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Tariffs guarantee higher prices for Americans who believe they are too high already
A scene on tariffs from Ferris Bueller’s Day Off in 1986 is getting some extra attention. (Paramount Pictures.)
Fans of the movie, “Ferris Bueller’s Day Off,” will remember the scene. Ben Stein plays a famously boring high school teacher giving a lecture about economics to a room full of teenagers fighting to stay awake. In about a minute, he covers the Smoot-Hawley Tariff Act and the Laffer Curve, fundamental economic topics, desperately trying to get the students to engage with him.
“Anyone? Anyone…” is the memorable device Stein uses, to no avail, to engage an audience who couldn’t care less.
Some analysts say the economy is the reason voters chose Donald Trump for a second term in last month’s election. His economic plan is rooted in the broad and cavalier use of tariffs on imports from friends and foes alike. Last week, he announced his plan to impose 25% tariffs on Canada and Mexico. The announcement prompted a surprise visit from Canadian Prime Minister Justin Trudeau, and a phone call from Mexican President Claudia Sheinbaum.
Meanwhile, the American public, particularly Trump voters, remain in an economic daze much like Ben Stein’s class.
The Smoot-Hawley Tariff Act was passed in 1930 in an attempt to thwart the impacts of the Great Depression. It was legislation initially designed to provide relief to the American agriculture sector but became “a means to raise tariffs in all sectors of the economy.” It also marked the end of an entrenched Republican platform of protectionist policymaking during that era. The policies ended because they were…anyone…anyone? Failures.
The details
Ignorance has become a vital asset in the political space these days. Yes, it is an asset in politics, but it is the devil in economics.
As a political asset, there are voters who believe that simply throwing a tariff at any nation they are mad at has nothing but benefits. Mad at Mexico because of migration? Slap them with a tariff and border crossings will go down, right? A good number of voters believe the answer is yes. Though this is almost entirely wrong, politically speaking, that ignorance served the pro-tariff candidate in November.
Economically however, the only real certainty that a 25% tariff on Mexico will have, is a 25% price increase in America. There actually is no disagreement on how tariffs functionally work, but I will refer to PBS for a simple explanation. Importers here pay the tariff, otherwise known as a tax, and remit that payment to the U.S. Treasury. How they pass that increase in costs along may vary a little from merchant to merchant, but ultimately it ends up in the price the American consumer pays.
Yes, a tariff program, in the most basic sense, is government imposed price increases. So, if high prices are the reason why an American voted against the current party in power, voting for higher prices seems, well, ignorant.
Now, does a tariff hurt who the angry American is mad at? Sure. In our example, Mexican goods become less affordable if a tariff is applied to them. In that sense, a tariff can hurt who it is designed to hurt. But that doesn’t change the fact that Americans pay the tariff, not the other country.
Many voters have the perspective that Trump imposed tariffs during his first term, and everything worked out fine. The Associated Press reports, “When Trump first became president in 2017, the federal government collected $34.6 billion in customs, duties and fees. That sum more than doubled under Trump to $70.8 billion in 2019, according to Office of Management and Budget records.” That sounds like a lot of money, until it is put in the context of the current $29.3 trillion gross domestic product.
The tariffs Trump is discussing in 2024 are wildly bigger and are being threatened toward virtually every country. But that’s not the only thing different between 2024 and 2017.
What else is different?
Anyone? Anyone?
The economy that Trump inherited in 2017 is sharply different than the one he will inherit in January. Inflation eight years ago was low and had been for a long time. Interest rates were also low and had been for a long time. The 2016 election wasn’t about inflation, and those rather small tariffs weren’t either. But times have changed.
For the life of me, I cannot find any credible theory as to how raising prices on imported goods will have the effect of lowering prices. I’ve written that sentence six times, and I know it reads like gibberish, but I just can’t help it.
Simply put, tariffs raise prices. After a bout with historic global inflation, consumers are exhausted with high prices. We can all agree with that part.
But there is a word for thinking that raising prices will actually lower them.
Anyone? Anyone?
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