As humans, we are plagued with the innate hubris of our ability to control our world. Here’s the reality: Not only do we have very little control over our own career paths, but we hardly stick to our own weekly schedule! There are far too many variables that get in the way of our plans.
Despite our shortcomings, our overconfidence pushes us to continue thinking we can plan the course of our outcomes. So much so, that we implement economic policies to plan the outcomes of millions of people.
source: tradingeconomics.com
Trump’s tariffs—the taxes on imported steel, aluminum, and other products— did not reduce the trade deficit. The trade deficit actually grew. [Refer to the graph above.] Some economists attribute this partly to the Trump tax cuts. The tax cuts of 2018, reduced the amount of money taken away from consumers and producers, allowing them to, well, consume and produce more. We consume a lot of imported stuff. Moreover, we use a lot of imported stuff to produce other stuff.
Tariffs, on the other hand, increased the price of steel. This, of course, has the opposite effect. The increase in the price of steel means that it is more expensive to produce stuff, so we should expect the price of stuff to increase. If sellers of the stuff can’t increase the price without losing a whole bunch of consumers, then they HAVE to reduce how much they produce. The tax cuts and the tariffs have the opposite effect. Tax cuts essentially make things cheaper where tariffs make things more expensive.
Woops!
This is not a revolutionary insight. Economists have argued this to presidents and politicians for years, except maybe Peter Navarro. Most of us learn this in our introductory economics courses in high school and college. So, why do they continue to do it?
Luckily, economists can also help answer this question. Public choice economics is the study of non-market decision making. It’s the economics of politics. The basic idea is that if profits in a market or business setting come in the form of dollars, profits in the political setting come in the form of votes. In each scenario, the actors—the business person or the politician—are seeking profits.
When it comes to policy making, we often find what is being implemented is being counteracted by something else. A fun example is when governments subsidize teen employment but are also calling for large increases in the minimum wage. Or, when a government says it wants to subsidize education so that people can have higher earnings and wealthier lives, but end up drowning a generation in debt instead. Or, when governments enforce occupational licenses for safety reasons but limit the ability for people to get a job.
How about when the government decides to spend more money on new projects that will “stimulate” the economy? This sounds great in a speech! But, what we get is an increase in government borrowing, which increases the market interest rate, which makes it tough for individuals and businesses to acquire capital to produce more stuff and “stimulate” the economy. This “crowding out effect” counteracts any kind of real stimulus.
There are literally thousands of examples of backward policies. What’s more is that these are the things we can actually observe. How about all the stuff that we can’t observe? All those lunch dates, meetings, snafus, and other chaotic non-planned events that get in the way?
When dealing with people there is no way to organize them that is better than the spontaneous organization of the market. When any politician says that they can “fix” the economy, it’s probably safe to assume that it will have the opposite effect.
ReasonablEconomics 