CROSSPOST: Kimberly Clausing (PIIE) & Maurice Obstfeld (PIIE): What Populists Don't Understand About Tariffs (But Economists Do)

For as long as I can remember—but more so under editors Kelly and Goldberg—the Atlantic Monthly has had a habit of publishing bullshit right-wing misinformation on important topics that are in my...

For as long as I can remember—but more so under editors Kelly and Goldberg—the Atlantic Monthly has had a habit of sometimes publishing bullshit misinformation, often right-wing, on important topics that are in my wheelhouse, and then doubling down and refusing to publish well-motivated, well-written, & convincing rebuttals.

Now we have another example of such.

For some reason unknown and unknowable—some reason beyond the comprehension of even THE ONE WHO IS—the Atlantic published Oren Cass’s “Trump’s Most Misunderstood Policy Proposal: Economists aren’t telling the whole truth about tariffs” <https://www.theatlantic.com/politics/archive/2024/09/economic-arguments-tariffs-trump/680015/>, and then rejected Clausing and Obstfeld’s rebutting “What Populists Don't Understand About Tariffs (But Economists Do)” <https://www.piie.com/blogs/realtime-economics/2024/what-populists-dont-understand-about-tariffs-economists-do>.

Why publish Cass? Other, that is, than to put a thumb on the scale for Donald Trump in the forthcoming presidential election by sanewashing his crazy talk and so reässuring people who want to keep their capital-gains tax cut that Trump’s policy proposals aren’t that crazy after all.

My reading is that the following is more likely than not: the Atlantic—and especially Kelly and now Goldberg—are fundamentally more in the stir-the-shitpot business than in the make-our-readers-smarter business. But then why not publish the rebuttal? Fights—especially between people who do and do not know what they are talking about—are a very good way to stir-the-shitpot, after all. My reading is that the following is more likely than not: the Atlantic still has a reputation as a quality joint that Goldberg wants to preserve, and putting the noses of his readers in front of a piece in which an authorial team including a guy perennially on the short list for the Economics Nobel Prize dresses down someone we will politely call a “Washington political-policy entrepreneur” would erode that.

Hear up and listen to this: I know economic-development industrial policy, and how the United States would be most likely to succeed at doing it. But Trump’s incoherent and self-contradictory tariff proposals are not it. The extraordinary and exorbitant economic costs of tariffs mean that their successful use in economic-development industrial policy requires that they be laser-focused on areas of likely large future comparative advantage and areas of large externality benefits from the nurturing and maintaining of communities of engineering practice. Those are simply not things that Trump or Vance care about themselves or care to delegate to anyone competent to assess them who cares about them. The arena for that laser-focus is small. For most of successful economic-development industrial policy, you need to rely on direct subsidies, tax reform, and government investment in research and development.

And as for the argument that expanding and preserving a large manufacturing assembly-line employment base is an important policy for boosting opportunity and equality? That was true. Once. That was true when you have (a) a strong union movement, and (b) manufacturing processes in which there are a huge number of potential workstation slots that require the enormous dexterity of the human arm and hand and the remarkable feedback coördination of the human eye-brain-arm-hand loop. We had both of those back in the day, when manufacturing was one-third of American employment and the AFL and the CIO were in their prime.

Now we have neither of those preconditions. That dog doesn’t hunt.

Manufacturing support via trade barriers to today is not an income-equality and opportunity policy. It is a policy to (i) boost the development and deployment of technology, (ii) nurture our important communities of engineering practice, (iii) create robust defenses against the weaponization of economic interdependence, and (iv) behind that, enhance our national security.

And, although Atlantic editors may claim otherwise, I find it highly likely that Cass is too smart to believe that Trump’s version of tariff policy would actually produce the benefits Cass claims for it. Cass knows almost as I do that the differences between the Old Clinton NAFTA and New Trump USMCTA are minor, and that even so Trump sincerely believes that NAFTA was the worst and USMCTA the best trade agreement America has ever made.

