• Tag Archives tariffs

  • Tariffs Are Awful, but the Income Tax May Be Worse

    Posted on by Azrael Comment

    Every fiber of my economic being cries out against tariffs. If they are so good, why doesn’t each state in the US have one against the products of all of the other 49? That is, Ohio could “protect” its industries against the incursions from Arizona. This is obviously silly. One of the important reasons America is so prosperous is that we have a gigantic, internal, free trade area.

    Donald Trump supports them on the ground that the McKinley administration was prosperous, and relied upon tariffs. But this is to commit the post hoc ergo propter hoc logical fallacy: that since A precedes B, A must be the cause of B. No, America did indeed become rich during this epoch, but that was in spite of tariffs, not due to their benign influence. If you are looking for a historical episode to shed light on this matter, the Smoot-Hawley Tariff of 1930 will do far better: it greatly worsened an already bad recession, plunging our economy into a deep depression.

    Our President also claims that the US is victimized by a negative balance of trade: we buy more from Canada and other countries than they purchase from us. However, I have a horrid balance of trade with McDonald’s and Wal-Mart. I acquire several hundreds of dollars’ worth of their products every year, and neither has yet seen fit to reciprocate with any of my economic services (hint, hint!). On the other hand, I have a very strong positive balance of trade with my employer, Loyola University New Orleans. They pay me a decent salary; apart from a few lunches in their cafeteria, my expenditures to them fill their coffers to a zero degree. Should anyone worry about this sort of thing? Of course not. Ditto for international trade. If Country A buys more from B than it sells to it, money will flow from the former to the latter, reducing prices in the former and raising them in the latter, until matters balance out.

    Everyone realizes the foolishness of tariffs when it comes to absolute advantage. No Canadian objects to the importation of bananas from Costa Rica. Producing this tropical product in the frozen North would be financially prohibitive (gigantic hothouses). Ditto for maple syrup in the country to the south. The only way they could produce this item would be to place maple trees in gigantic refrigerators. Ludicrous and prohibitively expensive.

    But when it comes to comparative advantage, all too many people are out to lunch insofar as the teachings of Economics 101 are concerned. They fear that other countries might be more efficient than we are; with free trade, they would produce everything, we, nothing, and we would all starve to death from massive unemployment.

    To dispel this myth, let’s consider a thought experiment. A lawyer is as good a typist as his secretary. He can produce $1,000 per day by practicing his profession. But for every such day, he needs a certain amount of typing. He can produce $200 worth each day. In two days, he can thus earn $1200 on his own. If he hires a typist, he can earn $2,000 from lawyering in two days, but must pay his secretary $200 daily for a total of $400. If he trades with her, he will come out with $2,000-$400=$1,600, an appreciable gain for him.

    So is there any economic case for tariffs, given the foregoing? Yes, paradoxically, there is—in a way, if the alternative is a tax that’s even worse.

    At the start of his second term, President Trump initially fired 6% of the employees of the Internal Revenue Service. He is now looking to end the employment of some 50% of them. Suppose he follows this up by getting rid of all of the rest of the IRS bureaucrats, eliminating the dreaded income tax, and achieving revenue neutrality with tariffs. His motto might be: “Let’s turn back the clock to 1912,” the year before this tax was implemented (when it ranged from 1% to 7%!).

    What would the benefits be thereof? First of all, there are many intelligent, productive people who work for the IRS. There are some 90,000 of them. If dismissed by their employer, they would be freed up to produce goods and services desired by the populace. Ditto for the many accountants and tax lawyers who devote all or part of their time to helping their clients wrestle with complicated IRS regulations. Further, many of us fill out our own tax forms. This takes hours, days in some cases, time that could be better spent on leisure or productivity.

    The benefit here is that it takes relatively little labor to run a tariff system. Hey, we already have tariffs in place. An increase in their level would hardly call for much more manpower, likely hardly any more at all.

    Halfway measures will avail us little. But if Mr. Trump completely eliminates the IRS and the hated income tax along with it, there may be a reasonable case for increasing tariff rates. Not to present punitive levels, though.

    To put it another way, if we accept that there has to be a government, and it therefore needs some revenue to function, this might be the least-bad option.

    Should we worry about so many people becoming unemployed? Not at all. A similar sort of thing occurred when the car replaced the horse and buggy, when the cell phone substituted for Kodak, when we switched from typewriters to computers, etc. We are all the richer for this sort of thing, and will be in this case too.

    • Walter Edward Block is an American economist and anarcho-capitalist theorist who holds the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at the J. A. Butt School of Business at Loyola University New Orleans. He is a member of the FEE Faculty Network.

