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“ 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.”

Chances are that the bast majority of these tariffs are not going anywhere. They’re politically popular.

But if you want to talk about how they can actually be changed to work better, metals are a great example.

There are several dozen instances of which I’m aware where the tariffs are structured in a way that applies to raw or nearly raw materials but not finished goods. This has prompted a great amount of disinvestment in small areas of manufacturing which were formerly economical to conduct here with Chinese or Korean precursor inputs, because those inputs have risen in price without prices for imported competitors rising.

Two examples are welded wire mesh reinforcement (wire and raw steel taxed, finished mesh not) and light gauge steel sections (sheet and raw steel taxed, shaped sections not).

Merely applying a uniform tax structure across these instances would get people investing in already-extant American production and hammering away at cost increases.

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While we're at it lets kill the sugar tariff. I'm tired of Mexican Coke, I want American coke to be as great as it used to be, even when it's not Passover in LA and NY.

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Nothing wrong with domestic sugar beet sugar, other than sugar beet farmers being one of the more greedy and litigious special interests around....

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But instead fizzy drink makers use high-fructose corn syrup (HFCS). It was Reagan, close ally of ADM chief Dwayne Andreas, who signed a law placing high quotas on imported sugar, which quickly raised the domestic price of sugar to twice the price on global markets, leading to Coke & Pepsi going HFCS.

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I think it's probably true that we could easily reduce inflation over 2021 if we rescinded the Trump tariff (say, by a couple tenths of a percent). But is reducing inflation from 4.0% to 3.7% over the course of 2021 really what we're concerned about? I think what people are really worrying about is that inflation will be persistent, and I'm not sure that a one-time reduction in tariffs will reassure them that we'll be able to curb persistent inflation.

What's missing from this particular article is the extent to which reducing the price of washing machines today will prevent an inflation spiral that causes persistent inflation. To his credit, Matt usually mentions this in his articles about inflation. The basic idea behind an inflation spiral is that when people fear that a big inflation is coming, they buy lots of stuff, pushing up prices, etc. For this inflation spiral to happen, what people need to fear is a broad-based increase in goods prices. I'm not sure if reducing the price of a single class of goods once will assuage these fears if they exist.

Instead, I think that in most modern economies, what shapes people's inflation fears is the perceived credibility of the central bank. People tend to watch the central bank in moments like this one to see how it will react to an uptick in inflation, so it's really the central bank's actions in the face of inflation that influence its credibility. On the other hand, reducing tariffs doesn't necessarily lend to (or detract from) the central bank's credibility.

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author

I don’t think we’re in a situation where we need to worry much about the spiral. But nonetheless people like lower prices and higher real wages.

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I agree-- my personal assessment about the current situation is basically the same, and I think we should get rid of pointless distortionary tariffs that hurt consumers. The only point that I was trying to make is that I'm not sure repealing the tariffs would assuage the people who are really worked up about inflation right now.

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This is wrongheaded. Yes, of course we should get rid of Trump’s tariffs - and all other tariffs too. Tariffs impoverish the people in the nation that imposes them and that’s reason enough to get rid of them. But this analysis is wrongheaded.

As the essay points out, “a tariff is just a tax.” When a state raises its sales tax rate we don’t call the resulting increase to purchase prices “inflation,” because it’s not inflation. It’s just a tax.

The error here is that the author is reifying the output of a tool used to detect inflation and calling it “inflation.” And there almost certainly is inflation, but the portion of it, as measured, that is caused by the washing machine tariff is not, in reality, inflation. It’s just a tax.

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Ken in MIA:

That's just wrong, full stop. Inflation is defined as an increase in prices. This is an increase in prices. Therefore it's inflation. There are no separate categories for inflation based on their "root cause" or whether it is caused by a shift in the AD or AS curve. It's just "inflation."

This is all explained pretty clearly in the opening chapters of any of Mankiw's Principles of Macroeconomics textbook.

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the textbook I use to teach my principles of macroeconomics courses

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The most common definitions of inflation look at the price of some selection of goods. So if a tariff on steel leads to cars becoming more expensive, that shows up as inflation in the CPI. Is your claim that the CPI is not a measure of inflation? How do you define inflation? If a freeze wipes out a orange crop in Florida, and the reduced supply of oranges leads to an increase in price, is that "just weather" and not "inflation"?