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What Populists Don't Understand About Tariffs (But Economists Do)

Kimberly Clausing (PIIE) and Maurice Obstfeld (PIIE)

October 1, 2024 1:50 PM

Oren Cass’s shallow and selective defense of Donald Trump’s trade policy proposals in The Atlantic misrepresents what economists know about tariffs. Agreed, Trump’s specific ideas—including minimum duties on all imports and the use of tariffs for commercial and foreign policy objectives—are unprecedented. Still, under Trump’s plan, the well-documented costs of tariffs will swamp the far more speculative benefits that Cass touts.

Cass’s main critique is that economists “consider only the costs of tariffs and not the benefits.” Cass imagines potential benefits of tariffs that he calls “externalities.” In his telling, these include fueling a US manufacturing renaissance, leading to higher middle-class wages and more stable families and communities. He asserts that this manufacturing resurgence will promote research, development, and innovation, leading to economy-wide productivity gains.

While such goals are laudable, an assessment of tariffs as a policy tool must answer three questions:

• How costly are tariffs?

• Would they deliver the desired benefits?

• Would other policy tools be more effective than tariffs?

Our brief answers are:

• Very.

• Negligibly or no.

• Yes.

By hawking the illusion that Trump can ameliorate America’s serious social problems with a wave of the magic wand of tariffs, Cass discourages the tough work that economists and policymakers need to do to craft and implement practical solutions.

Let’s take each of the three preceding questions in turn.

Costs of tariffs. Tariffs are a tax on imports, and they will raise prices for households and, crucially, for businesses that rely on imported inputs to make their products. Not only will prices rise for the imported products, so will the prices of goods produced at home that compete with imports.Simply put, protectionism reduces the gains from trade; we choose to pay more than necessary for some goods (imports and their domestic substitutes) instead of focusing on those goods that we produce more efficiently than foreigners.

Skeptics argue that inflationary effects of Trump’s 2018 tariff hikes were not visible in the data. However, the tariffs Trump now proposes will apply to more than 10 times more imports than his last round (about $3.1 trillion based on 2023 data), giving them a much bigger impact on prices while reducing opportunities for switching toward non-tariffed substitutes. Moreover, the US inflation rate did rise in 2018, leading the US Federal Reserve to raise interest rates. Careful product-level studies of the Trump tariffs—such as those here, here, and here—indicate that not only did the prices of tariffed goods rise, they rose by the full amount of the tariffs. In other words, American households and businesses bore the entire burden; none was shifted to foreign exporters.

Benefits of tariffs. Tariffs also have a poor record at creating the manufacturing renaissance that Cass yearns for. On the contrary, Trump’s 2018–19 tariffs harmed manufacturing employment. US exporters facing retaliation lost sales abroad, and some felt compelled to lower their prices as a result. Tariffs on intermediate goods also harmed US export competitiveness.

These negative effects would be even larger under Trump’s proposed universal tariffs, which would hit a wider range of production inputs. Since many of the manufacturing industries Trump hopes to resurrect produce precisely such inputs, it would be counter to his policy’s aims to shield US businesses by exempting intermediate imports from tariffs. So Cass’s big, unrecognized, benefit from Trump’s tariffs—their supposed boost to manufacturing employment—would be unlikely to materialize.

Economists have long known that tariffs on imports not only reduce the demand for imports, they also discourage exports. This effect arises because as more domestic resources are used to produce goods that were previously imported, those resources are drawn away from export industries. There is only so much that the US economy can produce with its current labor force and capital stock; moreover, shrinking the labor force, as Trump aims to do by deporting unauthorized immigrants, would only exacerbate that constraint. If US production of import goods rises but production of export goods declines, there is no guarantee that overall manufacturing employment will expand. This process also works in reverse when trade expands. One study found that higher US imports over 1995–2011 were associated with the loss of 1.4 million manufacturing jobs, but higher US export sales generated 2 million more manufacturing jobs.

Cass believes that the experiences of developing Asian nations and pre-World War I America demonstrate the value of tariffs in spurring manufacturing. However, these economies were all primarily agrarian, with large supplies of rural labor available to move into manufacturing, hardly a model for the United States today. Even Alexander Hamilton, the first US Treasury secretary and a strong advocate of policies to promote American manufacturing, preferred relatively low tariffs.

