I'm not sure we need any industrial policy. Yes, with our allies we need a electronic security policy that ensures we aren't using Chinese chips with backdoors or weaknesses they know about.
But short of that what we need is large stockpiles of things like artillery, more naval hulls etc etc and we are falling behind on those things because we are reluctant to buy from the south Koreans and other allies (they do ships so much more cheaply and quickly...we can build just the nuclear ones at home).
Realistically, the kind of threats we face are either unlikely to cut our ability to trade widely (war in Ukraine type stuff) or are likely to be huge high intensity near pear conflicts where the issue will be decided far before manufacturing gets involved.
We aren't Russia and we aren't -- nor should we plan to -- going to draw universal ire nor are we likely to have any need to grind our way into control of an unfriendly territory. If shit goes bad in Taiwan it will be decided either by a limited engagement that won't break our ability to import or by a very quick high intensity conflict that leaves neither side the time to rearm.
For that purpose we need to maximize our stockpiles by buying cheaply from allies (and even china when we can verify the products) not our manufacturing. Any long war that looks existential will become nuclear anyway.
As bad as this might be for the next four years, it's relatively self-limiting in scope and duration. Unlike some changes I fear from Trump it doesn't seem likely to embed incentives which encourage the next president to respond in kind -- in contrast to the politicization of the DOJ or other agencies (God help us if it's the fed) where Trump's politicization will naturally require appointments to counterbalance/undo what he did and will occur under strong pressure to return the favor in kind.
First, there is a simple government capacity and alignment problem. It's hard enough to quickly steer the ship of state when it's done openly with widespread public and congressional support. The scope of trade is extremely vast and Trump's immediate team can only personally attend to so many products. And, NRA vs Vullo limits the ability to communicate the policy to their underlings.
Second, Trump's nature is incompatible with the kind of incentives that would really do significant work here. Big companies have cultures and can't turn on a dime -- to shift their behavior you need incentives on the margin, e.g., donate 10% less to democratic aligned PACs. Instead, it seems likely that almost all of traditional Silicon Valley gets locked out of corruption.
In short it seems unlikely this will create a large enough constituency to create much incentive to keep the program up after only 4 years. Especially given that the limited scope for corruption will end up irritating those companies which can't gain access.
Aren't other nations likely to respond with their own tariffs for instance steep tariffs against our ag products. I understand farmers generally favor open trade.
Great column, as usual. This line - "Any highly discretionary process becomes political." - pretty much applies with equal force to our unbearably complex tax system as well, as does much of the rest of the piece. The tax code is riddled with special provisions for special people. One of my favorites was the story of how UVA managed to get a special tax deal for bonds to be issued to renovate its frat houses because its tax guy knew the right person on the hill and at Treasury were also UVA grads - and who then wrote about it in his autobiography like it was something great he'd done - the book is Edward Cohen, A Lawyer's Life: Deep in the Heart of Taxes and unconsciously reveals a lot about our tax system.
A trade agenda based on “abundance” - economic growth and good jobs – should be about exporting more, not importing less.
Exports support nine million jobs, and those tend to be better paying jobs. Rather than jeopardize those jobs with a trade war, we should seek to increase exports with free trade agreements, and (ok, this is the hard part) getting the budget deficit under control.
Our huge budget deficit sets off a row of fiscal and monetary dominoes that essentially enables and finances the trade deficit. To a large extent we “balance” our trade by exporting Treasury bills and newly printed dollars instead of products.
This is actually not entirely obvious! Tariffs you can’t bribe your way out of are a bit more effective at doing whatever industrial policy they are trying to do, and they don’t give bad incentives to bureaucrats. Tariffs you can bribe your way out of hit fewer people and have less direct market impact.
Does the IRS have a policy of granting exceptions to taxes? That would be needed for income taxes to create potential for corruption.
Similarly, are the green subsidies granted at the discretion of individuals, or are they written with some specific criteria such that everyone who meets the criteria gets the subsidies and no one who fails the criteria gets them? Discretionary subsidies create opportunities for corruption, but simply written and mechanical ones don’t.
IRS can interpret rules and depending on how the specific law there is some discretion. But I think the bigger corruption definitely comes from congress.
