Reason Magazine is confused. Wrong about inflation but partly right about tariffs. And partly wrong.

Read how the right-wing “Libertarians” take opposite sides of the same issue. Here are excerpts from an online Reason (Libertarian) article:

By Refusing To End Trump’s Tariffs, Biden Is Making Inflation Worse
Trump’s tariffs are adding an estimated 0.5 percent to annual inflation.
ERIC BOEHM | Reason |12.10.2021

Tariffs do exactly one thing: raise prices.

No, tariffs do exactly two things: Yes, they raise prices, but they also take dollars from the economy.

Right now, prices don’t need any help getting higher.

Economic data released Friday by the Bureau of Labor Statistics show that year-over-year inflation hit 6.8 percent in November—the highest level recorded since 1982. Despite other indicators showing that the economy is strong, persistently high inflation is a serious problem for American households.

That includes the current resident of the White House, for whom inflation is becoming a major political headache.

There’s probably not much President Joe Biden can do to curb inflation in the short term. That ship sailed when he pushed for and signed off on a major economic stimulus bill earlier this year—one that economists warned was too large and could overheat the economy.

The “too large” phrase might make you believe Mr. Boehm believes stimulus is good, just not so much. Don’t be misled. For Libertarians all federal spending is “too large.”

Had the stimulus package been $5, Mr. Boehm would have complained it was “too large.” Why? Just because. Libertarians are anti-government everything, and would prefer that the economy sink into depression than see more federal spending.

Other factors influencing inflation, like the disconnect between supply and demand that’s largely a result of the ongoing COVID-19 pandemic, are well beyond Biden’s (or any president’s) power to change.

“The disconnect between supply and demand” are not “other factors influencing inflation” They are THE factors causing inflation, the only factors.

All inflations are caused by shortages.  Today’s inflation is caused by shortages of oil, food, computer chips, lumber, shipping (and everything else that gets shipped), and labor.

This stimulus package, like all previous stimulus packages, did not cause the oil shortage. It did not cause the food shortage. It did not cause the computer chip shortage. It did not cause the shipping shortage.

It may temporarily have caused a labor shortage by giving people an alternative to low-pay, crap jobs. Unfortunately, the unemployment compensation safety net now has been pulled out from under workers, who the employers hope will be forced to accept those jobs.

But there is one thing Biden could do to immediately provide consumers with relief. He could eliminate the tariffs imposed by former President Donald Trump.

If Boehm is claiming that the tariffs were just another, stupid Trumpian attempt to punish China by punishing American consumers, he is correct. China doesn’t pay for American import taxes. Americans do.

But what Boehm neglects to mention (or doesn’t realize) is that import tariffs take dollars from the American private sector (aka “the economy”) and give those dollars to the federal government, and that reduces the federal deficit and debt.

And as anyone familiar with Libertarians knows, those folks absolutely hate the federal deficit and debt (despite the fact that whenever the deficit and debt are reduced we have recessions and depressions).

So in the backward logic of Libertarians, deficit-reducing tariffs should be a good thing.

Those tariffs, which Biden has been stubbornly unwilling to reverse during his first year in office, are adding roughly 0.5 percent to annual inflation across the economy. 

Trump’s tariffs on washing machines, solar panels, steel, aluminum, and a host of Chinese-made goods are a “secondary but noticeable contribution” to overall inflation right now.

That’s pretty much in line with what four economists at the San Francisco Federal Reserve warned in February 2019, shortly after Trump began slapping tariffs on various goods. “Imports from China are an important part of overall U.S. imports of consumer and investment goods,” they wrote.

“Thus, tariffs on these imports are likely to have sizable effects on consumer, producer, and investment prices in this country.”

But wait. Remember Boehm’s “supply and demand” comment at the start of the article. He claimed, in effect, that increased demand is half the problem. But tariffs reduce demand. That’s the underlying purpose of tariffs.

So in Boehm’s world, reducing demand via tariffs should mitigate inflation!

And as we have said, tariffs are taxes. Deficits and debt are the difference between taxes and spending. Libertarians supposedly hate deficits and debt. Tariffs, i.e. taxes, reduce deficits and debt.

Unlike other policies that could help slow inflation, like raising interest rates, Biden could cut tariffs without having to wait for Congress or the Federal Reserve to act.

He’s right, but cutting tariffs also would increase the federal debt, which Boehm doesn’t want.

Similarly, cutting tariffs would not come with some of the negative tradeoffs that other actions might. Raising interest rates will harm the economy in other ways (for example, by making it more expensive to borrow).

Boehm is correct that Trump’s tariffs were, as usual, stupid. But he is dead wrong about raising interest rates. While raising interest rates makes borrowing more expensive, private borrowing adds stimulus dollars to the economy. Banks lend by creating dollars.

Even more importantly, higher interest rates force the federal government to pump more interest dollars into the economy, which helps grow the economy.

To quote from an article we published in 2018, “Interest rates going up. Should you be concerned?”

Rising Rates Could Further Balloon Interest Spending, Mar 21, 2018

The Federal Open Market Committee (decided) to raise the federal funds rate by 0.25 percentage points to 1.5-1.75 percent.

