Copy of AFF Sentinel V21 #50-The Intertwining of Trade & the Economy
- Steve Dittmer
- Jul 22
- 4 min read
Trade New Topic to Reveal Keynesian Economics & Government Central Control
Steve Dittmer | AFF Sentinel
Colorado Springs, CO
Originally sent to subscribers 12/02/24
We’ve always said that economics is the study of human behavior: judging how people will react to certain stimuli, whether incentives or disincentives.
Some of the economists decrying Trump’s tariff statements don’t cotton to that approach, instead, sticking to simple arithmetic, whether it’s tax cuts or tariffs. They do not take into account the response of people short-term or long-term.
In other words, they think cutting the tax rate will mean lower government receipts and putting a tariff on a good will add to its price -- simple arithmetic. Only, it is not that simple. People will react to changes in the situation. And in today’s world, that can happen quickly and from 5,000 miles away.
Anyone who has been in business knows that raising prices must be weighed against losing sales or customers. Ivory tower or government economists evidently don’t know that or take that into account. They do simple arithmetic but do not account for the dynamic effects of people responding to changes.
They also seem to ignore evidence. The tax cuts of 2017, after the first year of people responding and adjusting, increased government receipts. The tariffs or the threat of tariffs did not raise inflation across the board because importers did not all respond by raising prices. And imports are still a minor part of the total economy. Trump handed over a 1.4 overall percent inflation rate at the end of his term.
The Fed is populated by hundreds of Ivy League-type economists that, as Larry Kudlow, a one-time Fed employee points out, contributed over 90 percent of their political contributions to Democrat candidates the last two elections. The Fed still believes in the Phillips Curve theory, that inflation and unemployment are inversely related; high inflation is correlated with low unemployment or low inflation is correlated with high unemployment
The supply-side economic theory holds that increased government spending, plus the government printing money to finance it, is what causes inflation. Those economists believe that what fixes inflation is more growth, more supply while the Fed believes crushing demand is the way to fight inflation.
S T. Karnick* quoted an analysis by Michael Lebowitz** pointing out that there is not just one response to tariffs on imported goods. Consumers may not pay the higher price and buy a substitute good; they may not pay the higher price and buy a competing cheaper product or they might pay the higher price and spend less on some other item. In all three of these instances, the effect of the tariff is not a direct effect on the overall inflation rate.
That’s if the price even goes up. The importer might not raise the price, may raise the price a lesser amount than the import fee or may negotiate a cheaper price from the exporter.
All of these things are just part of the equation and are the short term responses. The long-term could change the responses by anyone involved.
We’re not capable of either constructing or understanding the equation that would model all those possibilities plus a few more but it would be mathematical or algebra, not simple arithmetic, as some claim.
A tariff has always been regarded as a tax. But, the difference is that one is not forced to buy the good and incur the tax. It is voluntary, while a regular tax is not. But Karnick points out that if tariffs were really inflationary, so would other taxes be inflationary, like income or corporate taxes. And he hasn’t seen anyone opposing taxes because they were inflationary.
Karnick also is of the opinion that while tariffs if anything are deflationary, netting a small decline in GDP, they are not nearly as much of a drag on the economy as government imposed, mandatory taxes.
If consumers reduce spending on a specific imported good, they might buy some other substitute good, which shifts income to that firm. The company that had been importing a good, may reduce margins and import less volume. Basically, there is a shift in spending but the overall economy is not affected as much in total, according to Milton Ezrati***, another economist.
Ezrati also believes that what we’ve termed the arithmetic method of just adding the cost of the tariff to the price of the good is simplistic and doesn’t account for many factors. Ezrati called such interpretations ”politically motivated.”
If a good was being imported in the first place, it is often because it was cheaper than a domestic product. If the tariff increases the cost of the good, then it may be the same cost as the domestic product and the overall effect would be negligibly different than before and have little effect on inflation.
Then there are currency factors that may enter in. Last time, when tariffs were levied against China, its currency dropped in value, offsetting much of the damage caused American consumers by the tariffs. But imports from China actually increased, although they got fewer dollars in return for their products. Their volume increased but their revenue and profits decreased, meaning that they did suffer from the tariffs. They “paid” for the tariffs.
The same could happened this time, although Ezrati points out that the value of the yuan could eventually be getting low enough to worry China about currency outflows from the country, prompting more resistance.
*S.T. Karnik, Heartland Institute, formerly with Hudson Institute
**Michael Lebowitz, financial manager at RIA Advisors
***Milton Ezrati, chief economist, Vested
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