Cass mentions another item on the benefit side of the tariff ledger, revenue. Contrary to his assertion, economists do not assume that “tariff revenue simply disappears.” But he is correct that what happens to that revenue is important. Tariffs are regressive taxes, more costly to lower- and middle-class households. Would a Trump administration use extra tariff revenue to compensate those households? Simply put, no. Instead, Trump has suggested an ever-expanding array of regressive tax cuts, including cuts to corporate tax, extension of the Tax Cuts and Jobs Act income tax cuts, tax exemption of Social Security benefits, and restoration of the full deduction for state and local taxes. While Trump insists there will be enough tariff revenue to do all that and establish a sovereign wealth fund too, plausible estimates of tariff revenue are much lower and leave little scope to compensate poorer households.

Tariffs may also result in political dysfunction that limits the revenue they yield. Not only can they often be levied without congressional scrutiny, but tariffs create a regime that invites lobbying influence. As a consequence, tariff revenues will be dissipated as companies petition for exemptions, and politics will be a major factor in the disposal of the funds. Trump spent $28 billion on aid to farmers during his last trade war to compensate them for Chinese retaliatory actions. Consumers were not so lucky.

Are there better tools? Globalization is not the only factor that has disrupted US labor markets and communities over the past three decades, but economists often understate the difficulties associated with compensating those harmed by disruption.

However, the underlying problem of worker security is much broader than preserving manufacturing jobs, and tariffs are an ineffective and inefficient tool for enhancing this aim. After all, the net decline in manufacturing jobs masks massive job churn in our economy, much of which is domestic in origin. For example, factory closings in Indiana or California alongside openings in Alabama or Georgia will not be addressed by tariffs, nor will the disruptions due to technological change. These disruptions may cause distress, but they will be untouched by tariffs, which will instead penalize consumers and shift activity toward inefficient producers. What is needed instead is a redesign of the US social safety net and a strengthening of US fundamentals, including public investments in infrastructure, research, and people.

If one views more manufacturing jobs as desirable, other tools outperform tariffs. For example, direct subsidies avoid the side effect of higher consumer costs. One could also fix elements of the US tax code that incentivize US companies to produce abroad rather than in America.

Promoting research and innovation does involve a genuine externality: positive productivity spillovers throughout the economy. As a share of GDP, private US research and development (R&D) spending has risen steadily since 2006, but government investment in basic R&D is now below 1 percent, about half the peak it reached in the late 1960s. Direct R&D subsidies and government investment are in order and are much better ways to spur innovation than costly and inefficient trade barriers.

We do not deny that tariffs can be appropriate in some circumstances. For example, countervailing duties in the face of a trade partner’s subsidies, or safeguards to give industries more time to adjust, can be appropriate if done in a manner consistent with World Trade Organization rules.

In contrast, Trump’s proposed comprehensive tariffs, premised on the notion that “the U.S. has been ripped off for years” by the entire world, go far beyond any economically defensible purpose. The siren song of such snake-oil solutions should be rejected; instead, the United States should do the hard work of crafting a fairer and more resilient economy.

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NOTE: This essay is a response to "Trump's Most Misunderstood Policy Proposal: Economists Aren't Telling the Whole Truth about Tariffs," published on The Atlantic.com on September 25, 2024. We offered this essay to The Atlantic, which declined to publish it.

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References:

• Cass, Oren. 2024. "Trump’s Most Misunderstood Policy Proposal: Economists Aren’t Telling the Whole Truth About Tariffs." The Atlantic, September 25. <https://www.theatlantic.com/politics/archive/2024/09/economic-arguments-tariffs-trump/680015/>.

• Clausing, Kimberly, & Maurice Obstfeld. 2024. "What Populists Don’t Understand About Tariffs (But Economists Do)." Peterson Institute for International Economics. October 1. <https://www.piie.com/blogs/realtime-economics/2024/what-populists-dont-understand-about-tariffs-economists-do.>.

• Cohen, Stephen S., & J. Bradford DeLong. 2016. Concrete Economics: The Hamilton Approach to Economic Growth and Policy. Boston: Harvard Business Review Press. <https://archive.org/details/isbn_9789933896959>.