Hello and welcome to another episode of the Unanimity podcast. I'm Mark Thornton at the Mises Institute.
The Unanimity podcast is a long form podcast about a general subject that is of lasting value in terms of its content.
In contrast, the Minor Issues podcast deals more with current events, current affairs.
And so this is a little bit of a hybrid.
The title of this episode is Why Smart People Are Rightly Confused About Tariffs.
But it will drop in the same time slot as the Minor Issues podcast.
I encourage everyone to go back and look at the previous episodes of the Unanimity podcast.
Thank you for listening.
I've had several friends, several very smart friends, almost menace level friends, asked me about tariffs.
And they were generally confused.
And so this episode is addressing that confusion of my very intelligent friends.
But also it has a lasting value because it's something that Americans have been confused about for the entire period of American U.S. history.
So why don't we understand tariffs?
Well, the first reason is that it's really a special name.
You know, tariffs are essentially a tax and everyone understands a tax pretty well.
In the sense that, you know, taxes is the government taking your possessions, your wealth, your money,
and it's creating disincentives for you to work, to save, to invest, and anything that the tax is placed on.
So while we understand taxes pretty well because they directly harm us,
tariffs, using this different name for a tax on imported goods or even exported goods, adds to the confusion.
And of course, the second reason that people get confused about tariffs is that there are always a tendency to muddle the issue with not just tariffs,
but also non-tariff barriers.
So sometimes a protectionist policy, which also confuses the issues because tariffs are not really protecting us at all.
But very often these non-tariff barriers get lumped in, things like quotas,
so that we're only allowed to import a certain amount of a particular good or outright prohibitions of certain goods.
And then of course there's also the general tariff where the taxes on goods imported apply to all goods that are imported,
but very often they're targeted tariffs so that the tax only applies to certain classifications of goods
or particular goods or certain sectors of goods, such as putting tariffs on raw materials or putting tariffs on manufactured goods.
And so there's a lot of confusion about what exactly is that policy of protectionism.
And the confusion grows for most people because it's something we simply don't deal with that often.
So taxes we understand because we have to deal with them all the time, every day,
at least in the current situation we pay taxes on just about everything we do.
And it seems like there's multiple layers of taxation on our incomes and on our labor.
So we've got plenty of experience there, but with tariffs it's really something that we think that foreigners have to deal with
or customs officials have to deal with.
Customs officials are basically tax collectors who regulate and collect taxes on imported goods.
It might surprise a lot of people to know that later in his career Adam Smith was a tax collector.
He ran the customs house in the local area where imported goods would actually be taxed and the taxes would be collected.
So we don't have a lot of experience.
I mean most Americans, you know, if you're traveling abroad or foreigners who are traveling abroad,
once you cross the border, sometimes you're accosted by customs officials to declare what you might be importing into the country.
So if you're flying into a foreign country or you're on a cruise ship in the Caribbean,
when you reach home base again you might have to declare what you're importing into the country and pay a tax on it.
But that's usually very little typical experience although from my anecdotal data it seems like most of the people that I know
are smugglers in the sense that they don't officially declare everything that they're importing on their trips.
Now a big thing that adds to the confusion about tariffs and whether or not they're a good thing
is that tariffs in the United States are considered a good thing with respect to 19th century America.
That the United States relied, the federal government relied heavily on income taxes on imported goods.
And the tariff revenues made up a substantial part of the federal budget and that's true.
And the United States also grew as a nation in size, you know, in terms of its land mass.
The United States spread from the eastern seaboard through the south and the midwest and to the west coast during the 19th century.
The population of the United States increased from just a few million people to over 100 million people in that time.
And of course, our economy grew enormously not just because of the size or the population, but in terms of income.
The real income of Americans, the individual American or the individual family or household grew substantially through the 19th century
so that Americans were the highest income earners or at least near the top in the world by the end of the 19th century.
America had become by the end of the 19th century a economic superpower as a result of economic growth.
And historians have confused the issue thinking that tariffs were the source of economic success.
That by protecting certain industries, particularly iron, later steel industries that somehow contributed to American prosperity.
But that's really completely confused.
Tariffs, as I'm going to point out, are unequivocally a bad thing.
There's nothing good economically speaking about tariffs.
So I just want to get that on the table.
They're bad for the economy, both in the short run and the long run.
There's really nothing to be good to be said about tariffs.
And that's, you know, with respect to my smart friends, they realize that.
But then they remember the tale that somehow tariffs were good for America because America did so well in the 19th century.
The real cause and effect here, though, was that America was an incredibly free market economy in the 19th century.
And while the American Civil War was a complete disaster, killing untold numbers of people,
and we were certainly not at peace through the entire time, we were at peace for a substantial amount of the 19th century.
We were on the gold standard in the 19th century.
But most important of all is we had a very free market economy.
The federal government had very little budget, had very little control.
Economists have studied to the extent that they did have controls and the results were bad.
But the overall size of the federal government was so small that it just necessitated the fact that we had a open free market economy,
even if we did have tariffs at very high levels for much of that century.
