Tag Archives: tariffs

The argument for free trade is half sound

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In 1900, the average tariff on imported goods was 27.4% and there was no income tax. Import tariffs provided all the money to run the US government and there was no minimum wage law. The high tariffs kept wage rates from falling to match those in the 3rd world. Currently, the average tariff is near-zero: 1.3%. There is a sizable income tax and a government income deficit; minimum wage laws are used to prop up salaries. Most economists claim we are doing things right now, and that the protective tariffs of the past were a mistake. Donald Trump claimed otherwise in his 2016 campaign. Academic economists are appalled, and generally claim he’s a fool, or worse. The argument they use to support low tariffs was made originally by Adam Smith (1776): “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry.” As a family benefits from low cost products, a country must too. How stupid would you have to be to think otherwise?

A cartoon from Puck 1911. Do you cut tariffs, and if so how much. High tariffs provide high wages and expensive prices for the consumer. Low tariffs lead to cheap products and low wages. Uncle Sam is confused.

A cartoon from Puck, 1911. Should tariffs be cut, and if so, how much. High tariffs provide high prices and high wages. Low tariffs lead to low prices for the consumer, but low wages. Uncle Sam is confused.

Of course, a country is not a family, and there are certain benefits in keeping manufacturing and employment here, in not exporting jobs and expertise. It is clear that some people benefit from a flood of cheap, imported products, while some folks suffer. Consumers and importers benefit, while employees generally do not. They are displaced from work, or find they must compete with employees in very low wage countries, and often with child labor or slave labor. The cartoon at right shows the conundrum. Uncle Sam holds a knife labeled “Tariff Revision” trying to decide where to cut. Any cut that helps consumers hurts producers just as much. Despite the cartoon, it seems to me there is likely an optimal, non-zero tariff rate that allows productive trade, but also provides revenue and protects American jobs.

A job-protecting tariff was part of the Republican platform from Lincoln’s time, well into the 20th century, and part of the Whig platform before that. Democrats, especially in the south, preferred low tariffs, certainly no more than needed to provide money for government operation. That led to a diminution of US tariffs, beginning in the mid- 1800s, first for US trade with developed countries, and eventually with third world as well. By the 1930s, we got almost no government income from tariffs, and almost all from an ever-larger income tax. After WWII low tariff reductions became a way to promote world stability too: our way of helping the poor abroad get on their feet again. In the 2016 campaign, candidate Donald Trump challenged this motivation and the whole low-tariff approach as anti- American (amor anti America-first). He threatened to put a 35% tariff on cars imported from Mexico as a way to keep jobs here, and likely to pay for the wall he claimed he would build as president. Blue-collar workers loved this threat, whether they believed it or not, and they voted Republican to an extent not seen in decades. Educated, white collar folks were uniformly appalled at Trump’s America-first insensitivity, and perhaps (likely) by the thought that they might have to pay more for imported goods. As president, Trump re-adjusted his threat to 20%, an interesting choice, and (I suspect) a good one.

The effect of a 20% tariff can be seen better, I think, by considering a barter-economy between two countries, one developed, one not: Mexico and the US, say with an without a 20% tax. Assume these two countries trade only in suits and food. In the poor country, the average worker can make either 4 suits per month or 200 lbs of food. In the developed country, workers produce either 10 suits or 1000 lbs of food. Because it’s a barter economy with a difference in production, we expect that, in the poor country, a suit costs 50 lbs of food; in the rich country, 100 lbs of food. There is room here to profit by trade.

The current state of tariffs world-wide. Quite a few countries have tariffs much higher than ours. Among those, Mexico.

Tariffs world-wide. We put no tax on most imported products while much of the world taxes our products heavily.

