Tag: Tariffs

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Those Were the Days!

Andy Kessler (Wall Street Journal), Trump’s Protectionist Blunder: The U.S. prospers atop a horizontal empire, not as a vertical island.

Mr. Kessler writes,

“Mister, we could use a man like Herbert Hoover again,” goes the “All in the Family” theme song. Donald Trump, who grew up 15 minutes from Archie Bunker, took it seriously. “We’re bringing wealth back to America,” says tariff-happy Mr. Trump. “That’s a big thing.” Those in the Trump administration with Wall Street experience should know better.

Mr. Trump’s America-first policy, as hallucinated by trade adviser Peter Navarro, is this: Make in America. Invest in America. Everything done by Americans. A self-sufficient, stand-alone country. 

It’s more of a political agenda than an economic one—more about protectionism and isolationism. Trade? Globalization? Increased living standards? How quaint. 

Look, I’m all for America on top, but America first isn’t how you get there. America first is a vertical model: Do everything. But vertical always fails. Vertical IBM made chips, wrote software, assembled computers and wrapped plastic around them. Vertical AT&T provided phones, wires and both local and long-distance calls. 

Fortunately, vertical gave way to horizontal: industries organized into layers of expertise, sorted by value added. Intel and Microsoft owned layers in a horizontal stack that made up personal computers, leveling IBM mainframes. The internet became a horizontal stack of routers, servers and applications, upending AT&T’s network. Even the artificial-intelligence revolution is horizontal—Silicon Valley’s OpenAI uses Nvidia chips made by Taiwan’s TSMCusing Dutch ASML’s equipment.

“Didn’t need no welfare state, everybody pulled his weight,” the theme song goes. Globalism and trade also became a horizontal model, with the U.S. sitting on top of what I call a horizontal empire, sorted by value added. Apple designs iPhones in California but assembles them lower down the stack in China—now shifting toward Vietnam and India—where living standards also increased.

Sadly, this horizontal model causes freak-outs over U.S. trade deficits. But who cares? Forget actual trade numbers. Focus on the margin of the products flowing cross-border. Apple has 34% operating margins. Foxconn, which assembles trade-deficit-boosting iPhones, has operating margins of 3%. Which would you prefer?

TVs, cars, clothes, toys and lumber that we import are all low-margin and usually labor-intensive businesses. We export high-margin software, financial services, drugs and AI applications, all intelligence-intensive businesses. I like to say, “we think, they sweat.” Meanwhile, Commerce Secretary Howard Lutnick says, “Human beings screwing in little screws to make iPhones, that kind of thing is going to come to America.” You first, Howard.

Getting horizontal got society wealthy. Economists note that trade deficits have a flip side of capital-account surpluses, money that gets invested in the U.S. to offset those trade deficits. But where are they in our economic statistics? Hard to find. Economists can count foreign money that bought Treasury bonds (so Americans don’t have to). But when capital flows into stocks—foreigners own 18% of our equities—the numbers get fuzzy. A net $1,000 buying Google shares can drive its value up $2,000, or $5,000. Google is worth more than $2 trillion, but $2 trillion in cash didn’t get invested—productivity drove its value up.

Mr. Bessent says, “Data is on our side.” Is it? We’ve run cumulative trade deficits since 1999 of $15.4 trillion. Meanwhile, U.S. equity values rose $45 trillion between 1999 and 2024 (both market peaks). U.S. household net worth at the end of 1999: $41 trillion. End of 2024: $160 trillion. Let’s run bigger trade deficits! As long as we keep the margin. Trade and productivity pay. No wonder the market is a yo-yo.

“Gee, our old LaSalle ran great,” the song concludes. So why would you ever want to go back to a vertical, isolationist model for the U.S., leading to higher-rate mortgages and expensive cars? A margin surplus means we let low-margin jobs move overseas and become a high-margin nation. Living standards rose across the globe. Smartphones and autos everywhere. Why go back?

