I’ve been critical of Trump’s (and Biden’s) support for tariffs, so I was interested to read a defense of the former president’s trade plans that would challenge my view. Naturally, I turned to that reliable source of soundly reasoned Trump apologetics: the Atlantic.
There, Oren Cass of American Compass has written a piece funded by the left-wing Hewlett Foundation: “Trump’s Most Misunderstood Policy Proposal: Economists aren’t telling the whole truth about tariffs.”
What are those dastardly economists hiding from us?
Cass begins:
Donald Trump’s proposal to impose tariffs as high as 60 percent on imports from China, and a global tariff of 10 to 20 percent, takes the right approach to addressing globalization’s failures—but it has drawn resounding mockery from economists, and, in turn, from the mainstream media. “Trump Is Proposing a 10% Tariff. Economists Say That Amounts to a $1,700 Tax on Americans,” a representative CBS News headline declared in June.
Right away, Cass misdirects the reader by suggesting the mainstream media and economists are in cahoots. One of the primary reasons Capital Matters exists is that we can’t trust the mainstream media to get economics right.
This is the same mainstream media that popularized “greedflation” and “modern monetary theory,” runs PR for organized labor and the green movement, says imports reduce economic growth, spreads myths about inequality based on flawed data, sensationalizes stock-market freak-outs that have little to do with underlying economic conditions, covered for Democrats’ plan to expand the IRS, villainizes successful companies, runs puff pieces about government bureaucrats, parrots teachers’ unions’ talking points about education, and in general rarely comes across a government intervention in the economy that it doesn’t like.
It’s also the same mainstream media that publishes, profiles, quotes, celebrates, hosts, hypes, publicizes, interviews, valorizes, and photographs Oren Cass, so he should be careful about biting the hand that feeds him.
Cass’s case against economists is as follows:
At a moment when the cost of living is consistently one of voters’ top issues, the message is clear: A vote for Trump is a vote for inflation. But in making that argument, economists are abandoning some of their most basic analytic principles.
Again, Cass misdirects the reader by conflating inflation with the price increases that result from tariffs. Inflation is an increase in the general price level caused by an increase in the money supply, which has nothing to do with tariffs one way or another. Sometimes economists and writers (probably including me at some point) slip and say “inflation” when they really mean “relative price increases.” Tariffs would cause relative price increases, not inflation.
But that’s not really Cass’s point in this piece. He charges economists with three mistakes in their analysis of tariffs:
- “Their first mistake is to consider only the costs of tariffs, and not the benefits.”
- “The second big trap economists fall into when discussing tariffs is an obsessive and uncharacteristic focus on short-term consequences.”
- “In assessing a tariff’s costs, a holistic analysis must consider where the money goes.”
Not one of these objections sticks. Let’s go through them:
Objection 1: It is very obvious from economic theory that a tariff will have costs and benefits. A tariff is a tax on imports. If you tax something, you get less of it. Less imports benefits domestic producers of substitutes for the imports taxed. Taxes raise the price of a good and impose deadweight loss from inefficiencies. That costs consumers of imports, which includes individuals and businesses.
It is very obvious that, consistent with that theory, economic studies of tariffs consider costs and benefits. For example:
- A 2019 NBER working paper on Trump’s 2018 tariffs explained that the benefits of tariffs could in theory outweigh the costs, but they did not in practice. The paper found, “Although in principle the effect of higher tariffs on domestic prices could be offset by foreign exporters lowering the pre-tariff prices that they charge for these goods, we find little evidence of such an improvement in the terms of trade up to now, which implies that the full incidence of the tariff has fallen on domestic consumers so far,” and, “Our results imply that the tariff revenue the U.S. is now collecting is insufficient to compensate the losses being born[e] by the consumers of imports.”
- A different 2019 NBER working paper on the 2018 tariffs also considered costs and benefits. It said, “We find substantial redistribution from buyers of foreign goods to U.S. producers and the government, but a small net loss for the U.S economy as a whole.”
- Economic analysis of the Section 232 steel and aluminum tariffs from the International Trade Commission in 2023 acknowledged that they caused “an expansion of domestic production” of $2.25 billion, but that effect was overwhelmed by a $3.48 billion decline in production for domestic downstream industries.
- A 2024 paper by some of the top economists on the “China shock” specifically looked for “economic help to the US heartland” from the 2018 tariffs. It found that “import tariffs on foreign goods neither raised nor lowered US employment in newly-protected sectors; retaliatory tariffs had clear negative employment impacts, primarily in agriculture; and these harms were only partly mitigated by compensatory US agricultural subsidies.”
- A 2019 paper from Federal Reserve economists found, “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs.”
- A 2012 paper on U.S. tire tariffs found that they “saved a maximum of 1,200 jobs,” a benefit. But the cost was $1.1 billion in losses to American consumers, or over $900,000 per job saved.
- A 2019 paper on U.S. washing-machine tariffs found the benefit of 1,800 jobs created at domestic producers, but at a cost of $1.5 billion to domestic consumers, which, after subtracting the revenue collected, comes out to $815,000 per job created.
The problem for Cass is not that economists do not consider the costs and benefits of tariffs. It is that they consistently find that the costs outweigh the benefits.
Objection 2: Cass claims economists have a long-term view when they argue in favor of free trade but a short-term view when they argue against tariffs. He wrote, “When economists account for a tariff’s full range of effects, however, the picture changes dramatically.”