With no tariff, totally free trade, an importer will find he can make a profit bringing 100 lbs of US food to Mexico to trade for 2 suits. He can return two suits to the US having gotten his two suits at the price of one, less the cost of transport, lawyers, and middlemen (relatively low). Some US suit-makers will suffer, but the importer benefits immediately, and eventually US consumers and Mexican suit workers will benefit too. Eventually, US suit prices will go down, and Mexican wages up, We will have cheaper suits and will shift production to what we make best —  food.

In time, we can expect that an American suit maker will move his entire production to Mexico bringing better equipment and better management. Under his hand, lets assume his Mexican workers make 6 suits per month. The boss can now pay them better, perhaps 100 lbs of food and two suits per month. He still makes a nice profit, more than before: he ships two suits to the US to buy the 200 lbs of food, and retains now two suits as profit. Hillary Clinton believed this process was irreversible. “Those jobs are gone and they’re not coming back,” her campaign told CNN. She claimed she’d train the jobless “for the jobs of the future” and redistribute the wealth of the rich, a standard plank of the democratic platform since 1896. But, for several reasons, industrial voters didn’t trust her to succeed, or even to try. Redistribution of wealth rarely works because, even if a politician has the will, and most don’t, manufacturers can usually keep their profits off-shore, and they do.

A very high tariff would stop all trade, but lets see what would happen with Trump’s 20% tariff. With a 20% tariff, when the first two suits come to the US, we’d extract 0.4 suits in tax revenue. The importer still makes a profit, but it’s now 0.6 suits, the equivalent of 60 lbs of food. He can sell suits for less than the American, but not as much less. If the manufacturer moves to Mexico he makes more money, but not quite as much. Tax is still collected on every suit brought to America — now 20% of the 3 suits per Mexican worker that the Boss must export. The American worker’s wages are depressed but he/she isn’t forced to compete with the Mexican dollar-for-dollar (suit for suit). In barter terms, he isn’t required to make 6 suits for every 100 lbs of food.lincoln-national-bank-internal-improvements-tariffs

We find that, in the above fictional economy, a 50% tariff in the maximum to allow any profitable suit trade: the first two suits might enter the US; but they’d be taxed at one suit, just enough to pay for the 100 lbs of food that he’d have to barter for the 2 suits. At that rate, there would be no profit for the importer, and he/she would stop importing. A 50% tariff is thus counter-productive to the consumer and the US gov’t: we would get no imported goods, and we’d collect no import revenue – a bad situation in general, though good for the manufacturer. Lincoln’s “protective tariffs” of 1861 contributed to Southern succession and the start of the civil war. It seems to me that some modest tariff of 10% to 20% is fair and productive — tariff rates that Trump seems to have intuited, and that many other countries have adopted, see map-chart above. As for the academic economists, I note that they also predicted a stock market crash should Trump be elected; it’s gone nearly straight up since November 8, 2016. I find that most economists are not rich despite claiming to be experts on money.

Robert E. Buxbaum, March 27, 2017. I learned such economics as I have from my one course in economics, plus comic books like the classic “Once upon a dime” produced by the New York Federal Reserve. Among the lessons learned: that money is a distraction, just a more convenient way to carry around a suit, 100 lbs of food, or a month of work. If you want to understand economics, I think it helps to work things out in terms of barter, as above.

High minimum wages hurt the poor; try a negative tax

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It is generally thought (correctly I suspect) that welfare is a poor way to help the poor as it robs them of the dignity of work. Something like welfare is needed to keep the poor from starving, and the ideal alternative to welfare seems to be a minimal job — that is one that is easy enough for a minimally skilled worker to do it, and high-paying enough so that this worker is able to support a family of 4. Such jobs are hard to produce, and hard to sell to those currently getting welfare — that is those getting paid the same amount for no work at all. I’d like to propose something better, a negative tax along with the removal of our minimum wage.