The federal government (is projected) to spend $6.8 trillion on interest costs over the next decade. If interest rates end up just 1 percentage point higher than projected, interest costs would increase by a further $2 trillion. If interest rates return to their pre-recession levels, costs could rise by $3.4 trillion.

Let us rephrase as follows:

The federal government (is projected) to pump $6.8 trillion interest dollars into the economy over the next decade.

Should a $6.8 trillion stimulus — which is similar in effect to a $6.8 trillion tax cut — be a cause for concern?

Contrary to popular myth, raising interest rates does not “harm the economy” as Boehm and many other economists claim. In fact, raising interest rates stimulates the economy by forcing the federal government to pump more dollars into the private sector.

Blue line is interest rates. Red line is Gross Domestic Product growth.

Higher interest rates are associated with higher GDP growth, because higher interest rates cause more money growth.

The illusion that high interest rates “harm the economy” is caused by the stock markets, which decline in anticipation of raised rates. But anticipation is based on belief, not on fact.

Adding dollars to the economy, which is what higher interest rates accomplish, stimulates economic growth.

Lifting tariffs will ease inflation and provide a tax cut to many American businesses. 

Correct. Tump’s tariffs should be lifted, just not for the reasons Boehm claims.

Again: The one and only thing that tariffs do is raise prices. That is their only function.

Again, their other function is to take dollars from the economy, give them to the federal government (which has no use for them), and reduce deficits and debt (both of which are necessary for economic growth).

Politicians might want to deploy tariffs (to raise prices) for a number of reasons: to protect domestic industries, to influence where in the world individuals choose to invest, to retaliate against what they perceive as unfair trade practices from other countries, and so on.

Tarrifs are nothing more than a spite-one’s-face-by-cutting-one’s-nose exercise. All of the above goals can be accomplished via federal tax cuts and federal spending.

If Biden is going to keep ignoring this basic bit of economic reality, then he is choosing to make inflation worse than it already is.

The basic bit of American economic reality is this:

  1. Inflation is caused by scarcity, not by federal spending. Not by “too much money,” but rather by too few goods.
  2. Cutting tariffs does not increase supply, so it does not reduce inflation.
  3. Inflation can be cured by federal spending to obtain and distribute the scarce goods.
  4. Federal deficit spending is economically stimulative, i.e cutting taxes and spending both grow the economy
  5. Interest rate increases are stimulative
  6. Tariffs are not a good solution for any economic problem

While Mr. Boehm is correct about the need to cut tariffs, he is wrong about the way to cure inflation. That cure requires increased federal deficit spending to acquire and distribute the scarce products while decreasing taxes.

A great place to begin would be to eliminate the FICA tax, which has zero positive effects, but increases business costs and drags down the economy.

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

……………………………………………………………………..

THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

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 Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and 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. 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 the rest.

MONETARY SOVEREIGNTY

2 thoughts on “Reason Magazine is confused. Wrong about inflation but partly right about tariffs. And partly wrong.

  1. The Fed plans to Decrease interest rates and according to you (point #5) this will be harmful. This will be a real life experiment to see what happens. Keep an eye out for this eventuality as proof of your premise from your graphs. Unfortunately this will take some real time to play out.
    Meanwhile, the stock market’s short-run fear will dominate the short-run news cycle and short memory of the public.
    Your long-run crystal ball is needed in unforeseeable scarcity economics. A subject in need of predictability should, you’d think, recognize your work. Then again, there’s the problem of the threat to established thought and institutions, and those people fearfully trying to hang on to their jobs. So they’ll give the Nobel Prize to a confusing mathematical mess only to add to the mess we’re in. A truly effective award is one that would work in reality, not on paper alone.

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  2. RE: The illusion that high interest rates “harm the economy” is caused by the stock markets, which decline in anticipation of raised rates. But anticipation is based on belief, not on fact.

    This anticipation is based on beliefs that are part and parcel of the Bretton Woods hangover that continues to hold us all back. Raising interest rates causes different results under a gold anchored system of fixed exchange rates than what it does in a fully fiat world.

    Didn’t someone make a snarky remark a few years back that the stimulative interest paid out on the time deposits [aka the scary federal “debt”] at the federal reserve bank are guaranteed income for individuals and entities who already have money?

    As for this Boehm character I believe he may be a descendant of the economist Eugen Böhm later enobled Eugen Ritter von Böhm-Bawerk [1851-1914]. Böhm-Bawerk briefly became Austrian Minister of Finance in 1895. After a second brief period in the position, after his third appointment to the post he remained in it from 1900 to 1904. There he fought continually for strict maintenance of the legally fixed gold standard and a balanced budget. In 1902 he eliminated the sugar subsidy, which had been a feature of the Austrian economy for nearly two centuries. He finally resigned in 1904, when increased fiscal demands from the army threatened to unbalance the budget. The economic historian Alexander Gerschenkron criticized his “penny pinching, ‘not-one-heller-more policies’,” and criticised Böhm-Bawerk’s unwillingness to spend heavily on public works. Joseph Schumpeter praised Böhm-Bawerk’s efforts toward “the financial stability of the country.” His image appeared on the one-hundred schilling banknote from 1984 until the euro was introduced in 2002. https://en.wikipedia.org/wiki/Eugen_von_B%C3%B6hm-Bawerk

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