To back up that claim, he cites a paper I already cited, with the exact same quotation that I pulled:
For example, researchers at UCLA studying tariffs imposed on China in 2018 estimated that higher import prices were costing the U.S. economy $51 billion annually. But with a “general equilibrium” model that attempted to account for the economy’s response, that estimate fell by 85 percent and became statistically indistinguishable from zero. “We find substantial redistribution from buyers of foreign goods to U.S. producers and the government,” they concluded, “but a small net effect for the U.S. economy as a whole.” If this were in turn to prompt greater investment in domestic production, the net effect might eventually turn positive.
How is that supposed to back up the claim that tariffs are good for the U.S. economy? Are we really supposed to bank public policy on part of a study that finds no effect and hope that it “might eventually turn positive”?
Given enough time, anything might eventually turn positive. The reason for shorter-term analysis of discrete policy changes is that because there are so many variables in the economy, it becomes increasingly difficult to attribute causality to the policy change the further away it recedes in time. Also, the longer it takes for benefits to appear, the more costs accumulate with nothing to offset them.
Cass doesn’t acknowledge the rest of that paper’s findings. It also found that “import tariffs favored sectors concentrated in politically competitive counties,” suggesting that the tariffs were not designed in the national economic interest, and that “tradeable-sector workers in heavily Republican counties were the most negatively affected due to the retaliatory tariffs,” suggesting that this might not be a good policy for a Republican politician to pursue.
Objection 3: Economists do consider tariff revenue, but there’s simply not very much of it to consider. Tariff revenue has accounted for only about 1 or 2 percent of federal revenue since the late 1940s.
The government is running a large budget deficit, but that is, both now and in the future, mostly due to spending being too high, not revenue being too low. Regardless, economists recognize the necessity of taxation. They consider taxes on a spectrum based on how effective they are at raising revenue and how harmful they are to economic growth.
Tariffs rate poorly on both of these criteria. When levied on specific products, they target a very narrow tax base with high rates, creating strong incentives to avoid them and leading to unstable revenue generation. They also have the curious quality where, if they work as their proponents intend, they will raise less revenue. That’s because if the tariff is protecting domestic industry effectively, imports will not be arriving and therefore will not be taxed. For a tariff to steadily generate revenue, it should not be protective. Then, it behaves as a federal consumption tax on imports.
From the perspective of economic growth, consumption taxes are generally better than income taxes. But they should have a very wide base and low rates to limit their damage. If the U.S. were to have a federal consumption tax, it should include all final goods, not just imported ones, and the rate should be lower than the 20 percent that Trump has suggested as the possible rate for his “universal” tariff. (Think of state sales taxes, which are usually around 5 or 6 percent.)
Consumption taxes should exclude intermediate goods from taxation, to avoid taxing the same good several times. About half of U.S. imports are intermediate goods. Steel and aluminum are two great examples of intermediate goods. Raising their prices through tariffs has made a whole array of other products more expensive and has left less money for companies to pay workers or invest in new technology. And remember, if U.S. companies replace their imported inputs with domestic ones, then the tariff isn’t raising revenue anymore.
Economists wisely avoid this catch-22 by advising against tariffs. It’s not for lack of trying them. Economists used to suggest tariffs to poor countries to encourage their domestic economic development. After a couple of decades of trying that, the countries remained poor, and ones that have since liberalized have seen their prospects improve.
The larger point: Oren Cass does not trust you to make your own economic decisions. He makes this abundantly clear when he writes:
To the individual actor, the logical choice is to do whatever saves the most money. But those individual decisions add up to collective economic, political, and societal harms. To the extent that tariffs combat those harms, they accordingly bring collective benefits.
You might think you’re just shopping for a good deal, but Oren Cass doesn’t approve of your decision because he thinks it harms someone else for you to pay a lower price. When tariffs force you to pay a higher price, you’ll be a little poorer, but according to Cass, it’s for the greater good. It’s the same style of argument that environmentalists make when they argue for higher energy prices and more government spending on green energy. You’ll be a little poorer, but it’s for the greater good.
In many cases, though, it’s not just a little poorer. Cass gives a hypothetical example of a $32 American toaster to replace a $30 import. But, based on prices of toasters made in other developed countries, a fully American toaster would probably cost somewhere closer to $300. Multiplying the cost of a toaster by ten is not good for workers who want to buy toasters, and there’s a whole lot more of them than there ever would be workers who would make toasters.
Cass also believes that your money doesn’t really belong to you, but rather belongs to the nation. He makes that abundantly clear as well:
In fact, if 1 million consumers each pay a $5 tariff, $5 million has not been set on fire—it has moved from their pockets to the U.S. Treasury. The nation is not necessarily any richer or poorer.
It is not a conservative policy win to transfer more money from you to the Treasury, and doing so makes you poorer. Have you seen how that money gets spent?
Cass suggests that the money could be used to reduce a different tax, but he never names one, and he has written elsewhere about how he opposes tax cuts. He suggests that the money could be rebated, but we don’t need another way for the government to take money and give it back to us. Then he says the money could be “invested in some other activity.” In this context that means “spent by the government.”
Cass concludes:
Whether America should focus more on domestic or global prosperity, on the lowest possible prices or on long-term growth and industrial strength, are questions on which reasonable minds may differ. They are not, however, questions that economists can answer. In fact, they are precisely the sorts of questions best left to politicians and the voters who elect them.
Ah, yes, populism: Where you leave fundamental questions of how you spend your money up to politicians that half of voters liked one time, crossing your fingers that they ignore their self-interest and Washington lobbyists to act in your interest and the national interest, on the say-so of a former Mitt Romney adviser writing in the Atlantic, funded by left-wing philanthropists, who thinks economics is all one giant con.