Another issue with Tarrifs as warfare, is that even if the enemy is obvious, and tarrifs clearly shift the balance of power against the enemy, the political incentive for politicians is to use tarrifs for personal rather than public benefit. This is clearly happening with Trump, because even accepting the argument for tarrifs, as actually implemented Trump is using them to horestrade favors.
Noah Smith (an economics blogger) in specific made this error- he has been in favor of tarrifs and industrial policy for a long time, but the actual implementation of them under Biden and Trump has been for hanging out favors rather than addressing the equity and security concerns.
This is a point not limited to tariffs. The problem with a lot of economic arguments c. 1960 was that they showed that there was something a government could do that would have good effects, not that what government would do, given the power, would have good effects. Public choice theory was the rejection of that approach.
I don’t think you’re understanding the popular view of tariffs accurately. Real wages in China are far lower than in America, even when you account for exchange rates. It doesn’t have to be much more complicated than this. Your last piece said this is comparing height to weight, which is why I bring up the “aloof academic bit.” Wages paid to Chinese workers, when converted to dollars, are substantially lower than wages earned by American workers. It’s not pounds to inches, it’s inches to centimeters. That’s the actual objection and your previous post tried to wave it away with “exchange rates.” Am I wrong that if real wages earned by Chinese employees were equal to their American equivalent (subject to change rates), the trade deficit wouldn’t be there? If there’s more to this, please help me understand. I’m open to it being far more subtle than I’m thinking, but I know people outsource jobs to get cheaper labor, and you seem to be handwaving that away as not real.
Yes, I get that dollars in have to equal dollars out, but what this means in practice is, US stocks and real estate go up, while demand for low skill labor goes down. This is obviously a great deal if you have lots of real estate and stocks. It’s just as obviously a bad deal if you don’t have those things and all you have to offer is a willingness to work on things that don’t demand above average intelligence.
Yes, if you lump countries together as uniform blocks i can see the numbers balance out. Is it really a surprise that large groups of people who can’t find work and don’t own houses and stocks, aren’t going to be consoled by the idea that “on net, “we all come out ahead?”
" Real wages in China are far lower than in America, even when you account for exchange rates."
The relation between inches and centimeters is a definition of units. The exchange rate is a price, set by supply and demand — US supply of dollars, Chinese demand for dollars, on the dollar/yuan market..
The exchange rate is the price at which US sales to China — exports plus sales of American capital assets such as T-bills — equals Chinese sales to US, exports plus American purchases of Chinese capital assets. If the exchange rate was at a level at which Chinese real wages equaled US real wages, Chinese would be buying more dollars than Americans would be selling, which is impossible. (This is considering only the two countries.)
So far as the effect of an inflow of capital is concerned, increasing the amount of capital in the US reduces the return on capital — if the Chinese were not buying T-bills the treasury would have to offer a higher interest rate to make American investors, or other foreign investors, buy them instead, and similarly for all US borrowers. Reducing the return on capital increases the return on labor.
I hope that helps. You have to think about why the exchange rate is at a level at which the US imports more than it exports.
> You have to think about why the exchange rate is at a level at which the US imports more than it exports.
That sounds right. I understand that centimeters and inches are definitional things and that exchange rates come from markets. The two reasons I can think of for import/export imbalance would be
- American capital markets give better returns
- China has a much larger supply of unskilled labor and lower living standards, as expressed in terms of something objective like energy consumption
- China is more willing to print money because they control capital outflows and so don’t face the same inflation risks
I would think that if Chinese living standards were roughly equal to American ones, we’d see things mostly equilibrate. But I’d expect that to take a while given how poor China was just a few decades back, and how much of the country is still in poverty.
Am I thinking of this wrong? I don’t understand why it’s somehow invalid to say “some countries have cheaper labor than others.” That seems obviously true and a driving force for a bunch of economic decision making. Over time, eventually I would expect this to even out - but I’d think that process would take decades - it’s only been 40 years since Deng Xiao Ping - and would possibly break our cultural infrastructure along the way.
The reason we have a trade deficit with China is that, at the exchange rate at which demand equals supply on the dollar/yuan market, Chinese want to buy more US capital assets than Americans want to buy Chinese capital assets. If that were not the case, the exchange rate would be at a level at which there was no deficit. I expect that at that level Chinese living standards would still be well below US living standards — it is a much poorer economy.
China printing money has nothing to do with it — they print yuan, not dollars.
