Tariffs

Tocqueville read Say’s "Cours complet d’économie politique pratique" twice—the second time while enroute to America. Besides exposing Tocqueville to key ideas expressed in Adam Smith’s Wealth of Nations, Say stressed a point that Tocqueville never forgot: that while the economy can be studied on its own terms, one should never forget that it is embedded in society.--Gregg

That may be why the Europeans have such difficulty understanding the Americans.

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A Gallup poll this summer said 81% of Americans want a path to citizenship for those “brought to the U.S. illegally as children.” That included 64% of Republicans.

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Tariffs

A new National Bureau of Economic Research paper shows that tariffs probably did more harm than good. Using meticulously collected industry-level and state-level data, the paper traces the impact of specific tariff rates more clearly than before. The results are not pretty.

One core finding is that industries with higher tariffs did not have higher productivity — in fact, they had lower productivity. Tariffs did raise the number of US firms in a given sector, but they did so in part by protecting smaller, less productive firms. That was not the path by which the US became an industrial giant, nor is it wise to use trade policy to keep lower-productivity firms in business. Not only does it slow economic growth, it also keeps workers in jobs without much of a future.

These results contradict the traditional protectionist story — that tariffs allow the best firms to grow larger and capture the large domestic market. In reality, the tariffs kept firms smaller and probably lowered US manufacturing productivity.

The paper also finds that the tariffs of that era raised the prices for products released domestically. That lowers living standards, and should give a second Trump administration reason to pause, as he just won an election in which inflation was a major concern. The finding about inflation also counters another major protectionist argument: that tariffs eventually lower domestic prices because they allow US firms to expand and enjoy economies of scale. That is the opposite of what happened.

The paper also details how lobbying, logrolling, and political horse-trading were essential features of the shift toward higher US tariffs. A lot of the tariffs of the time depended on which party controlled Congress, rather than economic rationality. Trump is fond of citing President William McKinley’s tariffs, but they are evidence of the primacy of political influence and rent-seeking, not of a well-thought-out strategic trade policy.

The authors of the new research are Alexander Klein and Christopher M. Meissner with comments from Cowen in Bloomberg

Trump probably plans tariffs as a threat for other aims. And security questions are raised by foreign production of security products. But most economists argue against the value of tariffs in most instances and Trump, knowing these arguments, seems eager to bull ahead anyway.