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“The most common definitions of inflation look at the price of some selection of goods.”

No, that’s just a method of revealing and measuring inflation. Inflation is defined as a general increase in price level. Volatility of food prices due to weather is one of the reasons that food is excluded from calculations of core inflation.

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So, this is just an argument about semantics? You're using the theoretical definition of inflation as being purely a monetary phenomenon and most other commenters are using the more colloquial definition as changes in prices? I guess that both you and MY are right then. However, I think that "you can lower consumer prices by getting rid of tariffs" is of more practical importance than "tariffs are by definition not part of inflation".

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“…I think that ‘you can lower consumer prices by getting rid of tariffs’ is of more practical importance than ‘tariffs are by definition not part of inflation’.”

That’s fine. I think that “tariffs infringe on our freedom” is a more honorable claim than “Biden should remove tariffs because the effect on inflation statistics will make him look good to the electorate.”

But, apparently, that’s just me.

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Ok, I understand your objection, and I basically agree. Framing this as reducing inflation is silly --- if for no other reason that most of the electorate doesn't pay attention to inflation metrics.

If he wanted to cut tarrifs, he could 1) sell it as a progressive tax cut (since progressives don't like consumption taxes). 2) The people who don't pay attention to political news would have more money in their pockets. 3) The fact that inflation statistics would go down would help quiet the minority that does care about headline inflation statistics.

A triple win. He could even say that tariffs infringed on freedoms to make it a quadruple win...

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Would China have risen to be an industrial powerhouse without tariffs and other import restrictions?

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I've seen an argument that tariffs are necessary in a developing economy to protect their nascent industries so that they can build up the expertise to eventually be competitive on the world stage. It was described in a book, which I did not read, but I did read the review: https://astralcodexten.substack.com/p/book-review-how-asia-works

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It’s curious, is it not, that those who want more central control and planning of the economy point to tariffs and industrialization rather than, say, government prohibitions on trade unions and industrialization?

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I don’t see why not.

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Other than no country has followed that path successfully.

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I don’t know if that’s true, but even if it were it is not evidence that it is impossible to industrialize without tariffs.

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“… just the actual story of every country that industrialized in the 20th and 21st centuries.”

Which of the nations in the successful industrialization stories you tell *did not* do things like send their smartest students overseas to study and prohibit or severely limit trade unions?

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You see trolling because you cannot offer a response.

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This is wrongheaded. When the price of an object rises we call it inflation. That price rise can have many different causes but it is still a price rise. Tariffs are not taxes.

Are policy decisions in the Middle East that raise the price of oil taxes? On the other hand, your argument strongly supports the Liberal position that the inflation controlled by the Federal Reserve is completely unrelated to steel and oil and is instead related to rising wages.

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“When the price of an object rises we call it inflation.”

Inflation is a monetary phenomenon. It is not true that *any* price increase is due to inflation.

“Are policy decisions in the Middle East that raise the price of oil taxes?”

Energy is not considered when calculating core inflation.

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founding

It's not that any price increase is *due to* inflation, but rather that any price increase is *part of what constitutes* inflation.

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Inflation is properly understood as a phenomenon of the money supply. Price increases not due to the money supply are not inflation.

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Excluding food and energy is not a principled decision based on the definition of "inflation," its just that it tends to have very large short term fluctuations that would make getting a good read on short term trends very difficult.

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It is not just that there are short term fluctuations. It is that even the long term fluctuations are not relevant to the decision making process of the Monetary and Fiscal policy. Government policy affects employment and the "heat" of the economy. On the other hand Energy and Food are affected by conflict in the Middle East and the weather/climate.

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But this is true of every area. If you listen to Matt's interview with Skanda Amarnath he gives a lot of cases where public policy has nothing to do with the aggregate price level and in fact the way inflation is calculated seems relatively arbitrary. For example Verizon's decision to offer an unlimited data plan a few years ago drove a large increase in the "quality" of plan according to CPI calculations and therefore meaningfully decreased core inflation.

