THE POLITICAL ECONOMY OF TARIFFS: POPULAR MYTHS.

If Ross Perot had been correct in 1992, Donald Trump would not have his principal issue in 2016 or last year.

Think about it, dear reader, if there is a giant sucking sound of manufacturing jobs going to Mexico, why is there immigration through Mexico into the United States?

Our President seeks, as Don Surber explains, to bring back those thrilling days of the American High.

FDR called America the arsenal of democracy in World War II as we supplied our allies—including the USSR—with war materiel.

That won’t happen again. Our government’s refusal to protect American manufacturers from unfair competition created a rust belt that destroyed city after city and state after state.

Our factories are almost gone because of foreign exploitation of our post-war generosity. We bought the cheap made-in-Japan crap only to see us face tariffs and other economic barriers add 46% to the price of American goods sold there.

In retaliation, Trump is slapping a 24% tariff on Japanese products. It gets complicated because Toyota and Honda make some cars here.

I'm old enough to recall that story.  The Popular Perspective, circa 1981, was that the countries receiving Marshall Plan aid were able to undersell into the United States because they had state-of-the-art factories while the physical plant that won the War was still in place, if clapped out.  Reality is more subtle.

Mr Longworth argues that both leaders and the Midwestern work force took the persistence of broadly shared prosperity based on manufacturing and farming for granted. Because those lines of business were subject to business cycles, sometimes of great amplitude, many interpreted the turmoil in autos and steel that began in the late 1970s as simply one more nasty recession (to some extent it was) that would pass (but some things changed permanently). Those lines of business enjoyed protection from the rest of the world: with the full power of the government in the case of farming, by default in the case of autos and steel, with that era of broadly shared prosperity the prosperity of a temporarily closed market extracting rents from others. (But if you say that too loudly, people will squawk.) The technology and the absence of competition made it possible for a person with a strong back to earn a decent living and be able to purchase lakeside property and all manner of gasoline-powered toys that ran on the cheap gas of the era. At the same time, the North Central states had some of the strongest universities in the world (the Big Ten, Chicago, what Mr Longworth characterizes as a "rosary" of Catholic universities) and a social-democratic compact in which the muscle workers would pay taxes to support the educational aspirations of the mind workers.

All gone, now. Mr Longworth treats as inevitable the opening of world markets that disrupted the closed environment that was the midwestern economy. There are reasons, however, that the automotive and primary metals were among the first to go. The prosperity of those businesses and the unionized workers was sustained by numerous wedges between price and cost, as well as costs padded by perquisites. Where such a wedge exists, some entrepreneur will attempt to exploit the resulting profit opportunity. But it's more than oligopolistic smugness: the comparative advantage of the United States has involved knowledge-intensive, high-technology products. That's what steel and automobiles were, 100 years ago, and that's what biotechnology is today, and as Mr Longworth noted at his talk last Thursday, we've got plants and animals if that's what high-tech involves. But getting the money and the smart people?

In reality, the legacy companies had the option of demolishing their Steam Era factories and building new ones, and a planned demolition and reconstruction would be cheaper and less messy than having the Army Air Corps bomb them.  In general, they did not.  Startup companies did.  Sometimes, that meant rethinking what a factory was.

To the extent that it is not being used to provide machinery to work with that cheap labor, there must be incentives to use the money to own other machinery and work with other workers. (How many times do we have to beat down the "giant sucking sound" arguments?)

Now let's walk backwards to the "real work." Conjures up images of 10,000 comrades carrying lunch buckets into Magnitogorsk to fulfill the Five Year Plan, doesn't it? But improvements in information handling and in change-on-the-fly tooling make such images of mass production and mass marketing something for dystopian movies. Those developments do not have to mean all manufacturing has to move to low-wage locations, a lot of it can take place in residential neighborhoods with relatively few people and a lot of clever tooling doing the work. It also does not have to mean immiserisation of people in a rich neighborhood. If it's a bit hard to see why internationally, consider a parable of two towns, Wilmette and Waukegan. Suppose Wilmette is originally self-sufficient in food, manufacturing and trade, and Waukegan subsists on the food its inhabitants grow. Now let Waukegan trade with Wilmette. Waukegan gets the advantage of Wilmette's trading expertise, and obtains manufactured goods from Wilmette. As time passes, the manufacturing activity moves from Wilmette to Waukegan, and Waukegan begins to trade its manufactured goods for foodstuffs from Wauzeka. In no case does any community become worse off as a consequence of the trading, although Wilmette is still richer on a per-capita basis than Waukegan, as is Waukegan compared to Wauzeka. There is no reason not to think of the developed countries as continuing to be more prosperous as a consequence of international trade in exactly the same way that each of the midwestern cities become more prosperous as a consequence of inter-regional trade.