Note to Trump yes-men: Low-wage jobs aren’t the American dream either. Populist protectionism, worsened by tariffs, has been shown to destroy more jobs than it creates. Even the lower-valued jobs that the Trump administration hopes will return may not exist. Most machine and metalworking shops now use programmable machine tools. Factory jobs will require proficiency in operating robots. Fixing education is critical.

“Boo hoo,” one can almost hear, “collapsing stocks only hurt the rich.” Yeah, but it also severely limits access to capital for U.S. companies to fund growth and create better jobs—let alone build new factories. Do we really want that? America can stay first only by sitting on top of a horizontal empire, not by reconstructing a retro isolated vertical island. Going backward is a meathead move. Stop trying to bring back the “All in the Family” nostalgia: “Those were the days!”

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Fundamental Insights, Unwelcome News: For Trump, For the Rest of Us, Too

Steve Pearlstein (Washington Post), Trump’s tariffs were rash. But the reckoning was inevitable: And delaying that reckoning will only make things worse.

Prof. Pearlstein teaches public and international affairs at George Mason. According to him, that with which we must reckon is that “As a country, we live beyond our means, consuming more than we produce and investing more than we save.”

I urge you to read the article. Much of it, you probably won’t like. But that’s the very reason why you need to read it. 

But there is some sweet along with the bitter; you’ll like the multiple reasons why Trump’s tariffs are stupid. After expatiating on the multiple stupidities, Pearlstein ends this way:

That doesn’t mean we couldn’t benefit from raising tariffs on some imports until major trading partners lower tariff and nontariff barriers to American goods or stop subsidizing their exports. The dogmatic free traders were always wrong about that.

But tariffs are unlikely to alter the fundamental reality that, as a country, we collectively buy and invest more than we produce and save, which in broad terms is what the trade deficit represents. A simpler and more effective way to reduce that roughly $1 trillion annual trade deficit is to reduce our government’s $2 trillion annual budget deficit. Unfortunately, Trump is determined to do the opposite. For just as his new tariffs were unveiled, the president and his Republican allies in Congress were pushing through a budget plan to extend and expand tax cuts, increasing future budget deficits by hundreds of billions of dollars each year.

Put another way, by refusing to tax ourselves to pay for all the government services we demand — and borrowing the difference from the rest of the world — we are effectively giving households and businesses the money to buy more of the imports that the president is so determined to reduce.

For the past 50 years, America’s economic fantasy has been that another round of tax cuts or public investments will magically allow us to produce our way out of outsize budget and trade deficits. Instead, the twin deficits rose in tandem. In the real world, the only way to bring things back into balance is to begin living within our means and accept the painful adjustments that it entails. As we learned this week, there are better and worse ways to go about that rebalancing. But delaying that reckoning will only make things worse.

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Leonard Leo and Charles Koch Oppose Penguin Tariffs. They’re Unconstitutional!

Washington Post, As Trump tariffs sink in, conservatives challenge whether they’re legal: The New Civil Liberties Alliance, a legal nonprofit, has filed a complaint on behalf of a small stationery company in Florida.

You can read all about it at https://nclalegal.org. I looked for a Donations page. Didn’t find it. Guess you don’t need donations from peons when you’re financed by Koch and Leo. 

Wonder what they’ll say when they win in the Supreme Court and the Very Stable Genius tells the Court and their organization to go screw themselves. 

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The Wall Street Journal Would Like You to Know That I Nailed it: Trump’s Screwing the Poor, He’s Screwing the Middle, and, For Good Measure, He’s Screwing the Rich, Too

Robin Hood, he ain’t.

Wall Street Journal, Consumer Angst Is Striking All Income Levels: Signs of weakness are showing up in spending on everything from basics to luxuries

The Journal identifies the “key points” as follows, after which it expatiates.

Key Points

  • Consumer spending is declining across all income levels due to concerns about tariffs, inflation and a potential recession.
  • Retailers are reporting weak demand since the start of the year as consumers become more cautious about their spending.
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The Editor of the National Review Would Like You to Know that Donald Trump is a Nutcase Who is “Impervious to Facts and Logic”

Ramesh Ponnuru (Washington Post), Where’s the economic sense behind Trump’s tariffs? Not even Treasure Secretary Scott Bessent can convincingly defend the president’s trade policy.