By contrast there are numerous pipeline/port projects under consideration to transport oil/natural gas. The government decision to approve or not approve these would clearly impact the price of oil and gas and therefore the aggregate price level.

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I agree that the way inflation is calculated is fairly arbitrary. Nonetheless it is fairly well agreed upon that Fiscal and Monetary policy can overheat an economy and thus it is useful to have a metric for inflation.

It is useful that it not contain Energy and Food (so that you don't wreck your economy every time you have a bad harvest). It is also useful that it be simple so we don't have to fight over the minutiae of exclusions (and for messaging reasons).

If the Pipeline approval authority would like their own inflation index they are welcome to concoct one.

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Impressive tap-dancing.

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https://www.imf.org/external/pubs/ft/fandd/basics/30-inflation.htm

You may note that tariffs and taxes are not mentioned.

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I dunno... by far the largest expenses in my lifetime have been state, local and federal taxes, largely spent on dumb wars, keeping the elderly from poverty and providing deadbeats with healthcare. The US for its first hundred years largely funded its government with tariffs and did just fine, except cotton-growing slave-owners thought they were being ripped off by tariff-protected Yankees. That said, I'm all for the US adopting a VAT, whether you want to call it a tax or inflation seems like quibbling pedantry. Would save me hours each year finding files and filling out a return, a huge improvement in quality of life, which I'm sure the geniuses who calculate inflation would score as reducing inflation.

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Yep, I've long supported something like the Fair Tax

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In theory I agree with you. In practice, no country I know of that introduced a VAT did away with income taxes. Less substitution and more just addition.

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That's ok with me too if it pays the bills.

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“The US for its first hundred years largely funded its government with tariffs and did just fine…”

The cost of shipping at the time of the founding was a couple orders of magnitude higher than it is today. That means that tariffs were a much smaller part of the cost of imported goods than the tariffs imposed today.

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You should read Calhoun on the “tariff of abominations.” Southern planters paid materially more for manufactured goods because of the tariff. Also, transport costs from Liverpool to Charleston were not vastly more than Boston to Charleston. Sea transportation of finished luxuries has been cheapish for centuries.

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I used to believe that too, but have come around to the notion that free trade requires reciprocity with our trading partners, which is not the case, particularly with governments like China who deliberately engage in mercantilist policies and practices.

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We’ve known for two and a quarter centuries why mercantilist policies are bad for a nation’s economy. It would of course be better if China did not pursue mercantilist policies, but it would be folly for the US to have bad policies just because China does.

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“It's remarkably arrogant to look at the most sustained and successful economic growth story of the last century, that's lifted a billion-odd people out of poverty, and just write it off entirely as bad policy.”

And I would not do such a thing.

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I’m pleased that you are so amused. But, please, tell me what the “substance of the column” was. While reading it I was under the impression that it was ‘curb inflation by rescinding Trump's tariffs.’

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It’s unclear why you believe I did not read the column. Did you? If so did you notice that he offered two schools of thought on what the driving factors of inflation are? Surely he knows there is another school of thought on the topic. Do you?

Why not also mention another school of thought? Maybe he wanted to keep it brief or maybe its because it would not only undermine his view of inflation but also reveal that it’s unwise to pursue the policies that he wants?

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Yes, exactly. It’s an ugly thing, but there it is.

You know, I’ve been reading most of these daily missives for months now and when writing about economic policy I am still unsure whether the author actually believes that the policies he advocates are truly the most beneficial ones available, or whether he advocates for these policies solely because he believes they will benefit the Democratic Party.

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Reducing or eliminating tariffs is a total no-brainer. That said, this administration, despite the massive improvement over the previous one, is politically too cautious to a fault, and I'm personally not optimistic they'll do this.

Hope they prove me wrong!

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founding

I would argue they are politically very aggressive, not cautious. With only a very slim win in the Presidential election, a divided Senate and actually losing seats in the House, they are pursuing huge and long-lasting new welfare programs, in addition to a large infrastructure bill and the earlier round of stimulus.

