To analyze society and the economy, and especially if the goal is to coerce peaceful individuals, an understanding of basic economics should be a must. Economics is needed to think clearly about the social consequences of individual actions and government interventions. An example a contrario was just given by President Donald Trump; the Wall Street Journal reports (“Trump Says He ‘Couldn’t Care Less’ if Car Prices Go Up,” March 30, 2025):
“I couldn’t care less, because if the prices on foreign cars go up, they’re going to buy American cars,” Trump said. “I hope they raise their prices, because if they do, people are gonna buy American-made cars. We have plenty.”
The president doesn’t seem to understand that a tariff also leads to an equivalent increase in the prices of competing domestically produced goods—American cars in this case. This is precisely why domestic producers of tariffed goods are happy: higher prices for their own products will be protected against foreign competitors. A tariff “protects” only if it allows domestic producers to get higher prices. (For more on this topic, see two of my recent posts, “The Basic Error About International Trade” and “Aluminum, Economics, and Liberty.”)
Thus, nobody should have been surprised when Trump apparently warned domestic car producers not to rise their prices under penalty of punishment. He later denied having made this threat (see the March 30 WSJ report):
The Wall Street Journal reported last week that Trump had warned executives that the White House would look unfavorably on such a move, leaving some of them rattled and worried they would face punishment if they increased prices.
“I never said that,” Trump told NBC.
Did he or did not? Perhaps he entertains “basic holistic” beliefs, to use the terms of his trade advisor Peter Navarro as reported by the WSJ:
“If you look at this basically holistically, as they say, consumers and Americans are going to be better off, including all the jobs they get,” Navarro said.
“They” are certainly not serious economists, who never speak in those terms. However, it must be that only “basic holistic” intuitions can justify the sort of trade war Navarro has been pushing on Trump, admittedly a fertile ground.
At the time when he used economic theory instead to reason about such matters, Navarro was closer to reality. In his 1984 book, The Policy Game: How Special Interests and Ideologues are Stealing America (John Wiley & Sons), he attacked special interests and specifically explained how tariffs also push up the prices of domestically produced competing goods:
In the absence of trade barriers, goods ranging from autos and apparel to shoes and televisions are offered to consumers at lower prices (or higher quality) than if U.S. producers manufactured them. However, when a device such as a tariff is imposed, the importer must pay a duty to the U.S. government to sell his product. This, in effect, raises the importer’s costs and forces the importer to raise his price by all or part of the duty. U.S. producers can then raise their prices, which hitherto were lowered by import competition. [pp. 75-76, my emphasis]
Navarro offers other arguments that are not very original but at least in line with a couple of centuries of economic analysis, for example:
However, as the economic analysis indicated, the choice is not between preserving smokestack industries or relying on high tech wonderlands. Rather, it is between a protected but inefficient and declining industrial base versus a more innovative industrial sector that, under the spur of import competition, can and does invest in rapid technological developments that promise a prosperous merger of the two worlds. [p. 89]
The clear danger of this [protectionist] trend is an all-out global trade war. … And as history has painfully taught, once protectionist wars begin, the likely result is a deadly and well-night unstoppable downward spiral by the entire world economy.
If the world is, in fact, sucked into this spiral, enormous gains from trade will be sacrificed. While such sacrifice might save some jobs in the sheltered domestic industries, it will destroy as many or more in other home industries, particularly those that rely heavily on export trade. At the same time, consumers will pay ten of billions of dollars more in higher prices for a much more limited selection of goods. [pp. 55-56]
Of course, one cannot blame somebody for having changed his opinions and explained the reasons why he now thinks he was previously wrong. But basic holistic intuitions of the Tantric-New-Age sort can’t serve as a rational explanation. Nor can cozying up to politicians of all kinds provide a sufficient justification (see my article “Peter Navarro’s Conversion,” Regulation, Fall 2018).