> Chinese want to buy more US capital assets than Americans want to buy Chinese capital assets.
Ok, I think I get your point. But aren’t these both a consequence of, “it’s a poorer economy?”
I get that cost of labor alone isn’t suffice to explain this and you need to talk about demand for capital. If Chinese labor were cheaper but there were a ton of opportunities to invest there, maybe there wouldn’t be an imbalance. So cheap labor alone isn’t sufficient, unless labor cost is so tightly correlated with capital assets worth investing in that one might as well be a synonym for the other.
The reason I mentioned money printing is, doesn’t that also discourage demand for yuan? If the yuan were more stable, wouldn’t that increase demand for it by us investors and thus reduce the imbalance? Thank you for your patient explanations here.
It would discourage demand to hold yuan, but the reason people sell dollars for yuan isn't to end up with yuan but to use them to buy Chinese goods. It wouldn't discourage demand for yuan denominated capital assets because the interest they would pay would include an inflation premium.
re: Living Standards, US vs China, when I was over there it was generally accepted that the US and China had an approximately equal number of people of comparable wealth with some quirks: e.g. here in the US we see the CEO of Waste Management as "A Very Wealthy CEO" whereas his Chinese equivalent would be "Just a Garbage Man" despite comparable wealth.
Unfortunately for China, they Also have 1.1 billion additional people who are in poverty and don't seem to have any prospect to move beyond unskilled labor even as the market for unskilled labor continues to vanish—on my short-term trip in 2012 the English language press was starting to notice that China was no longer the cheapest option for certain classes of manufacturing.
By the time I moved there in 2015 this had been promoted to the "current economic reality" as China was, and still is, trying to move into higher-end products.
My wife is Chinese, so I follow this stuff a lot. She tells me about “997”: people working 9am to 9pm seven days a week. In many respects, their economy seems more “free market” than ours, which seems more socialist in terms of labor protections or competition between big firms.
I understand that low end wages have gone up and China is no longer the cheapest place to build things - but these systems have both friction and inertia. I can believe the idea that things will equilibrate - but the time this takes will depend on the question of friction and inertia. Empirically, it looks like trade does increase overall value flows, and I can totally buy that if you just add up dollars, the net value of the whole system only goes higher and tarriffs just block the flow of value.
I’m sure people see the foolishness of outsourcing the manufacturing of all our weapons of war to our adversary. I don’t think you can reliably crank out lots of missiles and drones without a bunch of other support infrastructure. A country that can’t manufacture most of its own machinery seems to me like a cell that can’t synthesize its own proteins: it’s just not resilient. I think those problems show up long before the shooting starts.
For decades, people have decried the enormous debt on the books of the US government. Obviously, nothing's collapsed (yet), suggesting that it's possible to carry debt like that for a long time. Historically, this doesn't seem to have been the case in multiple instances, even in Western nations (England in the 1640s and France in the 1780s come to mind). This makes me wonder what's different about the US. Debt exists in the form of treasury bills, which people are willing to buy for its stability - it's considered certain that these will be paid back. Why? Presumably because the engine of American businesses continues to chug along, despite whatever forces might be dragging on it.
If the expressed justification behind tariffs is to motivate American business, and we assume that the people expressing that justification believe it, how possible is it that those people are concealing a fear that if enough businesses are visibly outsourced (even if they believe comparative advantage is the ultimate cause), faith in the stability of T-bills will falter, and the US will finally experience the same debt crisis as England and France did?
Does this narrative hold water? Like I said, it hadn't occurred to me to think of it in these terms until literally a few minutes ago, and I wouldn't be surprised if I was missing something important.
The US debt to GDP ratio is high, but there are other countries such as Japan for which it is considerably higher.
The US trade deficit equals the inflow of capital, including foreign capital buying T-bills. It would be lower if the US were not running a budget deficit.
There are a variety of expressed justifications for tariffs, but I don't think any of them is to motivate American business.
One problem with all that debt is the interest payments, which memory says were $1.2 trillion last year, more than the military budget, about as much as Social Security, and half the annual deficit.
I think a lot of people think these are “just numbers” rather than “immense forces that distort the entire economy system.” I fall into the latter camp and am starting to wonder if I’m actually wrong. Any thoughts?
This is what I’d think - but when I take that seriously, I don’t see how this thing doesn’t eventually blow up into a death loop. What do you think there? Is it fixable?