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I remember when W "won" with fewer votes than Gore, which was a novelty back then, and everyone predicted he would be extra cautious and conciliatory. Then they deliberately decided to govern as if they had a mandate.

Biden, by contrast had the second largest popular and electoral vote win in 20 years.

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Tied in the senate, and like votes in the house. The only mandate was don't be Trump

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Sure. Fair point. But most of the provisions of the various legislative items you cite (expanded UI, child benefit, Medicare expansion, Obamacare subsidy increase, money for roads/bridges/trains, etc) are popular, even among a lot of Republicans. Political courage means doing things that are apt to be controversial, and leave you vulnerable to criticism. I don't do politics for a living, so, for all I know on the politics alone the administration is right about the non-actions it isn't taking. But there are definitely some things that (from my perspective as a liberal Democrat, though probably not yours) make sense from a policy perspective they're not doing: robust student loan relief, more aggressive vaccine mandates, modifying (our utterly insane) border policies, prosecuting previous administration high-level wrongdoing, and, yes, action on tariffs.

Anyway, I'm genuinely a fan of Biden. And I agree he's shown some serious willingness to legislate, as well as a lot of skill in this area. All good. But respecting a political leader ought to mean a willingness to criticize them when you think it's merited. And I *am* a bit underwhelmed at what I perceive to be an *excessively* conciliatory outlook out of this White House. And the thing is, sometimes doing the *safe* thing politically turns out to be the *wrong* thing politically over the longer term.

I guess time will tell!

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Biden isn’t playing for a second term, he’s playing for a legacy.

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And steel prices affect more than just new building!

We spend a lot of time talking about protecting domestic steel producers, but much like coal mining, the industry has outsize influence for the relatively small number of people it employs.

On the other hand, the metal fabrication industry alone employs ~1.4 million people and would much prefer lower steel prices: https://www.thefabricator.com/thefabricator/blog/metalsmaterials/whos-looking-out-for-the-metal-fabricators

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Matt hasn't really established that it would, in fact, help "a lot." The fact that no one was worried about overall inflation when Trump was doing this points to it not being a big mover of the overall rate.

That said the lumber/housing thing seems like a big enough deal to do it and for it to be politically advantageous.

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author

It wasn't a big concern pre-election because inflation was running below the Fed's target anyway

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That's my point!

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I just don't think anything other than maybe lumber is going to have enough of a ripple to impact either overall inflation or, more importantly, the federal reserve's impression of overall inflation.

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There are tariffs on lumber! Maybe drop those!

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After a huge surge, lumber prices have fallen on a cliff: https://www.calculatedriskblog.com/2021/08/update-framing-lumber-prices-down-year.html

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Its down from last year this time when it was surging, but is still ~50% higher than January 2020. Another good reason to drop the tariffs on Canadian lumber.

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It's kind of amazing how neoliberal trade policy, and its precepts, have become the consensus on the wonky right and left.

As far as tariffs (taxes) go, reducing gasoline taxes would have a much bigger and more immediate effect IMO, if the goal is controlling inflation. That's not to say I'm in love with Trump's tariffs (I have a free trade bias), but I tend to think they are small potatoes. Matt's essay here doesn't even attempt to quantify or WAG how much ending these tariffs would actually curb inflation.

On inflation, I worry most about housing and construction generally. Just look in the rapid rise of median home prices (https://fred.stlouisfed.org/series/MSPUS) and rents are rising too..

Another thing to consider is supply-chain disruption, which has been ongoing for well over a year now. The federal government ought to look at policies that will minimize future disruptions, particularly for items vital to national security as well as for vital industries.

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Nope we should be raising tarrifs even more on China. They are building more blastic nuclear missiles, oppressing Hong Kong, have concentration camps, oh and keep stealing our technology.

We need to decouple our economy from theirs.

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Tariffs are bad because they raise taxes and are like a sales tax, right?