Again the same thing happens with things like BBB. There is corruption in the legislative process then again more corruption when the executive implements it. See for example the union rules.
What are you trying to say exactly? That some lobbying and backroom dealing happens for bills to pass (publicly, by a vote requiring at least a majority in two houses, then signed by president) is exactly the same as some guy talking to the Trump at Mar-a-Lago and him unilaterally deciding to cut that guy some slack on Tariffs the very next day?
This article reminds me of Elon Musk's recent decision to openly endorse Trump and donate a big sum of money to a super PAC to help get him elected.
It is no secret that Trump is no fan of electric vehicles, but if getting on Trump's good side means that the new Trump tariffs on EV components are tailored to hit Ford/GM/etc. harder than Tesla, then Tesla gains a competitive advantage.
The $7500 tax credits also offer opportunities for similar gamesmanship. The law is so vague as to what qualifies and what doesn't, it gives the president a lot of power to reward and punish. Again, maybe getting of Trump's good sign means Tesla cars continue to get a small tax credit, while the competition gets nothing.
Coincidentally, today also seems to be the first time this election cycle that the markets have paid attention to Trump’s commentary on trade and geopolitics and reacted dramatically— everything in the semiconductor and large-cap software space is tanking after he talked shit about TSMC.
(In his first term, a lot of market actors had a strong prior that Trump would always prioritize getting stocks up— I remember hearing an execution trader joking about Trump holding a gun to Jerome Powell’s head and making him buy assets until the COVID dip reversed. I wonder if this has started to change.)
I don’t think it’s the nature of our democracy that’s changed, rather I blame the nature of our elites.
Imagine a small village, one where no one moves to town and no one moves away. I would expect the villagers to be very good at achieving and enforcing consensus through informal coordination, in a way would be less true for residents of a big city with lots of transients.
Speaking as an outsider, my impression is that in moving from local nepotism (broadly construed) to global meritocracy, we made our ruling class more numerous and more porous. They’ve moved from the village to the city. There were plausibly gains in efficiency, but I don’t know that we’ve adequately grappled with the costs, the consequences incurred in making elite coordination more difficult.
AIUI, voters usually judge incumbent candidates on the ends they achieve. Thus voters asking for the wrong means is usually OK as long as the desired ends are clear too, since politicians can prioritize the ends over the means.
That triangulation, however, requires a talented politician. I'm not sure Congress is paid enough to attract high-quality recruits.
By non-democratic bipartisan elite, do you the strengthening of the executive between Truman and Eisenhower in the early cold war? I haven't seen a single person explain how widespread tax hikes would get by without Congress stepping in, and Congress is the democracy. Congress today is generally for a lot of free trade, against most price controls, and has inherent limits on how much tax to raise, even on big bad corporations.
[Simpsons-style animated H.L. Mencken dressed as a bus driver tapping a sign reading, "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."]
For the link-averse, this is an article by Jeff Maurer with the headline "Voters Are Furious About Inflation, Demand Measures That Would Make Inflation Worse: Democracy Gonna Democracy"
This just isn't true though, in 2022 the public elected Republicans to a narrow majority in the House of Representatives, rapidly culling additional spending proposals and reframing the entire budget argument towards tiny cuts. Democracy is not the problem here.
“I’ve written several times about the “immense economic costs” aspect of this, including higher consumer prices and higher interest rates.”
Not an economist, so what happens if Trump does his tariffs but also artificially lowers interest rates by executing a political takeover of the Fed? Inflation?
I think this topic is super interesting. I started my career in manufacturing / supply chain shutting down US factories and moving them to Mexico (e.g., residential breakers, lighting panels). I was then responsible for transferring rail propulsion component production (e.g.,, gearboxes, motors, inverters) from Germany to the US to meet Buy America provisions. I've spent a lot of time in factories. I think what Matt misses with his Buy America critique - which I think he gets from Alon Levy - is that these rail rolling stock contracts are *so* competitive that they get competed down to marginal cost and marginal cost with US production is going to be cheaper than globally sourced + massive finished stock transport costs. That's why Bombardier Transportation was acquired by Alstom. These are very thin margin contracts. Said more specifically because I did the calculations, the Siemens S70 (Avanto) produced in Sacramento for Houston's METRORail is *cheaper* than if it was built in the main production facility in Europe and imported because the Sacramento facility has now reached world-class production scale / capacities / efficiency.