Someone (I think it might’ve been you) gave what I thought was the most cogent analysis of the madness of tariffs: consider a mad head of family who decides to impose tariffs on all goods and services that come into the house, in order to encourage the making of those things within the household. Is there any difference at all between that and a tariff on a macro economic scale? I don’t see that there is.
"Economic theory provides no guarantee of what form of tax has the lowest excess burden."
A consumption tax imposes a lower excess burden than a tariff, for the consumption tax does not subsidize the domestic high cost producers as a tariff does, but you'd be right about a comparison between a tariff and the income tax, say.
A nice shorthand description of the re-distributional effects of a tariff is that a tariff makes for winners and losers, but the winners win less than the losers lose.
The excess burden of a tax depends on elasticities. A tariff on a good with perfectly inelastic demand has no excess burden, hence less than a consumption tax on a good not with perfectly inelastic demand..
Of course. But pick a single commodity and a consumption tax on it will have lower deadweight losses than a tariff. Further, a uniform consumption tax has lower deadweight losses than a uniform tariff of the same rate. Or, to raise the same revenue, a uniform consumption tax has lower deadweight losses than a uniform tariff.
The reason I like tarriffs is that every mechanism of taxation creates incentives for the government and citizens. I think the tariff incentives are the least bad.
Income and consumption taxes incentivize the government to create a panopticon that has to monitor all behavior to collect tax revenue. They incentivize citizens to lie about their behavior, and when taxes are high the penalty for honesty can be nontrivial. The economic incentives are to have more tax lawyers and accountants, who I don’t think add as much value as they do enforce rules that cause friction.
Tariffs incentivize the government to secure the border, because that’s what their revenue depends on. I’d much rather have tariffs and then no income tax inside - that way there’s a “zero economic friction zone” where growth can be maximized, and it can protected from adversaries who would like to get in and cause harm. The economic incentives are to have more local manufacturing than would otherwise be possible, which yes, is a distortion. But I think it’s better than a distortion that adds more friction and surveillance, as well as.l points for government control.
Another issue with Tarrifs as warfare, is that even if the enemy is obvious, and tarrifs clearly shift the balance of power against the enemy, the political incentive for politicians is to use tarrifs for personal rather than public benefit. This is clearly happening with Trump, because even accepting the argument for tarrifs, as actually implemented Trump is using them to horestrade favors.
Noah Smith (an economics blogger) in specific made this error- he has been in favor of tarrifs and industrial policy for a long time, but the actual implementation of them under Biden and Trump has been for hanging out favors rather than addressing the equity and security concerns.
This is a point not limited to tariffs. The problem with a lot of economic arguments c. 1960 was that they showed that there was something a government could do that would have good effects, not that what government would do, given the power, would have good effects. Public choice theory was the rejection of that approach.
I discuss the point in a number of my talks.
I don’t think you’re understanding the popular view of tariffs accurately. Real wages in China are far lower than in America, even when you account for exchange rates. It doesn’t have to be much more complicated than this. Your last piece said this is comparing height to weight, which is why I bring up the “aloof academic bit.” Wages paid to Chinese workers, when converted to dollars, are substantially lower than wages earned by American workers. It’s not pounds to inches, it’s inches to centimeters. That’s the actual objection and your previous post tried to wave it away with “exchange rates.” Am I wrong that if real wages earned by Chinese employees were equal to their American equivalent (subject to change rates), the trade deficit wouldn’t be there? If there’s more to this, please help me understand. I’m open to it being far more subtle than I’m thinking, but I know people outsource jobs to get cheaper labor, and you seem to be handwaving that away as not real.
Yes, I get that dollars in have to equal dollars out, but what this means in practice is, US stocks and real estate go up, while demand for low skill labor goes down. This is obviously a great deal if you have lots of real estate and stocks. It’s just as obviously a bad deal if you don’t have those things and all you have to offer is a willingness to work on things that don’t demand above average intelligence.
Yes, if you lump countries together as uniform blocks i can see the numbers balance out. Is it really a surprise that large groups of people who can’t find work and don’t own houses and stocks, aren’t going to be consoled by the idea that “on net, “we all come out ahead?”
" Real wages in China are far lower than in America, even when you account for exchange rates."
The relation between inches and centimeters is a definition of units. The exchange rate is a price, set by supply and demand — US supply of dollars, Chinese demand for dollars, on the dollar/yuan market..