I suspect that our current system of minimum wage hurts the desperate poor and middle class at least as much as it helps the working poor. One problem with it is that it flattens the wage structure, hurting the ego and incentive of those who work harder or with higher skills. The minimum wage encourages lax work, and reduces the incentive of workers to improve. A higher talented or more experienced worker should make more than an unskilled beginner, but with the current minimum wages they hardly do. Our high minimum wage also hurts the desperate poor by cutting the lower rungs off of the employment ladder. Poor, unskilled, young folks are not hired because it will take a while before they’re productive enough to justify the minimum wage. And anyway, why should the minimum wage number assume that every worker lives independently (or should) and that every job deserves to support a family of four. Most unskilled workers are neither independent nor are they supporting a family of four. Most unskilled workers are not independent, nor are they the sole support of a family.

I suspect that people push for high minimum wages as a way to help without giving themselves. The cost is borne by the company, and companies are seen as evil, faceless oppressors. They prefer not to notice that the a high minimum wage creates high unemployment in central cities and other low skill areas, like Detroit before bankruptcy, and Puerto Rico today. In Detroit before bankruptcy, the living wage was set so high that companies could not compete and went bankrupt or fled. The ones that stayed hired so selectively that the unskilled were basically unemployable. Even the city couldn’t pay its wages and bills.

A high minimum wage increases the need for welfare, as some workers will be unemployable — because of disability, because of lack of skill, or from an ingrained desire to not work. The punishments a community can mete out are limited, and sooner or later some communities stop working and stop learning as they see no advantage.

The difficulties of taking care of the genuinely needy and disabled while the lazy and unskilled has gotten even some communist to reconsider wealth as a motivator. The Chinese have come to realize that workers work better at all levels if there is a financial reward to experience and skill at all levels. But that still leaves the question of who should pay to help those in need and how.  Currently the welfare system only helps the disabled and the “looking” unemployed, but I suspect they should do more replacing some of the burden that our minimum wage laws places on the employers of unskilled labor. But I suspect the payment formula should be such that the worker ends up richer for every additional hour of work. That is, each dollar earned by a welfare recipient should result in less than one dollar reduction in welfare payment. Welfare would thus be set up as a negative tax that would continue to all levels of salary and need so that there is no sudden jump when the worker suddenly starts having to pay taxes. The current and proposed tax / welfare structure is shown below:

Currently someone's welfare check decreases by $1 for each dollar earned. I propose a system of negative tax (less than 100%) so each dollar earned puts a good fraction in his/her pocket.

Currently (black) someone’s welfare check decreases by $1 for each dollar earned, then he enters a stage of no tax — one keeps all he earns, and then a graduated tax. I propose a system of negative tax (red) so each dollar earned adds real income.

The system I propose (red line) would treat identically someone who is  incapacitated as someone who decided not to work, or to work at a job that paid $0/hr (e.g. working for a church). In the current system treats them differently, but there seems to be so much law and case-work and phony doctor reports involved in getting around it all that it hardly seems worth it. I’d use money as the sole motivator (all theoretical, and it may not work, but hang with me for now).

In the proposed system, a person who does not work would get some minimal income based on family need (there is still some need for case workers). If they are employed the employer would not have to pay minimum wage (or there would be a low minimum wage — $3/hr) but the employer would have to report the income and deduct, for every dollar earned some fraction in tax — 40¢ say. The net result would be that the amount of government subsidy received by the worker (disabled or not) would decrease by, for 40¢ for every dollar earned. At some salary the worker would discover that he/she was paying net tax and no longer receiving anything from the state. With this system, there is always an incentive to work more hours or develop more skills. If the minimum wage were removed too, there would be no penalty to hiring a completely unskilled worker.

At this point you may ask where the extra money will come from. In the long run, I hope the benefit comes from the reduced welfare rolls, but in the short-term, let me suggest tariffs. Tariffs can raise income and promote on-shore production. Up until 1900 or so, they were the main source of revenue for the USA. As an experiment, to see if this system works, it could be applied to enterprise zones, e.g. in Detroit.

