Tariffs spook markets

President Trump has announced a 25% tariff on imports from Canada and Mexico to start tomorrow. Imports from China will face a 10% levy.

25% is punitive. It’s hard to imagine Trump intends this to remain the status quo; we will have to wait and see what happens next. Meanwhile the much more reasonable 10% global tariff has yet to be implemented.

Wall Street media however have mounted a propaganda campaign insinuating that tariffs are categorically intrinsically harmful. That is too easy … what tax isn’t harmful? Yet the same media are apologists for most harmful tax of all, the inflation tax, rarely if ever finding any fault with inflationary monetary policy.

Let’s take a closer look at the sophistry emerging from Wall Street economists. They claim that tariffs are inflationary, that they will cause the prices of goods and services to rise. It’s not a given … corporate profits are historically high and much of the cost could come from there. But let’s assume for the moment that that claim is accurate.

Suppose a tariff results in an increase in goods and services prices of 2%. All else being equal, that reduces consumers’ purchasing power by about 2%. 

Compare that with an increase in the income tax by the same amount. Doesn’t this also reduce consumers’ purchasing power by the same amount?

Yet tariffs are singled out as uniquely costly to the economy. I will leave it to the reader to assess today’s market action and form an opinion as to why Wall Street economists might assume such a bias. 

In each case, all else being equal, the purchasing power consumers have lost has been transferred to the federal government. But suppose that among all those elses being equal, federal spending remains the same as well. The funds collected from tariffs, or the income tax as the case may be, then must reduce the federal deficit. Since deficits are funded by inflation, this then must mean that the inflation tax is reduced by a like amount. In which case there is no loss to consumers’ purchasing power at all.

The only difference between collecting a tariff, assessing an income tax, and deficit spending is the means through which citizens’ purchasing power is taken and the incentive structure that goes with it. The amount taken is determined by federal spending.

Don’t expect Wall Street economists to explain that.