The exchange rate is the price at which US sales to China — exports plus sales of American capital assets such as T-bills — equals Chinese sales to US, exports plus American purchases of Chinese capital assets. If the exchange rate was at a level at which Chinese real wages equaled US real wages, Chinese would be buying more dollars than Americans would be selling, which is impossible. (This is considering only the two countries.)
So far as the effect of an inflow of capital is concerned, increasing the amount of capital in the US reduces the return on capital — if the Chinese were not buying T-bills the treasury would have to offer a higher interest rate to make American investors, or other foreign investors, buy them instead, and similarly for all US borrowers. Reducing the return on capital increases the return on labor.
I hope that helps. You have to think about why the exchange rate is at a level at which the US imports more than it exports.
> You have to think about why the exchange rate is at a level at which the US imports more than it exports.
That sounds right. I understand that centimeters and inches are definitional things and that exchange rates come from markets. The two reasons I can think of for import/export imbalance would be
- American capital markets give better returns
- China has a much larger supply of unskilled labor and lower living standards, as expressed in terms of something objective like energy consumption
- China is more willing to print money because they control capital outflows and so don’t face the same inflation risks
I would think that if Chinese living standards were roughly equal to American ones, we’d see things mostly equilibrate. But I’d expect that to take a while given how poor China was just a few decades back, and how much of the country is still in poverty.
Am I thinking of this wrong? I don’t understand why it’s somehow invalid to say “some countries have cheaper labor than others.” That seems obviously true and a driving force for a bunch of economic decision making. Over time, eventually I would expect this to even out - but I’d think that process would take decades - it’s only been 40 years since Deng Xiao Ping - and would possibly break our cultural infrastructure along the way.
The reason we have a trade deficit with China is that, at the exchange rate at which demand equals supply on the dollar/yuan market, Chinese want to buy more US capital assets than Americans want to buy Chinese capital assets. If that were not the case, the exchange rate would be at a level at which there was no deficit. I expect that at that level Chinese living standards would still be well below US living standards — it is a much poorer economy.
China printing money has nothing to do with it — they print yuan, not dollars.
> Chinese want to buy more US capital assets than Americans want to buy Chinese capital assets.
Ok, I think I get your point. But aren’t these both a consequence of, “it’s a poorer economy?”
I get that cost of labor alone isn’t suffice to explain this and you need to talk about demand for capital. If Chinese labor were cheaper but there were a ton of opportunities to invest there, maybe there wouldn’t be an imbalance. So cheap labor alone isn’t sufficient, unless labor cost is so tightly correlated with capital assets worth investing in that one might as well be a synonym for the other.
The reason I mentioned money printing is, doesn’t that also discourage demand for yuan? If the yuan were more stable, wouldn’t that increase demand for it by us investors and thus reduce the imbalance? Thank you for your patient explanations here.
It would discourage demand to hold yuan, but the reason people sell dollars for yuan isn't to end up with yuan but to use them to buy Chinese goods. It wouldn't discourage demand for yuan denominated capital assets because the interest they would pay would include an inflation premium.
re: Living Standards, US vs China, when I was over there it was generally accepted that the US and China had an approximately equal number of people of comparable wealth with some quirks: e.g. here in the US we see the CEO of Waste Management as "A Very Wealthy CEO" whereas his Chinese equivalent would be "Just a Garbage Man" despite comparable wealth.
Unfortunately for China, they Also have 1.1 billion additional people who are in poverty and don't seem to have any prospect to move beyond unskilled labor even as the market for unskilled labor continues to vanish—on my short-term trip in 2012 the English language press was starting to notice that China was no longer the cheapest option for certain classes of manufacturing.
By the time I moved there in 2015 this had been promoted to the "current economic reality" as China was, and still is, trying to move into higher-end products.
My wife is Chinese, so I follow this stuff a lot. She tells me about “997”: people working 9am to 9pm seven days a week. In many respects, their economy seems more “free market” than ours, which seems more socialist in terms of labor protections or competition between big firms.
I understand that low end wages have gone up and China is no longer the cheapest place to build things - but these systems have both friction and inertia. I can believe the idea that things will equilibrate - but the time this takes will depend on the question of friction and inertia. Empirically, it looks like trade does increase overall value flows, and I can totally buy that if you just add up dollars, the net value of the whole system only goes higher and tarriffs just block the flow of value.