Tying this back to this article ... the Samsung and LG washing machine story is a long one but it seems to have ended in a great spot. In 2013, the Obama administration imposed tariffs on imported washing machines from South Korea. They shifted production to China which led to a U.S. International Trade Commission anti-dumping investigation in 2016 that found the anti-dumping margins were 44.28%. In January 2018, Trump imposed tariffs of 20% to 50% on large residential washing machines. The tariffs expired in February 2023. Ok. So what happened? Samsung and LG both built massive US supply chains (same strategy as Bosch) and are building millions of washing machines a year here. Net net on pricing is they rose initially to match the tariff level and then fell just as quickly as production ramped.
Overall -- I think this is a huge win. But it's super interesting that Matt seems to be leaning way more into the ~ Libertarian view of just let capital and goods flow freely.
OMG. Yes. It's super hard just to transport them from Sacramento. A single car weighs 100k lbs and is 100 feet long and 13 feet tall. To say nothing about how risky even a slight drop would be for the undercarriage structure. .
EDIT: Just to provide more details, the cars are transported to their final destination from Sacramento by rail using special cars designed for rail-to-rail transfers.
Yes, but the high density and shock-sensitivity also apply to (say) automobiles. Indeed, automobiles are also transported inside the US on dedicated railcars. But automobiles also can be transported overseas, to the point that the general public considers final-assembly automobile plants in the US to typically be tariff engineering. That's why I focused on dimensional obstructions to placing such a vehicle in a shipping container; it's still not clear to me why the different size should make such a big difference.
2. 'Second, according to an August 2019 examination of the tariffs’ effects by the United States’ International Trade Commission (ITC), which recommended the tariffs and is required by law to review them periodically, the tariffs have not produced a thriving domestic industry. Although capacity and employment reportedly increased, for example, actual production declined, “resulting in declining capacity utilization, lower productivity levels, and higher unit labor costs.” (The ITC also noted the aforementioned price increases.)'
The WSJ and Cato articles are WAY out of date. The pricing analysis focuses just on the first 4-8 months. Which the CPA article fully addresses. Point 2 is crazy. LG and Samsung are literally now producing millions of machines here a year and both are expanding their factories. The domestic industry is indeed thriving.
EDIT: Which makes sense because once you've sunk the $300-500m to build the factory ... your pricing strategy is anchored to a lower marginal cost structure.
I think the assumption here is that China will be forced to cut its prices to offset the tariffs, rather than lose one of their biggest markets.
I'm not sure we need any industrial policy. Yes, with our allies we need a electronic security policy that ensures we aren't using Chinese chips with backdoors or weaknesses they know about.
But short of that what we need is large stockpiles of things like artillery, more naval hulls etc etc and we are falling behind on those things because we are reluctant to buy from the south Koreans and other allies (they do ships so much more cheaply and quickly...we can build just the nuclear ones at home).
Realistically, the kind of threats we face are either unlikely to cut our ability to trade widely (war in Ukraine type stuff) or are likely to be huge high intensity near pear conflicts where the issue will be decided far before manufacturing gets involved.
We aren't Russia and we aren't -- nor should we plan to -- going to draw universal ire nor are we likely to have any need to grind our way into control of an unfriendly territory. If shit goes bad in Taiwan it will be decided either by a limited engagement that won't break our ability to import or by a very quick high intensity conflict that leaves neither side the time to rearm.
For that purpose we need to maximize our stockpiles by buying cheaply from allies (and even china when we can verify the products) not our manufacturing. Any long war that looks existential will become nuclear anyway.
As bad as this might be for the next four years, it's relatively self-limiting in scope and duration. Unlike some changes I fear from Trump it doesn't seem likely to embed incentives which encourage the next president to respond in kind -- in contrast to the politicization of the DOJ or other agencies (God help us if it's the fed) where Trump's politicization will naturally require appointments to counterbalance/undo what he did and will occur under strong pressure to return the favor in kind.
