Do tariffs cause inflation?

There has been some debate between Trump critics and Trump defenders about whether tariffs cause inflation. Some defenders, including the Commerce Secretary Howard Lutnick, say that tariffs don't necessarily cause inflation. My view is that these defenders have a point, but not a good one.

Tariffs reduce productivity because they prevent the international marketplace from allocating resources to their best use. Lower productivity means lower real incomes. Lower real incomes could take the form of either (1) a higher price level for given nominal incomes or (2) lower nominal incomes for a given price level. Whether (1) or (2) occurs depends largely on monetary policy.

When Trump critics say that tariffs cause inflation, they are implicitly assuming case (1). That case may be the more likely one, but it is not necessarily the way things will play out. 

Bottom line: Trump critics should say that the tariffs will reduce American living standards (as well as living standards abroad) without invoking the word "inflation."

What I am reading

An intriguing new paper by John Cochrane picks up on a question that Ricardo Reis and I worked on long ago: Which models of the Phillips curve generate realistic dynamics? I have not yet processed all of what John has to say on the topic, but it seems like it might be a big step in the right direction.

Two Amazingly Stupid Ideas

It is hard to tell which is worse:

The Trump administration may exclude government spending from GDP

Trump calls for creation of a ‘crypto strategic reserve’

Bad as these ideas are, neither is as dangerous and morally bankrupt as cozying up to the autocratic war criminal who is trying to violently annex his neighbor.

A Crypto Fairy Tale

From the wise Owen Lamont.

A VAT is not a trade restriction

The Wall Street Journal reports a deeply troubling misunderstanding of economics among President Trump's advisers:

Trump’s team will likely target nations such as European Union members with value-added taxes, or VATs. The president’s trade advisers have long viewed VATs as an export subsidy because companies are given rebates when they export abroad. VATs “will be viewed as a tariff,” Trump said in the Oval Office.

Doug Irwin explains why this is nonsense:

Another fallacy is that other countries’ value-added taxes constitute discrimination against the U.S. Most European countries tax imported goods because they also levy taxes on domestic producers. In the end, VATs are taxes on consumption and don’t discriminate against imports. 

Summer Camp for Economic Theorists

My colleague Eric Maskin would like to draw your attention to this opportunity.

Principles of Trade Policy

The Wall Street Journal rightly calls the new Trump tariffs "the dumbest trade war in history." One positive side effect, however, is that they led me to stumble upon this old article by Doug Irwin, which I don't recall having previously seen. Though nearly 30 years old, Doug's piece is a great introduction to some of the most important ideas of international economics, which are especially relevant now. Highly recommended to anyone interested in a serious but nontechnical discussion of the key issues.

I talk with Michael Klein

On the Econofact podcast.

The Case for More H1B Visas

Apparently, there is an ongoing debate in Trumpworld about whether more H1B visas are a good thing. From an economic perspective, the answer is a clear yes.

From the standpoint of economic efficiency, allowing a highly skilled immigrant to work at a U.S. firm is, for standard reasons, beneficial. The transaction is voluntary, so both the employee and employer are better off.  And there are no obvious negative externalities (not counting, of course, pecuniary externalities). In addition, the U.S. government collects more revenue in the form of payroll and income taxes.

From the standpoint of economic equality, allowing a highly skilled immigrant is again beneficial. The relative wage of skilled versus unskilled workers depends on, among other things, the relative supply of the two types of worker. When highly skilled workers immigrate into the United States, the demand for less skilled workers rises. 

Think of technology firms that need both engineers and janitors. When the supply of engineers rises, the demand for janitors increases, leading to higher janitor wages.

So an increase in H1Bs visas not only expands economic liberty (arguably a good thing in itself) but also increases both efficiency and equality.

Score one for Vivek and Elon.

Update: A friend points out there may be significant positive externalities in form of new knowledge that highly skilled immigrants would produce. I agree. That strengthens the case.

A Great Podcast about the Great Economist Franco Modigliani

Not about his economics, but about his early life and escape from fascist Italy. Told by his grandson David Modigliani. I listened to it via Audible, but it's probably available at other outlets as well.

 

I talk with Scott Wolla

On the Teach Economics podcast.

Upcoming Webinar

I will be giving a webinar on Wednesday October 23 on The Fiscal Challenges Facing the Next President. For more information, click here.

More evidence on the value of education

According to the recent NBC poll, among white voters, those with a college degree favor Harris by a margin of  21 points, while those without a college degree favor Trump by a margin of 28 points.

Races other than white may be similar, but that comparison is not reported in the article.

Thank you, Pingry

I would like to publicly thank all my friends at the Pingry School, which recently honored me with its Letter-in-Life Award.

I talk with Scott Cunningham

Crossing to Safety

I rarely read books for a second time, mainly because I am a slow reader and there are so many good books I haven't yet read. But recently I decided to reread Crossing to Safety by Wallace Stegner. 

It had been about 30 years since I first read it. I did not remember it well, but I did remember liking it very much. After the second read this summer, I can report that I liked it just as much, maybe more.

Crossing to Safety is not a book of high drama. It is a book about friendship, marriage, aging, and life's other challenges, focusing on two couples as they traverse their lives from their youth as struggling academics to their later years of greater wisdom and inevitable loss. 

I read somewhere that, though fiction, the book is autobiographical. That makes sense. It reads like a thoughtful and honest memoir, which is a genre I love.

Maybe Ms. Harris needs some economists

The response to the rollout of Kamala Harris's economic plan, especially the price gouging regulation, has not been good. 

When you lose the ever-reasonable Catherine Rampell, you should doubt whether you are positioning yourself to attract swing voters. Rampell writes, "It’s hard to exaggerate how bad this policy is. It is, in all but name, a sweeping set of government-enforced price controls across every industry, not only food. Supply and demand would no longer determine prices or profit levels. Some far-off Washington bureaucrats would....At best, this would lead to shortages, black markets and hoarding, among other distortions seen previous times countries tried to limit price growth by fiat." 

The centrist editorial page of the Washington Post titles their piece "The times demand serious economic ideas. Harris supplies gimmicks." 

What is happening here? I have two hypotheses.

One is that the Harris campaign believes that the remaining persuadable swing voters are economically ignorant, so the campaign is offering them economically ignorant economic policies. Bryan Caplan's wonderful book The Myth of the Rational Voter documents a lot of mistaken beliefs among the general public, including an anti-market bias. Ms. Harris's political advisers may be steering her to pander to these mistaken beliefs,

A second hypothesis involves campaign personnel. The people I see mentioned as Harris economic advisers are Brian Deese, Gene Sperling, Mike Pyle, Deanne Millison, and Brian Nelson. All smart people, no doubt. But as far as I know, none of these people is trained as a PhD economist. They all seem to be lawyers. Maybe lawyers are more inclined to see a problem and think, "I know what new law will fix that." True economists are more respectful of the invisible hand and more worried about the unintended consequences of heavy-handed regulation.

Where is Jason Furman when you need him?

I talk with Jon Hartley