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Basic holistic stuff, by DALL-E and your humble blogger
READER COMMENTS
steve
Mar 31 2025 at 10:19am
I have wondered about the idea of Trump somehow forcing through some means of coercion US companies to not increase prices somewhat like what he has done with law firms. So just take the auto manufacturers. They have to pay higher prices for inputs like steel. They likely lose money if theydont raise prices. Meanwhile, they need to raise capital while losing money to build the new factories. The companies supplying them parts they dont make themselves face the same problems. Even supposing that no such thing as regulations, local zoning laws and safety rules are all suspended It takes a couple of years at the very least to build the new factories.
Then, since we have, theoretically, kicked out all of the immigrants, labor will be tight so you are going to have to pay higher wages. That may kind of be a goal ie Trump can tell they have provided higher wage jobs but at some point all of this has to show up in increased auto costs.
Steve
David Seltzer
Mar 31 2025 at 12:12pm
Steve: DJT’s principal source of confusion is the difference between jobs and output. The number of workers in manufacturing declined from around 19 million in 1980 to about 13 million today. It happened because we got pretty good at making stuff. Productivity in manufacturing has increased because of automation, technology, and global supply chains. “We”, with apologies to Pierre, produce more manufactured goods with far fewer workers.
Craig
Mar 31 2025 at 12:28pm
Not so sure I would trust the government’s numbers here on this one, but let’s stipulate to that for one second. IF TRUE, the 13 million remaining should be making beaucoup bucks, no? That’s not what I see, what I see is about 40% of the country looks like a bomb hit it. I’m fortunate I’ve gotten to travel around and to be honest I’m shocked at the state of vast swaths of the US. Its NOT a handful of places either.
David Seltzer
Mar 31 2025 at 12:53pm
Craig: You are one person, like any of us, with limited knowledge and information as to the earnings of 13 million individual workers. How much are beaucoup bucks? “40 percent looks like a bomb hit it.” The area of the united states is 3.79 million mi^2. 40% hit by a bomb would be 1,516,000 mi^2. Which 40%? Bunker bomb? Barrel bomb? Land mine? Just asking. Did you see the other 60%? (2,274,000 mi^2)
Craig
Mar 31 2025 at 1:20pm
Generally west of the Hudson in NY, west of the Delaware from NJ all the way St Louis and then down to New Orleans over to about Chattanooga. It looks rough and its really widespread.
” Did you see the other 60%?”
Oh absolutely, I have been fortunate that way even the nicer places have rough patches too.
“How much are beaucoup bucks?”
Median house price / 2 and things have gotten better, right? Those workers are even MORE productive, right? So it should be median house price / 1.5. (My dad did that back in NJ he was 19, got married, bought a house, two cars, had me, paid his way through college by 23). Nice home, its still there, it just costs $500k now. [My mom used to use the beaucoup expression and I was thinking of her so I used it, I don’t normally use it in common parlance] Show me one person who did that today and I’ll move to Missouri! 😉
Is the US AMONG the better nations? Yes. It is, is it the best nation? NOPE, and not close either, I’d say its a middling developed nation.
nobody.really
Mar 31 2025 at 2:14pm
I don’t reach the same conclusion. There are supply and demand phenomena here–but for me, the most easily grasped dynamic is substitution.
Manufacturing is up even as employment is down largely because employers have found it more efficient to substitute automation. It used to require more people to run a McDonald’s than it requires today–but I don’t know that the people working in those fewer jobs are making a lot more money.
Moreover, employers might be able to automate still more tasks–but have found it cost-prohibative to do so. So we might imagine that, with fewer employees, workers at a manufacturing plant might find it easier to organize a union and pose a credible threat to strike; that might prompt managment to increase compensation at the margins. But a countervailing dynamic arises: As employees become more expensive, employers may eventually find it cost-effective to substitute more automation for labor.
On the subject of substituting automation for labor, I would be remiss if I didn’t pay homage to the mother of all annecdotes:
Chicago Daily Tribune, “They Saw the Point,” p. 12, column 4 (September 20, 1901) (no, the annecdote did NOT originate with Milton Friedman)
Craig
Mar 31 2025 at 3:00pm
“but I don’t know that the people working in those fewer jobs are making a lot more money.”