First, there is a simple government capacity and alignment problem. It's hard enough to quickly steer the ship of state when it's done openly with widespread public and congressional support. The scope of trade is extremely vast and Trump's immediate team can only personally attend to so many products. And, NRA vs Vullo limits the ability to communicate the policy to their underlings.
Second, Trump's nature is incompatible with the kind of incentives that would really do significant work here. Big companies have cultures and can't turn on a dime -- to shift their behavior you need incentives on the margin, e.g., donate 10% less to democratic aligned PACs. Instead, it seems likely that almost all of traditional Silicon Valley gets locked out of corruption.
In short it seems unlikely this will create a large enough constituency to create much incentive to keep the program up after only 4 years. Especially given that the limited scope for corruption will end up irritating those companies which can't gain access.
Aren't other nations likely to respond with their own tariffs for instance steep tariffs against our ag products. I understand farmers generally favor open trade.
Great column, as usual. This line - "Any highly discretionary process becomes political." - pretty much applies with equal force to our unbearably complex tax system as well, as does much of the rest of the piece. The tax code is riddled with special provisions for special people. One of my favorites was the story of how UVA managed to get a special tax deal for bonds to be issued to renovate its frat houses because its tax guy knew the right person on the hill and at Treasury were also UVA grads - and who then wrote about it in his autobiography like it was something great he'd done - the book is Edward Cohen, A Lawyer's Life: Deep in the Heart of Taxes and unconsciously reveals a lot about our tax system.
Really well observed. I dislike tariffs so much for pure economics reasons I never really had occasion to consider this aspect.
A trade agenda based on “abundance” - economic growth and good jobs – should be about exporting more, not importing less.
Exports support nine million jobs, and those tend to be better paying jobs. Rather than jeopardize those jobs with a trade war, we should seek to increase exports with free trade agreements, and (ok, this is the hard part) getting the budget deficit under control.
Our huge budget deficit sets off a row of fiscal and monetary dominoes that essentially enables and finances the trade deficit. To a large extent we “balance” our trade by exporting Treasury bills and newly printed dollars instead of products.
When are you going to license the Scott Lincicome t-shirt design so we can buy one with a Slow Boring logo?
What's worse, tariffs you can't bribe your way out of or tariffs you can?
This is actually not entirely obvious! Tariffs you can’t bribe your way out of are a bit more effective at doing whatever industrial policy they are trying to do, and they don’t give bad incentives to bureaucrats. Tariffs you can bribe your way out of hit fewer people and have less direct market impact.
Great point about the potential for corruption
Of course.That same point also applies to the income tax corporate tax
And of course, all those green subsidies you love so much
Does the IRS have a policy of granting exceptions to taxes? That would be needed for income taxes to create potential for corruption.
Similarly, are the green subsidies granted at the discretion of individuals, or are they written with some specific criteria such that everyone who meets the criteria gets the subsidies and no one who fails the criteria gets them? Discretionary subsidies create opportunities for corruption, but simply written and mechanical ones don’t.
IRS can interpret rules and depending on how the specific law there is some discretion. But I think the bigger corruption definitely comes from congress.
Again the same thing happens with things like BBB. There is corruption in the legislative process then again more corruption when the executive implements it. See for example the union rules.
Income and corporate taxes are determined by Congress, the President can't dole out tax rates.
It's not the rates that are really the problems. It's all the exemptions and carve outs. Tax breaks, tax credits etc.
Also, the corruption starts in congress THEN it goes to the executive.
Or do you think all those lobbyists working with congress is 100% clean
What are you trying to say exactly? That some lobbying and backroom dealing happens for bills to pass (publicly, by a vote requiring at least a majority in two houses, then signed by president) is exactly the same as some guy talking to the Trump at Mar-a-Lago and him unilaterally deciding to cut that guy some slack on Tariffs the very next day?
Just because you are able to get that.Corruption passed through the normal .Political process doesn't make it less corrupt
Or give breaks to individual companies.
This article reminds me of Elon Musk's recent decision to openly endorse Trump and donate a big sum of money to a super PAC to help get him elected.