I’m sure people see the foolishness of outsourcing the manufacturing of all our weapons of war to our adversary. I don’t think you can reliably crank out lots of missiles and drones without a bunch of other support infrastructure. A country that can’t manufacture most of its own machinery seems to me like a cell that can’t synthesize its own proteins: it’s just not resilient. I think those problems show up long before the shooting starts.
At a tangent, a thought occurred to me just now.
For decades, people have decried the enormous debt on the books of the US government. Obviously, nothing's collapsed (yet), suggesting that it's possible to carry debt like that for a long time. Historically, this doesn't seem to have been the case in multiple instances, even in Western nations (England in the 1640s and France in the 1780s come to mind). This makes me wonder what's different about the US. Debt exists in the form of treasury bills, which people are willing to buy for its stability - it's considered certain that these will be paid back. Why? Presumably because the engine of American businesses continues to chug along, despite whatever forces might be dragging on it.
If the expressed justification behind tariffs is to motivate American business, and we assume that the people expressing that justification believe it, how possible is it that those people are concealing a fear that if enough businesses are visibly outsourced (even if they believe comparative advantage is the ultimate cause), faith in the stability of T-bills will falter, and the US will finally experience the same debt crisis as England and France did?
Does this narrative hold water? Like I said, it hadn't occurred to me to think of it in these terms until literally a few minutes ago, and I wouldn't be surprised if I was missing something important.
The US debt to GDP ratio is high, but there are other countries such as Japan for which it is considerably higher.
The US trade deficit equals the inflow of capital, including foreign capital buying T-bills. It would be lower if the US were not running a budget deficit.
There are a variety of expressed justifications for tariffs, but I don't think any of them is to motivate American business.
One problem with all that debt is the interest payments, which memory says were $1.2 trillion last year, more than the military budget, about as much as Social Security, and half the annual deficit.
I'm aware of the interest payments. So are lots of people who still by T-bills, I suspect. Meaning that they have faith that even this will be repaid.
That is some high-value faith there.
Paying out $1.2 trillion a year in interest is a big downside, and I thought that was what you were asking for.
I think a lot of people think these are “just numbers” rather than “immense forces that distort the entire economy system.” I fall into the latter camp and am starting to wonder if I’m actually wrong. Any thoughts?
Yes. Paying $1.2 trillion in interest every year, half of the annual deficit, has a lot of downsides.
This is what I’d think - but when I take that seriously, I don’t see how this thing doesn’t eventually blow up into a death loop. What do you think there? Is it fixable?
Someone (I think it might’ve been you) gave what I thought was the most cogent analysis of the madness of tariffs: consider a mad head of family who decides to impose tariffs on all goods and services that come into the house, in order to encourage the making of those things within the household. Is there any difference at all between that and a tariff on a macro economic scale? I don’t see that there is.
I don't think that was mine.
"Economic theory provides no guarantee of what form of tax has the lowest excess burden."
A consumption tax imposes a lower excess burden than a tariff, for the consumption tax does not subsidize the domestic high cost producers as a tariff does, but you'd be right about a comparison between a tariff and the income tax, say.
A nice shorthand description of the re-distributional effects of a tariff is that a tariff makes for winners and losers, but the winners win less than the losers lose.
The excess burden of a tax depends on elasticities. A tariff on a good with perfectly inelastic demand has no excess burden, hence less than a consumption tax on a good not with perfectly inelastic demand..
Of course. But pick a single commodity and a consumption tax on it will have lower deadweight losses than a tariff. Further, a uniform consumption tax has lower deadweight losses than a uniform tariff of the same rate. Or, to raise the same revenue, a uniform consumption tax has lower deadweight losses than a uniform tariff.
The reason I like tarriffs is that every mechanism of taxation creates incentives for the government and citizens. I think the tariff incentives are the least bad.
Income and consumption taxes incentivize the government to create a panopticon that has to monitor all behavior to collect tax revenue. They incentivize citizens to lie about their behavior, and when taxes are high the penalty for honesty can be nontrivial. The economic incentives are to have more tax lawyers and accountants, who I don’t think add as much value as they do enforce rules that cause friction.
Tariffs incentivize the government to secure the border, because that’s what their revenue depends on. I’d much rather have tariffs and then no income tax inside - that way there’s a “zero economic friction zone” where growth can be maximized, and it can protected from adversaries who would like to get in and cause harm. The economic incentives are to have more local manufacturing than would otherwise be possible, which yes, is a distortion. But I think it’s better than a distortion that adds more friction and surveillance, as well as.l points for government control.