And even if we did have a lot of unnecessary and sometimes disastrous monetary policy in the 19th century,
the day-to-day activities of the American population were almost completely unregulated by the federal government.
And because Americans were mobile and from state to state and from city to city,
it meant that state and local governments had to compete to a certain degree.
And they couldn't just use draconian policies without threatening to lead to an exodus of their population, their businesses, their entrepreneurs, etc.
And so as a consequence, we had a very free market economy.
Now where do tariffs come in?
Well, tariffs produce very little revenue because people avoid tariffs.
And there's a limit to what you can expect to get out of tariffs in terms of revenue.
They're almost always disappointing the official estimates.
So even though the United States government relied on tariffs for a substantial part of its revenue and its income stream,
the fact that they did rely heavily on tariffs meant that they just didn't have much revenue.
There wasn't much they could do.
And so their revenue sources were relatively small.
In the 19th century, there was tariff revenues and there was revenues from land sales and some excise taxes.
But revenues were very small, which meant that the federal government had to be very small.
And therefore, we had a free market economy.
So you can only say that tariffs were good and contributed to American prosperity to the extent that it put a stranglehold on revenues for the federal government.
And another misconception about tariffs is that tariffs cause the Great Depression.
In 1930, the U.S. government passed the Smoot-Hawley tariffs.
And those were protectionist tariffs to protect American industry and farmers from foreign competition.
But they were not the cause of the Great Depression.
As Murray Rothbard has explained very well, the Federal Reserve, which was a relatively new institution in this 20th century,
because of the tremendous interventions that took place because of World War I,
money and macroeconomic instability was really the rule after World War I.
The Federal Reserve was actually instead of a passive institution, it was an active institution,
and it set us up for a depression by the end of the 1920s.
We were going to pretty much have a depression at the end of the 1920s, no matter what.
Now, two of the two things helped make that depression great.
The first one was Herbert Hoover's response to the Great Depression.
Hoover was not a free market capitalist, but he was very much an interventionist,
almost a progressive in that sense.
And he took drastic actions as much as the federal government had power to do,
and the moral suasion that the White House provided.
He launched himself with the stock market crash into moral suasion to keep prices high,
to keep wages high.
And when 1930 came around and we were in the depths of the depression,
the Smoot-Hawley legislation made its way through Congress as sort of a last-ditch effort
to help save particular American voting blocks.
And Hoover, who had opposed the idea for a long time, ended up signing the legislation,
and that made the Great Depression great.
It made it much worse than it would have otherwise had been,
but it was part and parcel of Hoover's overall approach.
So he was urging American businesses to keep prices high and to keep wages high,
and that's one thing that tariffs do is, in terms of protectionism,
is they help keep prices high and they help keep wages in certain industries at least high.
But unfortunately, higher prices and higher wages as you're going into a depression
is really the last thing you want.
Austrians typically advise that deflation is really the solution to a depression
where you allow prices and you allow wages to fall, to reestablish equilibrium in the economy.
So while tariffs did not cause the Great Depression of the 1930s,
that was the work of the Federal Reserve, and everyone pretty much agrees with that,
you'll get a general consensus that Smoot-Hawley was not the cause of the Great Depression,
but everybody also agrees that it made things much worse.
And so, again, it's a cause-and-effect mixture that is confusing Americans here.
It would be like if we went back to 2010 with Auburn University's national championship football team,
and every time Auburn was losing a game, I would switch the chairs that I was in while I was watching the game,
and Auburn would go from losing to winning the game.
And so I would argue that me switching chairs during the game whenever Auburn was down
was the reason Auburn University won the national championship in football.
And I still hold to that position, but most people would argue that I'm confusing cause-and-effect,
and that my changing chairs during the football game had really no impact
about how the season turned out for the Auburn football team.
Okay, so we have many good reasons to be confused about tariffs in general
and tariffs specifically in American history.
So when we come to today, as we begin 2025, we're told that tariffs are going to do all sorts of things.
President Trump used tariffs in his first term.
Those tariffs were kept by President Joe Biden and actually expanded in some respects,
and now President Trump in his second term is coming back in
and claiming that tariffs are going to do all sorts of good things.
The first and most general thing is it's going to get back at China,
and I'm not exactly sure or could I describe a clear game plan here,
but President Trump has announced that he's going to place a general tariff
on the importation of Chinese goods.
He's also announced that he's going to put tariffs on goods coming in from Mexico and Canada.
And the goals for this is to stem the tide of illegal immigration,
to stem the tide of illegal drugs coming in from those countries,
as well as supporting American jobs and American factories and things of that nature.
Now, I guess both with the Chinese and the Mexican and Canadian tariffs,
it's a clear mixture here of economic policy in the form of tariffs
and foreign policy, and it appears to be a type of negotiating tactic.
But all of those problems can be quickly and effectively dealt with by specific policies,
specific economic policies that would have really nothing directly to do with China,
Mexico or Canada, but more or less cleaning up our own policy agendas.
It's not so much that we Americans benefit, for example, from cheap importations of Chinese goods
and goods coming in from Mexico and from Canada.
