May 14, 2019

Conservative critics of Trump's tariffs are WRONG

The received economic wisdom that has come down to us from David Ricardo onwards is that tariffs are uniformly impoverishing overall. And those who understand comparative advantage and the various theories involved can usually see only minor holes and exceptions in that theory. And it is true that in a fully free-trade world the theory would be 100% correct.  But we don't live in that world, nor are we likely to

Some critics allow that Trump's tariffs are reasonable as a temporary measure -- designed to coerce other nations to adopt freer trade policies.  That is certainly the headline aim of the tariffs and is sufficiently persuasive to most conservative commentators for them to adopt a "wait and see" posture.

But I believe that there is a warrant for tariffs of a PERMANENT nature.  And it is not a million miles away from popular thinking, as distinct from economists' thinking.

My hypothesis is that there is a trade-off between tariffs and unemployment such that as tariffs go up unemployment goes down. That sounds a crazy connection but it has been true since even before Trump's inauguration.  As soon as his election win was announced, Trump started to talk tariffs and almost immediately employment began to look up.  And what do we see now after more than 2 years of Trump? An almost unbelievable low of 3.6% unemployment.  Around the same time half way through the Obama administration, the figure was 8%.

You have to go back to the postwar boom under Ike to get much better than 3.6% --  and unemployment at that time was materially affected by the many workers who had been taken out of the workforce through death, disease and injury in WWII.  War is a heck of a bad way to maximize employment but it does have that effect.

So in the Trump administration, we do seem to have have a continuing demonstration that a tough tariff regime has led to reduced unemployment.

But is it all coincidence?  Obama diehards say that the low unemployment is a continuing effect of what Obama did -- though they can't name any mechanism for that.

One possible pointer to it not being a coincidence is the huge prospering of America behind the high tariff walls of the 19th century.  The tariffs were arguably the real cause of the civil war but despite that setback America developed rapidly from its primary-producing beginnings and was soon in a position not inferior to the major European powers.

So was unemployment low then?  We have no reliable figures to test that but the rate of industrial expansion strongly suggests that it was.  Millions of jobs were created.

So I think we now have two points of evidence in favour of my hypothesis.  But there is another example that is really stark.  What would you say to unemployment levels in an affluent society that stayed BELOW 2%?  Impossible?  It's not.  That is the situation that prevailed in Australia under Robert Menzies during the 1950s -- an era often remembered by those who were there (I was) as a golden age.

And guess what?  It was also an era of heavy protective tariffs.  There was a deliberate will to have everything possible made in Australia.  And if it could not reasonably be made in Australia, it could always be obtained from Britain.

That sounds all rather quaint to modern ears but the policy was underpinned by memories of wartime shortages.  During WWII, many things could simply NOT be imported.  Australia is a long way from anywhere else and so there was large scope for cargo-ships to be sunk by hostile powers.  So making as much as you could locally seemed not only obvious but urgent.

So the high tariff policy was not motivated  by an attack on unemployment but it did have that effect.

Now WHY would high tariffs cause minimal unemployment?  It's obvious psychologically.  If a businessman has a firm assurance that he will not be allowed to go broke by the sudden presence of cheaper goods from overseas, he will feel very easy in his mind about setting up shop.  He will feel confident that his investment in new manufacturing businesses will pay. And so all sorts of profitable businesses sprang up in Australia and searched for workers to staff them. There were jobs galore on offer and most people had a choice of what sort of job they wanted to do.  I remember myself the ease I had in finding jobs.

So that is the theory:  Tariffs stimulate business confidence and confident businessmen go on a hiring spree in their keenness to make money

It remains true that tariffs increase prices but the tradeoff of having most workers working is surely an at least equal compensation.  Dollars and cents are not the whole of personal or national welfare.

And the effect of the dollars and cents should not be exaggerated.  Despite its tariffs, Australia was in the '50s one of the most prosperous places in the world.  Australia is a major primary producer so there was often steak on the dinner table, most houses had a substantial backyard where you could grow most of your fruit and vegetables if you were so inclined, you could get on a steam train and go interstate to visit family and friends at vacation time, there was always the family car for local trips, the newspapers had lots of interesting news, particularly from overseas,  you could hear all the latest songs on the radio, the ladies all had pretty dresses and even in small towns there were several bars where one could drink cold beer after a hard day's work.  What else is there? -- JR




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