It is no secret that Trump is no fan of electric vehicles, but if getting on Trump's good side means that the new Trump tariffs on EV components are tailored to hit Ford/GM/etc. harder than Tesla, then Tesla gains a competitive advantage.
The $7500 tax credits also offer opportunities for similar gamesmanship. The law is so vague as to what qualifies and what doesn't, it gives the president a lot of power to reward and punish. Again, maybe getting of Trump's good sign means Tesla cars continue to get a small tax credit, while the competition gets nothing.
And, of course, getting on Trump's good side could have similar advantages for Elon in his other companies, such as SpaceX.
I just hope tariffs + Trump's interference at the Fed = the macroeconomic conditions for a Democratic comeback in 2026 and 2028.
And that we don't all starve. Also, that.
Coincidentally, today also seems to be the first time this election cycle that the markets have paid attention to Trump’s commentary on trade and geopolitics and reacted dramatically— everything in the semiconductor and large-cap software space is tanking after he talked shit about TSMC.
(In his first term, a lot of market actors had a strong prior that Trump would always prioritize getting stocks up— I remember hearing an execution trader joking about Trump holding a gun to Jerome Powell’s head and making him buy assets until the COVID dip reversed. I wonder if this has started to change.)
I'm beginning to think that unfettered democracy and good economic policies are kinda sorta in conflict with one another.
Tariffs, rent control, and high taxes on corporations are popular, while things like carbon taxes and free trade are not.
We need to bring back the non-democratic bipartisan elite.
I don’t think it’s the nature of our democracy that’s changed, rather I blame the nature of our elites.
Imagine a small village, one where no one moves to town and no one moves away. I would expect the villagers to be very good at achieving and enforcing consensus through informal coordination, in a way would be less true for residents of a big city with lots of transients.
Speaking as an outsider, my impression is that in moving from local nepotism (broadly construed) to global meritocracy, we made our ruling class more numerous and more porous. They’ve moved from the village to the city. There were plausibly gains in efficiency, but I don’t know that we’ve adequately grappled with the costs, the consequences incurred in making elite coordination more difficult.
AIUI, voters usually judge incumbent candidates on the ends they achieve. Thus voters asking for the wrong means is usually OK as long as the desired ends are clear too, since politicians can prioritize the ends over the means.
That triangulation, however, requires a talented politician. I'm not sure Congress is paid enough to attract high-quality recruits.
By non-democratic bipartisan elite, do you the strengthening of the executive between Truman and Eisenhower in the early cold war? I haven't seen a single person explain how widespread tax hikes would get by without Congress stepping in, and Congress is the democracy. Congress today is generally for a lot of free trade, against most price controls, and has inherent limits on how much tax to raise, even on big bad corporations.
[Simpsons-style animated H.L. Mencken dressed as a bus driver tapping a sign reading, "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."]
I'm just gonna leave this here: https://imightbewrong.substack.com/p/voters-are-furious-about-inflation?utm_source=publication-search
For the link-averse, this is an article by Jeff Maurer with the headline "Voters Are Furious About Inflation, Demand Measures That Would Make Inflation Worse: Democracy Gonna Democracy"
This just isn't true though, in 2022 the public elected Republicans to a narrow majority in the House of Representatives, rapidly culling additional spending proposals and reframing the entire budget argument towards tiny cuts. Democracy is not the problem here.
“I’ve written several times about the “immense economic costs” aspect of this, including higher consumer prices and higher interest rates.”
Not an economist, so what happens if Trump does his tariffs but also artificially lowers interest rates by executing a political takeover of the Fed? Inflation?
I think this topic is super interesting. I started my career in manufacturing / supply chain shutting down US factories and moving them to Mexico (e.g., residential breakers, lighting panels). I was then responsible for transferring rail propulsion component production (e.g.,, gearboxes, motors, inverters) from Germany to the US to meet Buy America provisions. I've spent a lot of time in factories. I think what Matt misses with his Buy America critique - which I think he gets from Alon Levy - is that these rail rolling stock contracts are *so* competitive that they get competed down to marginal cost and marginal cost with US production is going to be cheaper than globally sourced + massive finished stock transport costs. That's why Bombardier Transportation was acquired by Alstom. These are very thin margin contracts. Said more specifically because I did the calculations, the Siemens S70 (Avanto) produced in Sacramento for Houston's METRORail is *cheaper* than if it was built in the main production facility in Europe and imported because the Sacramento facility has now reached world-class production scale / capacities / efficiency.