But I sure am having trouble finding the impact of those tariffs on the US. Take aluminum. Trump imposed tariffs on it in early and mid 2018. There was a blip upward in the US spot market price in 2018 (but no higher than 2011) and then by 2019, prices had fallen back to normal (and were *really* low in 2020): https://www.statista.com/statistics/209336/price-of-aluminum-on-the-us-market/

The worldwide price of aluminum fell steadily from 2017 until 2020 and then went up spectacularly in 2021 -- obviously not because of the 2018 Trump tariff: https://tradingeconomics.com/commodity/aluminum

You can argue that we can fight inflation by removing those tariffs, but it seems to me that they either had minor effects or just got lost in the noise of all the factors that drive international and internal markets.

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I wonder if inflation is now an issue that Modern Monetary Theory people are thinking about. It seems like a lot of MMT got spun up when concerns about inflation were practically non existent.

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If we're going to have an industrial policy of propping up domestic washing machine manufacturers like this, isn't that something Congress should vote on and ratify?

The President personally does not have any greater expertise or insight on the technocratic considerations of a policy like this than the average members of Congress, so why should a decision like this be delegated to the President?

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"If we're going to have an industrial policy of propping up domestic washing machine manufacturers like this, isn't that something Congress should vote on and ratify?"

It won't prop up domestic manufacturers. It will prop up domestic assembly, if these tarriffs really started to bite, Samsung and LG would be in the US opening plants the same way Honda and Toyota did when there were automobile import quotas. Part of the reason Toyota and Nissan produce all their pickup trucks here is the "chicken tax" on pickup imports.

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I don't know what the 'chicken tax' on pickup imports is, but I'm pretty sure the main reason Toyota and Nissan build pickups here is because Americans love them to show off their virility in ways other markets don't. Why we like wars and have a huge reserve of battle-hardened veterans ready to take on China.

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The chicken tax is an interesting episode: https://en.wikipedia.org/wiki/Chicken_tax

Japanese manufactures absolutely started factories in the US because of the 25% tariff on importing pickup trucks. Building factories is expensive, and without the tariff, they could just as well have made them in Japan and shipped them here.

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Good point, this tariff isn't well targeted even at its ostensible purpose of shoring up the oh-so-critical-for-national-security industry of domestic washing machine manufacturers (not dryers, or dishwashers, or refrigerators, or stoves, just washing machines).

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You raise a good point. I remember thinking on a number of occasions during the previous administration that Congress really ought to clip the executive branch's wings when it comes to tariffs. Reasonable people can disagree about this or that tariff. But they're quite powerful policy levers that create very substantial economic ripples affecting millions of people and jobs, create winners and losers, and cause billions and billions in gains and losses.

And Canadian cars pose no national security threat!

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This is a good point.

There's a case to be made for industrial policy to encourage certain industries to locate in the US, but you have to actually commit to this -- think through the economics, the policy making, etc.

There really isn't a case to be made for just making some random gestures and calling it good.

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“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.“

Not quite. One can also look at the distribution of value created between labor and capital and between different sectors of labor. Nor should one ignore social effects of different kinds of work.

People are nostalgic about manufacturing jobs for s reason. They are more stable. They encourage a kind of steadiness that construction jobs, which are often temporary or seasonal, do not. It’s easier to maintain a stable family life if you have steady work. If you make enough, steadiness is less important, you can more easily cover slack periods without hardship, though there’s still an important psychological difference between being a salaryman and a proprietor.

MY is too blasse about manufacturing jobs. They are good. They are worth a 12% tax on foreign washers. Total tariffs are about $80 billion a year, or 0.4% of GDP. Is that too high a price to pay for a vibrant manufacturing sector.

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Washers are a completely finished good at least, that is, they're never an input to anything we make here, so if you really care about manufacturing jobs, a tariff on washers doesn't hurt those. I don't agree with you that it's worth adding a tax to these to prop up manufacturing jobs but at least I see how you achieve the goal you want with the tax(in the short term - in the long term there's a risk that American washing machine manufacturing companies get less competitive and then when if the tariff goes away or something changes they all go out of business because now they _need_ the tariff to survive)

But tariffs on inputs like steel DO hurt manufacturing. Even if you add the tariff to certain finished goods like wire mesh, as David R. mentions above, unless you're adding the tariff to _everything_ that includes steel as an input, not just obvious transformations of steel then you're hurting a bunch of different manufacturing jobs.

