Shostack + Friends Blog

 

The Economy

Trump’s cornerstone economic policy is bad for America and the world. An election graphic

On the economy, the choice between two offerings could scarcely be more clear. On the one hand, tariffs, on the other hand, increased transfer of wealth via tax policy.

I cannot believe we have to say, but: tariffs are bad.

Now, on the one hand, Mexico will pay for the tariffs, but on the other hand, that’s a complete fantasy. The people who pay tariffs are the ones buying products, and those products are suddenly more expensive. The market doesn’t magically create factories overnight, and even when the market shifts, companies may hold off on new investments, because they may anticipate a shift back. (As an example of this, there were stories early in the pandemic about how bike makers were not investing in new factories, because despite a bike shortage, they expected demand to drop back to or below pre-pandemic levels as used bikes flooded the market.)

Tariffs are somewhat popular with businesses because if you happen to have a product and your competitor raises price by 20%, so can you. Instant profit! But that’s a sucker’s game because the other countries impose tariffs on you, and everyone gets less efficient, because markets are more local. That’s why the General Agreement on Trade and Tariffs, and their successor, the World Trade Organization, are such a pillar of the global order: We agreed to stop playing a sucker’s game, and created unprecedented global wealth. While it’s imperfect, people around the world are far better off, with global poverty at all-time lows.

Trump’s team can barely maintain the fiction that his economic policies will be good. Elon Musk believes that markets will tumble and we’ll have to endure “temporary hardship,” as he says “Fire in any direction, and you’re going to hit (inefficiency in government)” We all know he won’t fire at Tesla’s carbon credits, tax credits for electric vehicles, or military contracts for SpaceX, but any other direction will be ok with him.

In fact, they could make the election about this question of government spending. Taxes are unpopular, deficits are unpopular, and if you cut spending, you can cut one or the other or both. They should tell us what they plan to cut. The trouble is, every program exists for a reason, and every cut hurts at least the person paid to administer the program, and likely lots more. It’s easy to say “we’ll fire in any direction,” and that’s not a policy proposal.

Overall, the Economist called America’s 2024 economy The envy of the world, and says “expect that to continue.” CNN says the economy hit a soft landing Empirically, the Democrats are doing ok, and I wish the Republicans had a credible alternative on offer..

That’s not to say there are no problems with the economy. The cost of housing, education, and medical care are through the roof, in part because of federal programs (mortgage tax deduction, guaranteed student loans, and ... health insurance policy could be its own multi-stage rant). Fixing each of these will require a political bargain so we actually get predictability, rather than 20 years of fighting over a law once it’s passed.

I don’t think Harris’ increasing the complexity of the tax code is going to create lots of new, successful entrepreneurs, but that’s a bet and a molehill compared to the certainty of mountain of a problem from a sudden price hike of 20% on every imported product.

Tariffs, the cornerstone of Trump’s economic policy, are bad for America and the world.