    Source: Tariffs Are Awful, but the Income Tax May Be Worse


    📂This entry was posted in News and Politics 📎and tagged

  • Here’s How Biden Is Making It Even Harder to Buy a Home

    Posted on by Azrael Comment

    The US housing market is extremely competitive right now; prices are high and houses are selling fast.

    When Molly Rodela — who is a wife as well as a mother to two kids — was finally able to find a suitable house for a reasonable price online, she could not spend any time considering the decision. She contacted her agent, visited the house without her husband, and then put in an offer $20,000 above the asking price all in the same day.

    With her quick action, the Rodelas were able to get the house. But many have not been so lucky.

    Moreover, the factors behind the tight housing market are concerning.

    For homebuilders across the country, it has become harder and harder to create affordably-priced housing. One of the reasons is the increased labor costs associated with a shortage of skilled workers.

    And a huge factor has been the recent spike in the price of lumber. In fact, the National Association of Homebuilders recently reported that the cost of building a new house has gone up by $24,000 due to soaring lumber prices alone.

    For homebuyers, the issue may go from bad to worse.

    The Biden administration recently took the first step to double tariffs on Canadian lumber from roughly nine to 18 percent.

    In doing so, the administration is falling for an age-old economic fallacy.

    In his timeless book, Economics In One Lesson, Henry Hazlitt argued that “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

    In other words, Hazlitt believes that we must not assess policy with blinders on, but rather with a broad understanding of the policy’s consequences.

    In the chapter titled “Who’s ‘Protected’ by Tariffs,” he applied this principle to anti-trade protectionism specifically, pointing out that people who support tariffs fall for the fallacy of “considering merely the immediate effects of a tariff on special groups, and neglecting to consider its long-run effects on the whole community.”

    In this case, Biden is justifying his tariff hike by its immediate effects on the American lumber industry. He argues that when Canada subsidizes their lumber industry, they are able to undercut US producers in an unfair way. So, by implementing a tariff on Canadian lumber, Biden is making Canadian lumber more expensive, thus giving American lumber companies a competitive advantage.

    But a true practitioner of the art of economics would then ask: who else does the tariff impact, and how?

    One important question to ask, for instance, would be how does the tariff impact American industries that purchase lumber? The answer: they have to pay higher prices.

    The burden of these increased production costs inevitably ends up being passed onto consumers. Basic economics tells us that when the price of one resource used to produce a good goes up, the price that the consumer eventually pays for that good rises as well.

    This is exactly why home buyers — and consumers of products that use lumber in general — will be the victims of Biden’s lumber tariff.

    A shortage of lumber as a result of the pandemic led to its price in May being up nearly 400 percent over the past year. But prices have begun to drop again because production has started to ramp up. To increase the tariff — which is just an import tax — would serve to restrict the supply of lumber. This would not allow prices to decrease back to pre-pandemic levels.

    The natural consequence of high lumber prices is the increase in price for all of the goods that use lumber in their production. This does not just stop at houses, but rather includes things such as furniture and storage appliances as well. The average consumer will then have to pay a higher price for all of them.

    Tariffs are not only harmful to individual consumers, but the economy as a whole. As Hazlitt points out, “Higher prices in one area mean that they will not be able to spend that money on something else, thus hurting other industries as well.”

    For example, if, because of Biden’s tariff hike, people have to spend more on houses and other things made with lumber, they will have less money to spend on things such as restaurants, tourism, and consumer technology. Therefore, workers and investors in those industries will be economically disadvantaged by the tariffs, too.

    As Hazlitt says, “In order that one industry might grow or come into existence, a hundred other industries would have to shrink.”

    At the core of the matter, President Biden is making the mistake of only looking at the effect of this tariff on a special group — the US lumber industry. But, in doing so, he is neglecting the millions of Americans who — far from being protected — will be economically harmed by the tariff hike, including consumers (especially homebuyers), workers, and investors.

    Tariffs, much like any number of other well-meaning government programs, seem like a plausible solution to certain problems we face. But, if we think like an economist and widen our lens to encompass the bigger picture, it becomes clear that they will primarily hurt the American people.

    Buy Economics in One Lesson from the FEE Store.


    Jack Elbaum

    Jack Elbaum is a Hazlitt Writing Fellow at FEE and an incoming sophomore at George Washington University. His writing has been featured in The Wall Street Journal, Newsweek, The New York Post, and the Washington Examiner. You can contact him at jackelbaum16@gmail.com and follow him on Twitter @Jack_Elbaum.

    This article was originally published on FEE.org. Read the original article.


    📂This entry was posted in News and Politics 📎and tagged

  • Yes, a Currency Devaluation Is Very Much Like a Tax

    Posted on by Azrael Comment


    Britax is a global corporation with a manufacturing hub in Fort Mill, South Carolina where it employs 300. It is there that the company creates car seats for children. Unknown is how long it will continue to.