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I’m certainly not saying that Trump was a technocratic genius who established a perfect tariff schedule we should never change. The tariff on lumber is especially silly. Canada has a comparative advantage and isn’t exactly pummeling is with cheap labor. The tariff on steel seems more defensible, there are good jobs in the American steel industry and there is low wage foreign competition. I’ll concede that also means putting tariffs on finished goods where steel is a major input, eg cars. However, those tariffs would be small because steel is maybe 5% of the cost of a car, so a 25% steel tariff would only increase the price of a car by 1-2%.

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I guess... where does it end?

We want to protect good jobs in the American steel industry but then that makes everything we make using steel more expensive.

We can put a tariff on import cars as well, but we also want to sell cars abroad, and now they're more expensive to export as well. So we've made them more expensive for local customers and less competitive worldwide?

I could see a situation where we are borderline competitive on domestic steel before but not exporting (when you factor in transportation costs we can afford to compete on imports but add them to our exports and we can't), and where tariffs push it up to help us. But that ends up hurting both consumers and a bunch of other industries.

I feel like supports of tariffs are mostly only looking at the domestic results and not looking at the fact that in any case where we put tariffs on an input (like steel), our exporters suffer - and they're manufacturers too.

(There's also the retaliatory tariff situation, but even without those we're hurting our own exporters with these steel tariffs)

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The "steek tariffs hurt our own exporters" argument" has the same flaw as the argument that "higher working-class wages cause inflation." Yes, you are increasing an input cost and that will increase prices. BUT, because only one factor is going up in price, the increase in the price of the finished good (big macs, cars, whatever) will be only a fraction of the increase in the input (steel, labor, etc.) Higher service wages make fast food more expensive for service workers but still make service workers better off because they only spend a fraction of their income on fast food, and fast food prices will only increase by a fraction of the increase in service wages.

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Curious if there is something specific about the steel industry that you find extra worthy of such tariffs?

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not really, i admit the case for steel tariffs is weaker than for tariffs on finished goods

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True, but that's service workers to the same service workers. That is, service workers get a 10% pay bump, prices for those services probably go up by < 10%, and the workers are better off.

The _rest_ of us however now have to pay more money. That may or may not be worth doing (the evidence on the minimum wage increases in Seattle etc seems to be that in places like that at least it's fine, and I think minimum wages SHOULD go up), but _my_ pay didn't go up, but my costs did.

For car manufacturers. You made their steel more expensive, so you increased the wages of people who make steel (~80k people according to what I just googled) by a small amount. But everyone else has to pay higher prices, and all those who manufacture cars (~800k people) are having a slightly harder time of it. Now their costs didn't go up 1:1, but if steel is 5%, then the ratio is what, 1:20? So you've already done "40k steel workers worth of cost increases", and that's not counting the harder time exporting these.

And there are other industries that use steel as well, so it's not just the car employees.

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Cutting tariffs is good policy but won’t offset the consequences of printing money to cover bloated government spending.

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Getting rid of bad tariffs is good policy. If there is a belief that tariffs cause inflation, and if that belief can make it easier to convince the powers that be to eliminate tariffs, then that is a good thing even if in truth tariffs play little role in the rate of inflation, which is mainly governed by aggregate supply and demand as shaped by monetary and fiscal policy.

I see an analogy with the deregulation of trucking, railroads, and airlines back in the Carter and Reagan years. Regulations and regulatory capture by rent-seeking transportation companies and their unions raised the relative prices of transportation services, but they were not in any meaningful sense the cause of the rapid inflation of the 1960s and 1970s. However, it was good policy to deregulate, and framing the fight against regulation as part of a fight against inflation turned out to be good politics. If the same thing will work for tariffs, I say, go for it.

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Semi-related but the recent request for OPEC to increase production following the shutdown the the Keystone XL pipeline is embarrassingly hypocritical.

“President Biden has made clear that he wants Americans to have access to affordable and reliable energy, including at the pump,” the White House said in a statement. OPEC’s current plan to increase production slowly “is simply not enough.”

https://www.bloomberg.com/news/articles/2021-08-11/biden-s-opec-plea-shows-how-cheap-fuel-fixation-imperils-climate

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