We got inflation news this week that was perfectly designed for a choose-your-own-adventure narrative. The news emphasized by the Biden administration was that inflation moderated relative to the previous few months, and in particular, the bespoke inflation sub-index they created several months ago has shown a clear sign of moderation.
On the flip side, critics emphasized that inflation is still really high and that we have clear signs of price pressure building in the housing sector which is a huge component of the White House’s “other” category.
There’s a partisan political aspect to this (the North Carolina Republican Party blamed Biden for the high price of mayonnaise), but the wonky dispute here is really about monetary policy. One school of thought is that high inflation leads to expectations of high inflation which itself leads to more high inflation. On that analysis, the right way to respond to a few months of high inflation is with contractionary monetary policy. Another school of thought is that this isn’t what’s happening, and instead inflationary pressures will wane away so we can keep interest rates at zero until the unemployment rate further drops.
This is an incredibly important conversation, but I am struck that the inflation doves really seem to have decisively won it as far as the Federal Reserve is concerned. Inflation has come in higher than the Fed itself expected and Jay Powell is sticking to his guns.
So setting that aside, I think a good thing for people to ask themselves is whether they can do anything to moderate inflation. That’s not a question we really asked of policymakers over the past 20 or even 30 years. But it’s a natural complement to the view that the Fed shouldn’t raise rates. Since after all, inflation isn’t just a monetary policy shadowboxing issue, it’s also a real topic in people’s lives. When you have good monetary policy in place, supply constraints that generate price increases become a binding factor in economic growth. So the White House and Congress ought to be looking at ways to release those constraints. And a great place to look is at the tariffs imposed by Donald Trump which attracted a lot of criticism at the time but seem to have fallen oddly out of view right now, even as consumer prices have become an issue.
Tariffs make things more expensive
Back in January of 2018, the Trump administration announced new tariffs on washing machines. A tariff is just a tax. In particular, it’s a kind of sales tax. And if Trump had imposed an across-the-board federal sales tax on washing machines, people would have lost their shit. But this wasn’t an across-the-board sales tax; it’s a sales tax just on imported washing machines, which makes it a tariff.
When you think about it, though, limiting the sales tax to foreign-made washers doesn’t actually change the situation very much. An across-the-board tax would raise the price of washers across the board. With a focused tax, there is more nuance. In 2016, for example, we put some tariffs on Chinese-made washers which seems to have mostly just led American retailers to import more washers from Korea, while the Chinese-made washers went to wherever the Korean washers used to go. But in 2018, Trump really got serious with broad tariffs on all foreign washers, which raised the price of washers in the United States by about 12%. Notably, the price of American-made washers went up even though they weren’t taxed — our companies took advantage of the higher prices of foreign washers to raise their prices and profit margins.
An interesting academic finding from Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot was that it also made dryers more expensive even though there were no tariffs on dryers, because apparently the structure of the market is such that the prices of these things move in tandem.
Now what did not happen was an explosion of manufacturing jobs in washing machine factories. That doesn’t necessarily mean the policy was a failure per se. It’s possible that absent tariffs, competition from cheaper imports would have driven American factories to reduce production or even close. Beyond that, if profit margins for washer manufacturing remained elevated for a while, we would expect additional capital to flow into the washer manufacturing sector and thus create jobs.
In either case, though, it’s not just that tariffs push up prices but that the putative benefits of tariffs require high prices to work.
This didn’t matter when we talked about it
Trump’s tariff policies attracted tons of news attention and controversy when he applied them. But I think you’d be hard-pressed to argue that they were actually a big deal.
Nobody was very worried about the price of washing machines or other durable goods during Trump’s presidency. To the extent that we thought about prices, we were focused on the big nontradeable sectors — things like healthcare, education, and child care — and there was widespread pessimism that work in things like the foodservice or retail sector could ever be “good jobs.”
Today nobody talks about tariffs anymore, but the substantive situation has actually made them much more relevant.
For starters, pay for working-class service sector jobs in places like restaurants and grocery stores has soared. That’s not a bad thing, but it calls into question the logic of wanting to reallocate labor out of those sectors and into manufacturing. That’s especially true because these days people are worried about inflation. If you do want to see wages rise for the working class but don’t want to see those gains all eaten away by rising prices, then you need to worry about efficiency and productivity.
One way to get there is with new technology. But another way to get there is with trade. If you drop the taxes on Asian washing machines, prices will fall mechanically. But beyond that, capital will now flow to low-cost Asian producers to help them expand production and further drive down prices. It’s true that this will imperil some jobs in the U.S. manufacturing sector, but that’s one of the reasons we’re glad to have tons of job openings and rising wages across multiple sectors. We don’t need to hoard jobs, we need to expand our production capabilities.
Tariffs of steel
The washing machines example is unusually well-studied because it’s a fairly simple market. But Trump tariffed tons and tons of random products. The Trump actions with the most significance, I believe, were the tariffs on steel and aluminum because those are intermediate goods — things that we use to make other things.
Now, in this case, U.S. metal production has in fact risen which according to my reporting makes Team Biden think this Trump policy has worked. Beyond that, labor unions like it. Despite the significant Obama-Biden continuities, one difference is that Biden is less into picking fussy technocratic fights with his allies.
That’s all understandable, but the implications of this for the broader economy aren’t great. Earlier this year we had a lot of attention paid to a shortage of lumber, which led to a big drop in housebuilding. That lumber shortage has ameliorated and housebuilding picked back up a bit, but builders are still starting fewer homes than they were at the beginning of the year thanks to highish overall prices of construction materials — including steel and aluminum.
This has two kinds of impacts on the economy.
One is that constraining the supply of new homes tends to put upward pressure on inflation. The other is that raising the cost of materials decreases the tendency for a hot housing market to generate employment. It’s the washing machine tension through the other side of the telescope. If you dropped the tariffs on metals you’d lose some jobs in metal-making. But you’d get the jobs back in house-making. And housing prices would be lower.
Ordinary economics for extraordinary times
These are pretty banal ideas — tariffs raise prices and cause inefficient economic distortions. You could say the same thing about Jones Act shipping restrictions or a dozen other random things.
But I think that’s the shift the Biden team needs to make. They delivered a huge stimulus bill. They have a Federal Reserve in place that’s committed to full employment. They have aspirations in terms of expanding the American safety net and making big new investments in children, families, and clean energy.
That’s all good stuff. But precisely because they’ve made a lot of progress, old-fashioned basic economics is really relevant now in a way that it hasn’t been for most of the 21st century. There’s lots of cash sloshing around the economy, and not just in the hands of rich people — in the form of $1,200 checks and new monthly payments to all parents. But prices are rising. Not spiraling out of control. Not “omg it’s Weimar.” But rising enough that making them rise modestly slower would be a meaningful economic policy win in a way that it wouldn’t have been five or 10 or 15 years ago.
So it’s really worth everyone’s time to take a tedious technocrat’s magnifying glass and look all up and down the array of federal policy to see which price-raising tax and regulatory measures can be eliminated. Some rules, of course, serve a legitimate non-economic purpose like reducing pollution or serving as part of a geopolitical chess game against China. Some may just have insurmountable political forces behind them.
But in places where the political forces are surmountable, it’s really worth trying to surmount them, especially because in many cases the actions you’d need to take offer scope for bipartisanship and other political winners. It’s obviously not the case that Trump-era tariffs are the cause of contemporary inflation. But if toothpaste spills on the floor, you don’t squeeze it back into the tube. Making the price of washer/dryer combos drop 12% would be a win. Shifting employment out of metal-making and into housebuilding would be a win. This stuff is achievable, and in the aggregate, it matters a lot and is worth doing.