    While it’s surely risky to draw immediate correlation, James Politi of the Financial Times recently reported that Britax is thinking about relocating. The impetus for relocation is the tariffs the Trump administration has levied on foreign goods.

    It seems the car seat business is a low margin affair, and beginning in 2018, Britax suddenly faced a 10 percent tariff on the textiles it imports to cover its seats. The tax moved up to 25 percent after a breakdown of trade talks this past May, and then this month a new, 15 percent tariff on metallic inputs such as harnesses and buckles was imposed. The taxes levied on imported inputs Britax relies on to complete its car seats has put it at a disadvantage vis-à-vis car-seat makers located outside the U.S. According to Politi, foreign producers of the seats enjoy a tariff exemption care of the “U.S. trade representative for some, but not all, safety products.”

    It’s all a reminder of the basic truth that tariffs are a tax, plain and simple. Not only do they harm the businesses they’re naively assumed to protect by shielding them from market realities, they’re paid for by other businesses reliant on imported inputs; meaning all businesses.T

    Figure that something as prosaic as the pencil is a consequence of global cooperation, so imagine by extension just how much a car seat is the end result of production taking place around the world. In this case, the Trump administration falsely “protects” textile and metal companies located in the U.S., and the bill for the protection is sent to companies like Britax. The tax paid by the latter has shrunk its already slim margins even more.

    Interesting about tariffs is that they bring about agreement among people with differing ideologies. President Trump’s NEC head Larry Kudlow strongly believes that tariffs are a tax, as does Democratic presidential hopeful, and frequent Trump critic, Pete Buttigieg. Tariffs raise the cost of doing business, which means they’re a tax on earnings. It’s all very simple.

    Which is why the quietude about President Trump’s dollar stance is so strange. As some know, Trump would like a weaker dollar. He incorrectly believes a debased greenback would make U.S. industry more competitive. Except that it wouldn’t, and one reason that a falling dollar wouldn’t enhance the health of U.S. corporations is because currency devaluation is 100 percent a tax.

    Tariffs raise the cost of importing simply because a 10, 15 or 25 percent tariff is a tax above and beyond the price of the imported good in question. When Trump imposes tariffs that are paid for by importers, the U.S. Treasury ultimately collects the proceeds of same.

    With devaluation, much the same is at work. In this case, devaluation of the dollar logically raises the cost of importing foreign goods. It also raises domestic prices, but that’s another piece of commentary for another day. For now, it should be said that money is an agreement about value. If the agreement is shrunk such that it means something different, or is exchangeable for less, it’s only logical that the cost of importing foreign inputs is going to rise unless foreign producers are willing to accept haircuts for what they send our way.

    And what about the U.S. Treasury. While it doesn’t collect the “proceeds” of dollar devaluation in the way that it does the false fruits of tariffs, the result is the same. A dollar is yet again an agreement about value. If the exchangeable value of the dollar is shrunk, so shrinks what Treasury owes.

    Devaluation is most certainly a tax, and it has a very similar impact on corporations as a tariff. Not only does it raise the cost of purchasing the inputs necessary to produce market goods, it at the same time shrinks company earnings. If the dollar is devalued, so must shrink the value of the dollars a corporation takes in.

    For those who think a dollar is a dollar is a dollar, think again. No one earns dollars, as much as they earn what dollars can be exchanged for. There’s a big difference. If the value of the dollar decreases, so must we decrease the value of a dollar earned by a business.

    The previous paragraph helps explain why periods of dollar devaluation (think the 1970s, think the 2000s) correlate with greatly subdued stock-market returns. If the market value of a company is a speculation by investors about all the dollars a company will earn in the future, it’s only logical that a devaluation of the currency unit that investors use to attach a value to corporations is going to negatively impact share prices.

    Taking the previous point further, companies logically grow via investment; be it in people, processes, and nearly always both. Investors, as readers of this column well know, are buying future dollar returns when they put money to work. Devaluation logically shrinks the exchangeable value of those returns. Again, it’s a tax.

    Which leads to the final question of this piece: why do honest members of left and right readily acknowledge the tax that is the tariff, all the while ignoring the tax that is devaluation? In each instance policymakers are shrinking the value of individual and corporate work, all the while shrinking what individuals and corporations can get in return for their work.

    Yet Trump’s tariffs bring forth all manner of reasonable (and sometimes unreasonable) hand wringing, while his calls for a shrunken dollar happen mostly without comment. This despite them being the same. Yes, a tariff is a tax. And so is devaluation. Why don’t policy types and candidates for public office speak up about the other devaluation?

    This article is republished with permission from Forbes. 


    John Tamny

    John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.

    This article was originally published on FEE.org. Read the original article.


    📂This entry was posted in News and Politics 📎and tagged