Tying this back to this article ... the Samsung and LG washing machine story is a long one but it seems to have ended in a great spot. In 2013, the Obama administration imposed tariffs on imported washing machines from South Korea. They shifted production to China which led to a U.S. International Trade Commission anti-dumping investigation in 2016 that found the anti-dumping margins were 44.28%. In January 2018, Trump imposed tariffs of 20% to 50% on large residential washing machines. The tariffs expired in February 2023. Ok. So what happened? Samsung and LG both built massive US supply chains (same strategy as Bosch) and are building millions of washing machines a year here. Net net on pricing is they rose initially to match the tariff level and then fell just as quickly as production ramped.
Overall -- I think this is a huge win. But it's super interesting that Matt seems to be leaning way more into the ~ Libertarian view of just let capital and goods flow freely.
https://prosperousamerica.org/economic-view-tariff-jumping-investment-the-success-of-the-2018-washing-machine-tariffs/
https://www.cbp.gov/trade/quota/bulletins/qb-23-505#:~:text=Quota%20Period%3A,and%20Chapter%2085%20duty%20rates.
"massive finished stock transport costs"
Why are these so expensive? Is it really that hard to fit rolling stock into a shipping container (or group of shipping containers "fused" together)?
OMG. Yes. It's super hard just to transport them from Sacramento. A single car weighs 100k lbs and is 100 feet long and 13 feet tall. To say nothing about how risky even a slight drop would be for the undercarriage structure. .
https://assets.new.siemens.com/siemens/assets/api/uuid:8bdeb615058534866abb0890338b4cfcc1110406/twin-cities-s70-data-sheet.pdf
EDIT: Just to provide more details, the cars are transported to their final destination from Sacramento by rail using special cars designed for rail-to-rail transfers.
Yes, but the high density and shock-sensitivity also apply to (say) automobiles. Indeed, automobiles are also transported inside the US on dedicated railcars. But automobiles also can be transported overseas, to the point that the general public considers final-assembly automobile plants in the US to typically be tariff engineering. That's why I focused on dimensional obstructions to placing such a vehicle in a shipping container; it's still not clear to me why the different size should make such a big difference.
Shipping containers are 40 feet long.
This Cato piece strongly disagrees on your washing machine story I guess:
1. Supposedly raised prices on the washing machines https://www.wsj.com/articles/consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276
2. 'Second, according to an August 2019 examination of the tariffs’ effects by the United States’ International Trade Commission (ITC), which recommended the tariffs and is required by law to review them periodically, the tariffs have not produced a thriving domestic industry. Although capacity and employment reportedly increased, for example, actual production declined, “resulting in declining capacity utilization, lower productivity levels, and higher unit labor costs.” (The ITC also noted the aforementioned price increases.)'
https://www.cato.org/blog/will-president-trump-do-essential-medicines-what-he-did-washing-machines-lets-hope-not
The WSJ and Cato articles are WAY out of date. The pricing analysis focuses just on the first 4-8 months. Which the CPA article fully addresses. Point 2 is crazy. LG and Samsung are literally now producing millions of machines here a year and both are expanding their factories. The domestic industry is indeed thriving.
EDIT:
https://news.samsung.com/us/samsungs-road-to-success-south-carolina-seha-home-appliance-manufacturing-facility/
https://www.lg.com/us/press-release/lg-expands-tennessee-laundry-factory-operations-to-support-unprecedented-us-demand
On washing machines, after everything settled out, how much, if any, do you think onshoring increased purchase cost?
None. Maybe down. By Jan 2020 CPI pricing returned to 2017 levels and look at the disconnect vs. CPI since 2022 peaks: https://data.bls.gov/timeseries/CUUR0000SEHK01.
Everything is coming down.
EDIT: Which makes sense because once you've sunk the $300-500m to build the factory ... your pricing strategy is anchored to a lower marginal cost structure.