That is, don't blame some Mexican maquiladora or Chinese prison plant for the deindustrialization, look for internal emergence and creative destruction.

But Our President's tariff pitch includes an appeal to Organized Labor, still yearning for those thrilling days of the American High.

Protectionism has never been unpopular. A number of members of the United Auto Workers attended today’s announcement, and one of them spoke. They are excited about the prospect of more auto manufacturing jobs in the U.S. Are they crazy? I don’t think so. I think there will be a considerable number of auto manufacturing jobs created in the next few years. But how the new tariff regime nets out for American workers and consumers remains to be seen.

Those additional automobile manufacturing jobs might not be as "considerable" as John Hinderaker expects.  Nor is that necessarily a bad thing: an industrial robot can thread in and tighten a bolt much more dependably than a human bored out of his skull after a few hours at it.  (And reshoring clothing factories Stateside?  Give me a break.)  Furthermore, those lunch-bucket-toting comrades at the mill or on the factory floor were a historical oddity.

[The comparative advantage of the United States] has been in producing knowledge-intensive products using advanced technology.  The "broadly shared prosperity" of The America that Worked(TM) was in some ways an aberration, as the routine production of primary metals such as steel or aluminum, or of consumer durables, such as automobiles and appliances, had been codified enough as to become routine, and production could be undertaken almost everywhere, including countries rebuilding after the war, and new countries rendered independent as a consequence of the peace.

Those advanced-technology factories are not as place-bound as their Late Steam Era predecessors.  Unfortunately, more than a few people hope that a tariff, or some other miracle, will bring the old days back.  "It misses the simpler lesson: an industrial era in which monopoly rents attenuated the incentive for some people to invest in human capital, followed by an era of do-your-own-thing nonjudgementalism could only end badly for the people who didn't make the investment, who have been left behind by their neighbors who did."  The adverse selection for the remaining residents will not turn out well.

David Harsanyi, a sometime Trump advocate, is no more optimistic this time around.

According to protectionists like Vice President JD Vance, the public is the victim of stagnant wages and a lack of good jobs due to "deindustrialization." Not only is manufacturing output at historic highs right now, but real annual family income has spiked $28,000 since NAFTA was enacted, while overall wealth rose close to 500%, outpacing inflation five times over that time.

The U.S. per capita income over the past 10 years is unrivaled. The middle class has only shrunk because of the growth of the upper middle class.

Tariffs are meant to prop up a small number of antiquated union jobs in the Rust Belt at the expense of millions of others. We're not "bringing back" manufacturing jobs lost to automation, which is most of them. And we already have plenty of high-tech, high-paying jobs. For every Rust Belt town that struggles, a new wealthy suburb in Texas, Nevada or Florida continues to grow. Those voters may not be as accommodating to the administration if its technocratic adventures start tanking 401(k)s.

It should not be this way. Over many decades, Congress has incrementally handed over "emergency" and tariff power to the president. There's simply no model of the constitutional order that foresaw the executive unilaterally installing economic policy or taxing citizens without legislation. Courts are constantly intervening when Trump acts in ways that fall under his executive purview. And yet, no one stops him from enacting tariffs, a clear violation of Article 1, Section 8 of the Constitution.

In a healthy republic, we would have a debate on how to implement economic policy. A federal legislature would represent the needs of its districts, states and the country. Our relative stability relies on checks on power. In this case, the entire economy hangs on the daily whims of one man.

One suspects that memories of a strong pre-COVID economy helped Trump win in 2024. That success was predicated on free market deregulation and tax cuts, not a statist remaking of the economy. Polls show about 60% of people are already concerned about how the president is handling tariffs.

Let us close this post with a litany of myths as revealed by Jack Salmon and Veronique de Rugy.

1.  America in the Past Thrived Under Tariffs.
   
2.  Trade Deficits Are a Sign of Economic Decline.
3.  Tariffs Will Rebuild Manufacturing and Secure Investment.
4.  Other Countries Cheat—So We Should Too.
5.  Free Trade Only Benefits Elites.
6.  Deindustrialization Means the End of American Power

Visit the link for elaboration and exegesis.  The fourth point merits elaboration in a future post.