R. E. Buxbaum, June 27, 2014. I worked out the math for this while daydreaming in an economics lecture. It strikes me as bizarre, by the way, that one can contract labor for barter, pay a pizza for two hours labor, but you can’t contract labor for less than the minimum cash-rate $7.45/hr. You can go to jail by paying less than this in cash, but not in food. In Canada they have something even more bizarre: equal wages for equal skills — a cook and a manager must earn the same, independent of how well the cook cooks or how needed the work is. No wonder violent crime is higher in Canada.

In praise of tariffs

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In a previous post I noted that we could reduce global air pollution if we used import taxes (tariffs) to move manufacture to the US from China and other highly polluting countries. It strikes me that import tariffs can have other benefits too, they can keep US jobs in the US, provide needed taxes, and they’re a tool of foreign policy. We buy far more from China and Russia than they buy from us, and we get a fair amount of grief — especially from Russia. An appropriate-sized tariff should reduce US unemployment, help balance the US, and help clean the air while pushing Russia in an alternative to war-talk.

There is certainly such a thing as too high a tariff, but it seems to me we’re nowhere near that. Too high a tariff is only when it severely limits the value of our purchasing dollar. We can’t eat dollars, and want to be able to buy foreign products with them. Currently foreign stuff is so cheap thought, that what we import is most stuff we used to make at home — often stuff we still make to a small extent, like shoes, ties, and steel. An import tax can be bad when it causes other countries to stop buying from us, but that’s already happened. Except for a very few industries, Americans buy far more abroad than we sell. As a result, we have roughly 50% of Americans out of well-paying work, and on some form government assistance. Our government spends far more to care for us, and to police and feed the world than it could possibly take in, in taxes. It’s a financial imbalance that could be largely corrected if we bought more from US manufacturers who employ US workers who’d pay taxes and not draw unemployment. Work also benefits folks by developing, in them, skills and self-confidence.

Cartoon by Daryl Cagle. Now why is Russia a most favorable trade partner?

Cartoon by Daryl Cagle. Trade as foreign policy. Why is Russia a most favorable trade partner?

In a world without taxes or unemployment, and free of self-confidence issues, free trade might be ideal, but taxes and unemployment are a big part of US life. US taxes pay for US roads and provide for education and police. Taxes pay for the US army, and for the (free?) US healthcare. With all these tax burdens, it seems reasonable to me that foreign companies should pay at least 5-10% — the amount an American company would if the products were made here. Tariff rates could be adjusted for political reasons (cartoon), or environmental — to reduce air pollution. Regarding Russia, I find it bizarre that our president just repealed the Jackson Vanik tariff, thus giving Russia most favored trade status. We should (I’d think) reinstate the tax and ramp it up or down if Russia invades again or if they help us with Syria or Iran.

A history of US tariff rates. There is room to put higher tariffs on some products or some countries.

A history of US tariff rates. Higher rates on some products and some countries did not harm the US for most of our history.

For most of US history, the US had much higher tariffs than now, see chart. In 1900 it averaged 27.4% and rose to 50% on dutiable items. Our economy did OK in 1900. By 1960, tariffs had decreased to 7.3% on average (12% on duty-able) and the economy was still doing well. Now our average tariff is 1.3%, and essentially zero for most-favored nations, like Russia. Compare this to the 10% that New York applies to in-state sales, or the 6% Michigan applies, or the 5.5% that Russia applies to goods imported from the US. Why shouldn’t we collect at least as high a tax on products bought from the non-free, polluting world as we collect from US manufacturers.

Some say tariffs caused the Great Depression. Countries with lower tariffs saw the same depression. Besides the Smoot-Hawley was 60%, and I’s suggesting 5-10% like in 1960. Many countries today do fine today with higher tariffs than that.

Robert E. Buxbaum, March 25, 2014. Previous historical posts discussed the poor reviews of Lincoln’s Gettysburg address, and analyzed world war two in terms of mustaches. I’ve also compared military intervention to intervening in a divorce dispute. My previous economic post suggested that Detroit’s very high, living wage hurt the city by fostering unemployment.