We often have written about the giant misunderstandings regarding tariffs.

Many (most?) people believe import tariffs benefit America by:

  1. Protecting Americans’ jobs
  2. Providing the federal government with dollars

This is not even laughably wrong. It is tragically wrong.

To paraphrase the comedian, Henny Youngman, “Take this article, please”:

US reaps more than $1.4 billion from steel and aluminum tariffs, report finds
By Stephanie Dhue, Kayla Tausche, Published Mon, 13 Aug 2018

*Between March 23 and July 16, the U.S. collected $1.4 billion from levies on foreign imports of steel and aluminum.
*That figure could reach $7.5 billion this year, based on last year’s import levels.
*Tariff revenue is impacted by Commerce Department exclusions and President Trump’s change of heart.

In less than five months, the Trump administration has collected more than $1.4 billion in new revenue from steel and aluminum tariffs, according to a recent report prepared for members of Congress.

The Congressional Research Service estimated that, between March 23 and July 16, the U.S. reaped $1.1 billion and $344.2 million from levies on foreign steel and aluminum, respectively.

Those earnings are on the rise as trade negotiations with allies linger on and President Donald Trump moves to hike tariff rates on countries like Turkey.

CRS says the new tariffs could reap the U.S. some $7.5 billion$5.8 billion on steel and $1.7 billion on aluminum– based on last year’s import levels.

Whom do you think will pay that $7.5 billion? Not Turkey. Not Canada. Not China. Not any foreign nation.

The answer: You, the American consumer, will see $7.5 billion taken out of your pockets, and transferred to the U.S. government, where all $7.5 billion will be destroyed.

That’s right, destroyed. As soon as those dollars hit the Treasury, they no longer will exist as part of any money-measure. The government doesn’t need or use those dollars.

To pay creditors, the government creates brand new dollars, ad hoc. Paying creditors is the only method by which the government creates U.S. dollars. 

Those federal tariffs constitute a $7.5 billion tax on the American economy, a net loss for the private sector and a net gain for no one.

Just as a tax cut is stimulative, a tariff not only is recessive, but it also is inflationary, as it increases prices.

Trump has suggested the tariffs – originally unveiled as a national security provision – could have the added benefit of reducing the federal deficit, which rose to $77 billion in July, wider than the July 2017 budget deficit of $43 billion.

And the Treasury’s borrowing to fund government operations is set to top $1 trillion this year for the first time ever.

There are only two ways to reduce the deficit: Increase federal taxes and/or cut federal spending. Both are recessionary. They reduce the number of growth dollars coming into the economy.

A growing economy requires a growing supply of money. Reducing the deficit is the worst possible act if one wishes the economy to grow. 

Red line shows changes in federal debt. Reductions in debt growth lead to recessions (vertical gray bars) by taking dollars from the economy. Increases in federal debt growth cure recessions by adding dollars to the economy.

Because of Tariffs we will be able to start paying down large amounts of the $21 Trillion in debt that has been accumulated,” Trump tweeted on Aug. 5. “At minimum, we will make much better Trade Deals for our country!”

As usual with Trump pronouncements, this is false. Tariffs do not in any way help pay down the federal debt.

The debt is paid down by returning the dollars that already exist in Treasury security accounts. No taxes are used for this.

And in any event, paying down debt causes depressions.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

In short, while tariffs may protect a relatively few jobs in a chosen industry, they cost jobs overall by being recessive and inflationary. 

Taking $7.5 billion from the economy in an attempt to save jobs is moronic.

Rather than destroying $7.5 billion, the government could, if it wished, support those chosen industries by:

  1. Reducing their taxes
  2. And/or buying from them
  3. And/or giving them money

Though we have come to expect moronic ideas from Trump, we also receive the same moronic ideas from “respected” sources. For instance:

What to learn from Trump’s accidental tariff success 
THE WEEK, Ryan Cooper

President Trump’s economic choices over the last two years have been terrible. When he wasn’t busy shoveling vast piles of cash into the suppurating maw of the top 1 percent, he busied himself starting a flailing trade war with China and Europe.