Maybe the leftists are right on this point? Perhaps Pierre can do a post on productivity to set me straight? 😉 I will say this I also think that they’re just straight up miscounting imports as manufacturing and that while they might TRY not to do that I just think they wind up doing it. My cousin does sheet metal and back in the day it was USX shipping steel products to his factory in NJ, they’d employ 50-75 people, ‘90%’ of the value add was domestic and now they mostly sell Chinese made products, they still DO make things there, but they make when there’s a time issue so now there’s 10 people working in a place where total gross sales has done a 5x over time, but 80% of it is now imported even the things made in house are made with Chinese steel. If you ask a business owner what % of their value add is imported, they’ll look at you cross eyed as if its worth one cent to even bother for them to even calculate.
Pierre Lemieux
Mar 31 2025 at 4:22pm
Craig, Nobody, and others: It seems to me that the issue is the following. More capital investment per worker will indeed raise labor productivity (the physical product per worker) other things being equal. But if the price of the products goes down because (for example because consumers spend relatively less on, say, manufactured goods compared to services like education and health, the workers’ value of marginal product may decrease or increase less than otherwise. On the graph, we have the supply and demand for labor in a certain industry/market; the demand for labor is the workers’ value-of-marginal-product (physical marginal product times price of the good produced) curve.
Ahmed Fares
Mar 31 2025 at 3:42pm
This is precisely why you want to be in manufacturing. The following is a partial Twitter post from Michael Pettis:
Jon Murphy
Mar 31 2025 at 6:38pm
Pettis makes a basic Econ 101 error: confusing marginal with average. (Well, that and ignoring opportunity cost).
Warren Platts
Apr 2 2025 at 2:07am
No, Pettis is exactly right. Automation is a good thing. That’s what we want. Overall productivity will increase, and due to the Baumol so-called “cost disease” wages for barbers will also go up. Again, this is what we want, because the barber can now afford more goods and services for herself.
Craig
Mar 31 2025 at 12:07pm
“If you look at this basically holistically, as they say, consumers and Americans are going to be better off, including all the jobs they get,” Navarro said
To be fair here, Pierre, I did catch onto Navarro’s comment at some point and my take is that he was weighing the tariffs v tax cuts, no?
Ultimately I do think DH’s admonition that as between income taxes and tariffs we ultimately might wind up with both. But I would say if we’re going to trade income taxes for tariffs, that concept is absolutely salivating to me.
Pierre Lemieux
Mar 31 2025 at 4:10pm
Craig: I suspect that Navarro thinks, like Trump, that tariffs are a panacea. (Perhaps it will even cure cancer and acne?)
I don’t know who is “DH” but there are many reasons to think that tariffs could not replace income taxes, except if the federal government’s expenditures were reduced by something like 90% (roughly to the level of the late 19th century). Before you salivate, a few other factors need to be taken into account:
Collecting taxes on imported goods is more costly than it was in the 19th century, when there were only a few deep ports. A VAT is more neutral (less deadweight loss) and easier to collect (not counting the businessmen’s costs).
At any rate, tariffs can probably not raise more revenues than $780 billion per year, that is, 23% of current federal expenditures. Prohibitive tariffs raise no revenue at all. (See my recent Regulation article at https://www.cato.org/regulation/fall-2024/assessing-trumps-new-tariff-ideas.)
Tariffs are (nearly always or mostly) paid by the consumers of the imported goods on which they are levied so that indeed the poor would pay proportionally more relative to their incomes and you would pay proportionally less. Taxes on capital flows can change this.
Tariff revenues collected from the poor(er) are probably more likely to be spent in transfers to the poor and to Walmart and Tesla than to you.
Since money is fungible, there is really no way to know if tariff revenues will have decreased income taxes or not compared to what they would otherwise have been.
What we are most certain of is that the higher the tariffs or other barriers to trade, the more America will be isolated and the poorer most people will be.
Craig
Mar 31 2025 at 4:33pm
DH = David Henderson
“there are many reasons to think that tariffs could not replace income taxes, except if the federal government’s expenditures were reduced by something like 90%”
That’s a feature not a bug of the scheme. Remember you are writing to somebody here who advocates for the COMPLETE elimination of the federal government. However if we are stuck with the regime then I would suggest that a limited government of enumerated powers should be funded SOLELY and exclusively by tariffs precisely BECAUSE it is ineffective. The income tax and VAT have been proven to be HIGHLY effective at raising revenue.