Ramesh Ponnuru is a senior fellow at the American Enterprise Institute and editor of the National Review. He writes, 

If you think tariffs are painful, try watching President Donald Trump’s aides and supporters attempt to defend them. Whenever they come up with a rationale for his policies, however dubious, he immediately says or does something to contradict it. They say Trump’s trade strategy is all about containing China — then he slaps tariffs on the allies we would need to do so. They explain that the law lets him impose tariffs on Canada to protect our national security, only for him to let slip that he’s mad about Canadian dairy policies.

The truth is that Trump just likes tariffs and people who tell him they make sense. His trade adviser, Peter Navarro, thinks imports harm the economy because he doesn’t understandhow gross domestic product data is calculated. The administration has no grand trade strategy.

But the demand for sophistry in defense of Trump’s tariffs is apparently inexhaustible. Scott Bessent, the treasury secretary, tried out another argument at the Economic Club of New York last week.

The president, Bessent said with a straight face, “sees the world not as a zero-sum game but as interlinkages that can be reordered” to help Americans. (If this were a college paper, the professor would scrawl “citation needed.”)

Bessent argued that the tariffs are designed “to rebalance the international economic system” and “[level] the playing field.” He’s not just making the standard complaint that other countries place tariffs on U.S.-made products. Although true, that fact does not go very far toward justifying Trump’s policies. In fact, many countries place lower tariffs on our exports than we do on theirs — yet Trump wants to hike tariffs on them anyway.

The treasury secretary has a broader view of the imbalances that need to be fixed. “The United States,” he says, “provides reserve assets, serves as a consumer of first and last resort, and absorbs excess supply in the face of insufficient demand in other countries’ domestic models.” Most economists think the United States runs a trade deficit because investment outstrips savings. Bessent looks at it differently: Other countries force trade deficits on America by undervaluing their currencies and investing their excess savings with us.

Bessent sketched his case briefly in New York, but others have developed it in greater detail. Manufacturing employment has shriveled because of all this currency manipulation, these theorists say, but tariffs can undo these distortions by encouraging increased production at home.

Bessent alluded to this idea in the most quoted remark from the speech: that “access to cheap goods is not the essence of the American Dream.” He believes that the global economic order has pushed us to consume too much and produce too little. Perhaps a man with assets above $500 million should have found a better way to phrase this opinion.

But set aside the bad PR. The argument itself is a chain with several links — and not one is solid.

Trade balances don’t indicate which economies are succeeding and which are failing. The United States ran a trade deficit for most of the 19th century while rising as an industrial power. Nor is it true that trade surpluses can keep a country from losing manufacturing jobs. Every developed country — including Germany, which has a trade surplus — has seen the same downward trend.

Tariffs are not a reliable means of increasing domestic production, either. That’s partly because they tend to cause the currency to appreciate. Bessent himself has told us so: During his confirmation hearings, he tried to allay fears that tariffs would raise prices by saying that a rising dollar would soften the blow. But a stronger dollar also reduces demand for U.S. exports — which is the very reason Bessent complains about currency manipulation.

Tariffs also tend to raise the price of goods that U.S. manufacturers use, which makes it harder for them to make and sell their own products. Study after study has found that the tariffs Trump imposed during his first term caused manufacturing employment and output to shrink. Moreover, those tariffs didn’t even reduce the trade deficit.

What Bessent’s case for tariffs has in common with all the other rationalizations is that the president has given no indication he believes it. If Trump believed it, he would want a weaker dollar and an end to its status as a global reserve currency. He doesn’t; he has talked about punishing countries that try to displace the dollar.

The purpose of these theories is not to cohere. It’s to sound just plausible enough to distract from the unsettling truth: The president has an obsession with tariffs, and it is impervious to facts and logic.