It’s very frustrating. I’ve come to believe that one of the major problems we face with the electorate is the complete ignorance of basic economics.
The problem is, just about every issue that we debate and create policy on, revolves around economics in some way. So when the vast majority of voters are clueless on economics, we will inevitably end up with bad policy.
Let’s take a look at tariffs. Trump’s use of tariffs will destroy our economy. We know that by the experience of history. Every time it’s been tried, it does damage. Nearly every reputable economist will tell you so, including Trump’s very own economic adviser, Larry Kudlow.
But that doesn’t matter. We do it anyway and the people cheer.
Why is that?
The answer is simple…the proponents of tariffs exploit the economic ignorance of the people by using one of the oldest and most persistent economic fallacies there are. That is, they highlight the seen and ignore the unseen.
A perfect example is the story last week about the Ganite City, IL steel mill reopening as a result of Trump’s tariffs on steel. It’s a great feel-good story for the community of Granite City and they are so very grateful to President Trump for making it all happen. They have been praying for the steel mill to reopen for many years, and Trump made it happen…he answered their prayers. Of course, Trump hyped it up by visiting the steel mill for a speech and some great video footage. We even got an interview of a rough and tough steel mill worker shedding tears of gratitude to Trump:
And Trump’s supporters cheered! This, to them, is total and complete vindication for Trump’s much criticized tariffs. Trump was right. Trump won. They won.
To be clear, I have no issue with the steel workers or the fortunate circumstances they are experiencing.
The thing is, though, it’s the same old story with tariffs. Yes, there is no doubt that the U.S. steel industry and the workers within in it will win with such tariffs on foreign steel. U.S. steel industry profits will soar and workers will be hired and their wages will be great. This is the “seen” part of the equation. This is the easy part to display to the world. We get video of a jubilant, revived community, and images of steel workers crying with joy and gratitude. And everything is wonderful.
In the short term.
As with all such cases, the “unseen” part of the equation far exceeds the seen. The problem is, it’s difficult to highlight the unseen because, well, it’s unseen, and not as obvious and direct. But it’s the unseen consequences that are the big problem.
Yes, the U.S. steel industry will do very well, but the price of steel will surge (and it already has), affecting every product that uses steel in it’s production. Products like automobiles, motorcycles, washing machines, homes and skyscrapers…and millions of other products. All of the workers in these industries will be adversely affected when the demand for their product decreases due to the higher costs. And this then has a snowball affect on other products because if someone has to pay more for a car, then he has less money to spend on something like a new suit. And if that tailor can’t sell that suit, then he has less money to spend going out to dinner. And so it goes.
And the ironic thing is that eventually this will all circle back and adversely affect the steel worker when the economy is damaged such that the demand for U.S. steel becomes even less than it was before the tariffs.
I’d like to highly encourage that everyone read the following articles on tariffs and free trade in order to get a good understanding of it. And then please pass that understanding on to your circle of influence (friends and family). Let’s start with one from Kevin Williamson (National Review) that was written December 7. 2016, “We Do Not Have a Trade Deficit”:
It works like this: Almost every advanced country does a great deal of international trade. They have lots of imports and exports because it is easier to grow sugar in Florida than it is in Norway and more efficient to sew T-shirts in Bangladesh than it is in Switzerland. When Walmart orders $1 million worth of flip-flops from a Chinese concern, those Chinese gentlemen receive 1 million delicious U.S. dollars, which they are very happy and grateful to have. But what can you do with U.S. dollars? You can buy stuff from U.S. companies or you can buy assets from sellers who take U.S. dollars, which ultimately means U.S.-based investments. (This is true even when you add in all of the real-world complications such as foreign exchange.) If you are that flip-flop entrepreneur in China, you probably have a very high rate of savings, which is normal for people in poor, backward, and unstable countries. There is lots of uncertainty in a place like China, and having a whole lot of savings — especially dollar-denominated assets — is a rational response to that.
Next, let’s move to an article co-authored by Larry Kudlow in March of this year (prior to becoming Trump’s economic adviser). This one is entitled, “Tariffs Are Taxes” (National Review) and explains the concept quite well:
But even if tariffs save every one of the 140,000 or so steel jobs in America, they put at risk 5 million jobs in industries that use steel. These producers now have to compete in hyper-competitive international markets using steel that is 20 percent above the world price and aluminum that is 7 to 10 percent higher than the price paid by our foreign rivals.
Steel and aluminum may win in the short term, but steel-and-aluminum users and consumers lose.
Tariffs are really tax hikes. Since so many of the things American consumers buy today are made of steel or aluminum, a 25 percent tariff on these commodities may get passed on to consumers at the cash register. This is a regressive tax on low-income families.
Meanwhile, up to 5 million jobs will be put in harm’s way. And if U.S. steel-and-aluminum-using industries sell less to foreigners, the trade deficit goes up, not down.
Ironically, the main image of this article shows a picture of the Granite City Steel Co. It’s curious that Kudlow is now defending Trump’s tariff policies, isn’t it?
Ok, one more, again from Kevin Williamson…this one was published just yesterday, “Understanding Trade Deficits” (National Review). Here’s an excerpt:
When the Germans run a $63 billion trade surplus with the United States, as they did last year, that means they have $63 billion on their hands. What can they do with that money? They can sit on it, as the Chinese and many other people around the world do, preferring to keep their savings in strong and steady dollars rather than in yuan, euros, or pesos. They can use it to buy dollar-denominated assets such as shares in Apple or Ford. Or they can invest it directly in the United States, as the Germans have with their automobile factories in the United States.
Far from being victimized by such trade, Americans are enriched by it. We get $118 billion in German-made goods in exchange for $54 billion in U.S.-made goods, which leaves $64 billion over to invest in American assets. Do you know who the largest U.S. automobile exporter is? It is BMW Manufacturing, which builds SUVs in Spartanburg, S.C., where it employs more than 9,000 people. Our trade deficit with Germany made that possible — that’s where the money to build the factory came from. Ask the autoworkers in South Carolina whether they think that’s a good tradeoff.
An understanding of these issues is very important if we ever want to be able to take our Republic back from the demagoguery of our politicians.
Don’t fall for the happy videos and the tears from the steel workers. They do not show all of the hidden, unseen consequences that far outweigh the seen.