Pierre Lemieux
Mar 31 2025 at 5:40pm
Craig: 10-4. But a straight sales tax on final goods (which is the same as a VAT but more difficult to collect) would have the same effect without (1) discriminating between where the residents purchase their goods, and (2) the opacity of the tariffs (with a sales tax, nobody can you make you believe that it is paid Haitians-eating-pets or other bad foreigners who have abused you).
Roger McKinney
Apr 1 2025 at 9:46am
To analyze society and the economy, and especially if the goal is to coerce peaceful individuals, an understanding of basic economics should be a must.
And there is the problem. The Natcons trash the science using the arguments of Marxists. Most sociologists, philosophers, historians, literature professors, theologians and other academics are Marxists and trash the science of economics. All the mainstream media promotes Marxism. The average person would rather have a root canal than read an intro to econ book. I can clear a crowded room by mentioning economics. People leap out closed windows.
I don’t have the answer. But 150 years of brilliant economists have changed few minds.
Ahmed Fares
Apr 1 2025 at 2:24pm
Marxism is a divine blessing. That’s because it doesn’t work. Beautifully crafted by God to appeal to the highest intellect, it leaves a people in poverty, and poverty is what preserves spirituality.
God loves the Russian people whose Christianity is closer to the truth, which is why He gave them Marx. You guys in the West, not so much. That’s why he gave you Smith and Ricardo instead.
The chief injunction in Christianity is to seek the Kingdom of Heaven, which is all around you, made harder by being rich, akin to a camel entering the eye of a needle. Then we have this:
Pierre Lemieux
Apr 1 2025 at 4:48pm
Ahmed: Can you give or linked to a source when you quote it?
Ahmed Fares
Apr 1 2025 at 5:57pm
Prosperity theology – Wikipedia
Jose Pablo
Apr 1 2025 at 1:16pm
Even without any knowledge of economics, what stands out about tariffs is their sheer abundance of logical contradictions.
According to Trump, foreign producers must pay for the “privilege” of selling goods and services to Americans. Yet, foreign students are said to have the “privilege” of attending American universities. So, in this case, is the “privileged” party actually the buyer?
If foreign cars are blocked at the border, local producers will sell more cars. But if fentanyl is stopped at the border, the product is expected to vanish from the domestic market. How does that logic hold?
Tariffs, we are told, will finance tax cuts. But let’s indulge, for once, in the organic fallacy that Trumpism thrives on. Suppose “America” collects tariffs on imported goods while “America” also pays reciprocal tariffs on its exports. With a 20% tariff, the “net revenue” would be roughly 0.75% of GDP, since the trade deficit is about 3% of GDP. That’s less than half of corporate tax revenue and only about 4% of total federal income tax revenue. So, all this noise is about a tax reform with a 0.75% of GDP impact on revenues (around 10% of the deficit)?
This administration’s rhetoric is an insult to people’s intelligence. Even to those with no background in economics. And it speaks volumes about the audience it aims to persuade.
Jose Pablo
Apr 1 2025 at 1:39pm
We are told that tariffs will create jobs. But with the U.S. unemployment rate at 4% (and only 0.9% of that being long-term unemployment), this is considered “full employment.” Are we importing people to fill these new jobs? Wouldn’t that imply we’re allowing in “criminals” and “cat and dog eaters”?
steve
Apr 1 2025 at 4:05pm
I try to check claims like you just did and see if the numbers make sense. For me, they dont. Talking with my MAGA brother he claims yes, UE is only 4% but tariffs will create better jobs that pay more. OK, then who fills the jobs currently being held when those new, better jobs come on line? What about the jobs lost because input costs increase? What’s the time frame on all of this? Do people really believe that corporations are going to go out and build and have operating new factories in just a couple of months?
Steve
Pierre Lemieux
Apr 1 2025 at 5:19pm
Steve: Your (correct) demonstrations are not pure logic, though, but logic applied to economic relations (economic logic). See also my response to Jose.