So far, so good, but why is that trade war failing? Because all trade wars fail.

However, there have been some accidental side benefits. The tax cuts provided a bit of badly needed fiscal stimulus that jolted the economy half-awake (despite being otherwise monstrous policy).

Right. The tax cuts are stimulative, because they add dollars to the economy. Unfortunately, the primary benefits of Trump’s tax cuts went to Trump and his rich pals.

And, as an Economic Policy Institute report details, his tariffs on aluminum have restored some employment and production in that sector.

Whereas nearly the entire American aluminum industry had vanished between 2010 and 2017, after tariffs went up in March of this year, production is up 67 percent, three smelters have been reopened, and one has been expanded, resulting in 1,000 new jobs and $100 million in new investment.

Taking billions from the economy does not create “new” jobs. It shuffles jobs from one industry to another, while costing the economy money and inflating the price of all things made with aluminum.

Not that tariffs are always and everywhere good, but they can be an important tool for managing trade and the economy.

Tariffs are taxes. Taxes are not a tool for managing the economy; they are a tool for shrinking the economy.

Sure, some tariffs have been pretty lousy or misguided. For instance, the Smoot-Hawley tariffs of 1930 at a minimum utterly failed to cure the Great Depression — and quite possibly enabled a protectionist race to the bottom that ultimately worsened the situation.

Tariffs, being taxes, cannot cure anything. As you have seen from the above data, recessions are caused by reduced money growth, and are cured by increased money growth. Taxes (tariffs) take dollars from the economy.

But, free trade (especially of capital) under a fiat currency regime can fuel devastating financial crises just as it did in the 1920s.

The depression of 1929 was caused by ten years of federal surpluses (taxes exceeding spending).

What the world and America need is a global trade regime that allows poorer nations to get started on the development ladder, but without creating (politically disastrous) severe trade imbalances, or requiring the United States to run a gigantic trade deficit until the end of time so nations can settle their international accounts.

Utter nonsense. “Trade imbalances” (i.e. more money leaving a country than entering it) are no problem for a Monetarily Sovereign government. Such a government creates its own sovereign currency at will, and at no cost.

The U.S. consistently runs trade deficits, which actually are beneficial. Trade deficits allow the federal government to obtain valuable goods and services in exchange for dollars they produce at the touch of a computer key.

Past Federal Reserve Chairman Ben Bernanke: “The U.S. government has a technology that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

This is discussed further at: Questions about the trade deficit illusion. Do we even have a trade deficit?  Monday, Dec 10 2018

A world trade system like Bretton Woods (but better) would be best — but tariffs can absolutely be part of such an effort in the meantime.

Bretton Woods was the last of a series of gold standards which inevitably fail because they tie money creation to the availability of a physical chemical. Nations that are short of gold cannot grow, just as nations that are short of money cannot grow.

For the author, Mr. Cooper, to mention Bretton Woods favorably, demonstrates an abject ignorance of economics.

Trump’s tariffs show they do pretty much exactly what they say on the tin: change the price structure to make domestic production more feasible.

No, tariffs cost both people and nations money, and have zero positive value.

It’s long since time China (and Germany, for that matter) rebalanced its economy to be less export dependent.

Cooper does not even understand that Germany is monetarily non-sovereign. It cannot create its own sovereign currency at will, as it does not have a sovereign currency. So Germany, and all euro nations, must be net exporters (i.e import money) to survive.

The U.S., by contrast, does not need exports in order to import money. It can create its money at will.

As John Maynard Keynes suggested, a trade system favoring neither surpluses nor deficits is a much more sensible way to structure the global economy.

“A trade system favoring neither surpluses nor deficits” would be a zero growth trade system.

Bottom line: A Monetarily Sovereign nation should not levy tariffs, ever. It can encourage any of its industries and their jobs, if it wishes, simply by supporting those industries financially.

A tariff is a tax. Just as a tax cut is stimulative, a tariff not only is recessive because it takes dollars from the private sector, but it also is inflationary because it increases prices.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

The single most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:
1. Eliminate FICA

2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.

MONETARY SOVEREIGNTY