I talk with Filippo Gaddo

From the Society of Professional Economists.

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.