0 COMMENTS)