25 March 2019

Why politicians ignore economists’ opposition to tariffs

by T. Norman Van Cott

Originally published by CapX.

There are two primary reasons for economists’ opposition to tariffs. First, by raising US prices of imports, tariffs encourage high-cost domestic production of import substitutes. This production would be uneconomic in the tariffs’ absence. Cost measures what people sacrifice to obtain a particular objective, so substituting higher cost domestic production for lower cost imports means more of other things are given up to get those items. Giving up more means having less, which is another way of saying overall living standards are lower!

The second reason also follows the fact that tariffs raise US prices of imports. The higher prices discourage domestic consumption of imports, consumption that otherwise would yield benefits greater than costs. Foregoing such consumption also reduces the size of the tariff-imposing country’s economic pie, which is yet another way of saying overall living standards are lower.

Politicians can argue for a “pass” for ignoring economists between 1789 and 1910. In all years but five, tariffs were the most important source of the federal government’s revenue. The government had to be financed, and tariffs were the financing mechanism. When the US Constitution was amended in 1913 to permit the income tax, tariffs’ importance as a revenue source receded.

At the same time, it should be noted that except for a tariff’s maximum revenue point, any given amount of tariff revenue can be obtained with a “high” tariff as well as a “low” tariff. This is one of the lessons of Laffer curve analysis. Does it make any difference which tariff is enacted? Yes. The reduction in the country’s economic pie is larger with the “high” tariff.

The US Constitution is silent when it comes to the economic preference for the “low” tariff. It is interesting that the constitution of the Confederate States of America, which is similar to the US Constitution in many respects, contained language mandating the “low” tariff. The latter can arguably be traced to the 1828 “Tariff of Abominations” together with the ensuing “Nullification Crisis.”

With revenue requirements less compelling, one can still explain that even though tariffs reduce the size of the economic pie, they also reslice the pie in favor of some Americans. These Americans, moreover, can generate political clout to secure tariffs’ passage. They end up with a larger piece of pie even though their actions reduce the size of the pie.

It is producers of import-competing items who are the tariffs’ beneficiaries. They get a higher price for what they would have produced in the tariffs’ absence along with an incentive to produce more of the items. Consumers lose with the reslicing. They end up paying a higher price for American production and whatever imports remain after tariffs are enacted. Given that the size of the pie is reduced, we know that what producers gain is less than what consumers lose.

The political clout differential traces to the fact that those who benefit, the producers, are relatively small in number compared to those who lose, the consumers. This means that the benefits per producer tend to be much larger than losses per consumer. More is at stake for individual gainers, meaning they have a bigger incentive to get involved in the political process leading to tariffs. Consumers become the scattered, speechless majority.

This is a tough question because, to my mind, the answers are between slim and none. A constitutional amendment mandating the “lower” tariff a la the constitution of the Confederate States of America is a possibility. Alternatively, a constitutional amendment banning import tariffs is another possibility. Neither appears likely to the extent Congress is involved in the amendment process. Both would be asking senators and congressmen to voluntarily limit their ability to reward constituents who compete with imports.

Some economists see more economic education as the answer. While this would advance the living standards of economists, I believe it runs athwart the fundamental postulate of economics that individuals act to promote their interests. That is, an auto worker whose living standards would improve were a tariff on foreign cars enacted will support such a tariff regardless of whether he/she had an economics course that taught that such a policy reduces overall living standards.