Jose Pablo
Apr 1 2025 at 6:27pm
who fills the jobs currently being held when those new, better jobs come on line?
That’s a very good “first level logic no economic knowledge required” question. Is DJT thinking about forcing McDonald’s to close in the US?
There is a certain irony in one Donald forcing the closure of another Donald, but the disappearance of fast food sure is going to benefit Trump’s constituency’s health. So maybe there is a plan behind the whole thing after all.
jobs that pay more
Ask your brother, who is going to pay for these extra salaries? I am very curious.
Pierre Lemieux
Apr 1 2025 at 5:16pm
Jose: You write:
I agree and I love your examples. If many people’s intelligence is such that it is not insulted, then one may think there is not much future for liberty and prosperity. Fortunately, it is not when they pursue their private affairs but when they try to run other people’s lives that people look so handicapped. See my short Regulation article on “Mencken’s Theory of Democracy.”
Your distinction between straight logic and economics is well-taken. But economic theory does help apply logic to problems of scarcity and trade (human interaction). In his conversation with Hartmut Kliemt, Anthony de Jasay says that economics teaches one to think, which is true although there are other doors to the world of thinking. He also, at the same place, says that economics has nothing to do, with finance–which must be a slip of the tongue! At any rate and somewhat incidentally, this conversation is well worth watching.
Jose Pablo
Apr 1 2025 at 6:32pm
But economic theory does help apply logic to problems of scarcity and trade (human interaction)
Sure it does!
I was arguing that even if you lower (a lot) the intellectual bar …
it is not when they pursue their private affairs
Certainly nobody is silly enough to impose a tax on the goods and services bought from producers outside their household. Or from producers outside their town or their state. It seems that just national politics causes this brain collapse.
Warren Platts
Apr 2 2025 at 2:26am
That is hard to believe. A ship pulls into Long Beach, the customs guy inspects the cargo & charges the tariff. With a VAT, everybody who does anything has to calculate how much value they added, and then send 20% to the government. That is what I call a tax burden.
Again, so what? $780 billion doesn’t even cover the Department of Defense budget. These are the guys keeping the sea lanes open you so you can have your personal trade deals with dudes from China. And forget about the interest payments we are paying due to the fiscal deficit. But every Benjamin helps..
Pierre Lemieux
Apr 3 2025 at 5:23pm
Warren: You write:
This is not true. It may be a paperwork burden, or a tax burden in the sense that it is more difficult to evade, but not a tax burden in the narrow sense. The 20% any state sends to the government in the process is reimbursed by the next stage. Only the last state in the process, the final consumer, is not reimbursed for his tax on the total value added over all preceding stages.
Jose Pablo
Apr 2 2025 at 1:30pm
If you look at this basically holistically, as they say, consumers and Americans are going to be better off, including all the jobs they get
If you look at this basically holistically, would Californians be better off, including the jobs they get, if they imposed tariffs on goods and services coming from the rest of the country?
And if the issue is trade deficits, would the states most likely to have an international trade surplus—such as Texas, Washington, and South Carolina—be holistically worse off, including the jobs they would lose, if tariffs were imposed?
Jose Pablo
Apr 2 2025 at 2:43pm
Imagine that everything Peter Navarro and MAGA followers say about international trade is correct. So, trade deficits are bad, and “groups of individuals” (such as the U.S.) are better off by reducing trade deficits.
If that is true, then trade surpluses must be “good,” and “groups of individuals” would be worse off if trade surpluses were reduced.
But if you avoid the “organic fallacy”, you’ll realize that every individual in the U.S. has a specific trade deficit with the rest of the world. Some individuals run a deficit, while others run a surplus. The same is true for any aggregation of individuals above the individual level but below the national level. For example, some cities, counties, and states have an international trade surplus, while others have a deficit.
Considering that American imports represent around 15% of GDP, while the U.S. trade deficit is just about 3%, even if Peter Navarro and the Trumpists are right in their view of international trade, tariffs are, more than anything else, a redistribution of benefits from Americans with an “international trade surplus” to Americans with an “international trade deficit.”
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