We get an enormous amount of resources and goods from all three of those countries
that come into us at lower prices than we ourselves can produce.
But that doesn't mean that we don't have any policies that can deal with illegal immigration
or the immigration problem in general, the importation of illegal goods and fentanyl
and things of that nature, and there's specific policies that we have access to,
that we can enact in the United States that facilitate good job formation
and factory formation, that are general policies that would naturally induce the construction of factories
and the construction of jobs.
We clearly saw that the government's effort to sort of bulldoze us in with the CHIPS Act
and the protectionism under President Trump and President Biden, those clearly didn't work.
And any kind of job creation came at an enormous expense.
All of those policies were, in any kind of cost-benefit analysis, were clearly loser-type policies.
Another reason for tariffs as a negotiating tool, I guess in this case,
is to prop up the value of the U.S. dollars.
The BRIC countries, Brazil, Russia, India, China, now South Africa and several other countries
are working on coming up with an alternative to the U.S. dollar to offset the monopoly of the U.S. dollar.
It's not that these countries don't like the U.S. dollar or they're adverse to trading with it.
Their governments would like essentially to have the same exorbitant privilege
that our government and our Federal Reserve has in terms of inflation.
But the reason they're able to push this agenda is that the U.S. dollar has been abused
by our government and by our central bank, you know, the placing of sanctions on other countries
and the freezing of assets, dollar-denominated assets and government bonds and so forth.
We're using these economic policies aggressively against these countries and they don't like it, okay?
So this is an area of, it's not just economics.
This is an area of foreign policy and protectionism.
Another thing that's, you know, perennially in the works is that tariffs will help our auto industry
and our steel industry create jobs.
But we've already recently seen that any kind of job creation has come at an enormous cost
to American consumers and to American businesses.
And a final, and this has happened in the past, but it's happened in the present as well,
is that tariffs will offset taxes, reduce the national debt, reduce deficits, things of that nature.
But that's all not true.
Tariffs are very bad revenue raisers and so we should not expect any less burden in terms of other taxes.
We shouldn't see any real debt in deficit spending or the growth of the national debt as a result of increased tariffs.
And in any case, tariffs are not really paid for by foreigners.
Foreigners are not going to pay those things.
Those are going to be paid by American consumers in the form of higher prices and American businesses in terms of higher input cost.
So it's all going to be paid for by Americans.
And so just switching the name and switching the source from, say, income taxes to tariff revenue or deficits being reduced by tariff revenue,
that's still all going to come out of Americans pockets.
Plus, you're going to induce lots of very bad distortions in the economy, particularly in the short run.
And you're going to create all sorts of inefficiencies in the long run as an inefficient Americans at producing product X
have to come online in order to replace the efficient foreign production of product X.
I'm going to put a lot of references in the show notes and in particular my recent paper on Ludwig von Mises
and his general understanding of bad economic policy and the role of protectionism and tariffs in that area.
And creating bad economic policy starts with economic intervention at home.
In terms of creating bad economic policy, Ludwig von Mises really showed us the way the interconnections between the various levels of bad economic policy
and how you go from one bad economic policy to another and eventually to chaos and destruction.
So it all begins with interventionism, domestic protectionism in the local economy.
So this is all the micro economic policies that the United States is just filled with in every most almost every other country
is also just loaded up with all sorts of domestic interventionist policy.
And here we're talking about regulations.
We're talking about licensing the professions and even the minimum wage law really is a good example of this domestic interventionism
that seemingly has nothing to do with things like international economic policy, foreign policy and war.
But ultimately it does with the minimum wage law that disadvantages low skilled workers.
Okay, some people get the minimum wage job, but a lot of people are left out in the cold, not having access to any economic jobs
and having to rely on charity and welfare.
But the minimum wage also advantages high skilled labor.
It protects high skilled labor by keeping low skilled workers from competing with high skilled workers.
So the same is obviously going to be true with licensing.
Licensing advantages the people with the licenses to a particular profession.
And it disadvantages people who don't have a license and they can't get into a profession.
So they have to go to their second best or third best job opportunity.
So they're going to be disadvantaged or end up worse yet on welfare.
And then of course regulation. We all hate regulation, right? We all hate red tape.
And the big breakdown here is that regulations are an advantage to big business.
Big businesses, big corporations, multinational corporations, they have, you know, whole sections in their company
with accountants and lawyers and people to look after all of the regulations and to fill out all the paperwork.
So that's really an advantage to the big corporations where it's a disadvantage to small businesses
who don't have lawyers and don't have, you know, accounting departments
and people to fill out all the paperwork or who even know how to fill out the paperwork.
So, you know, it's advantages and disadvantages throughout the economy, producing virtually no benefits whatsoever,
just creating a lot of red tape and protectionism for particular people.
You know, say in my little town, profession X, all of a sudden the government,
the local government requires people to work in that profession to have a license.
Well, the people who have a license in that profession in my town can effectively keep out new competitors
and so they can raise their prices.
And so that means that I have to pay higher prices to use that service.
And so what's my natural inclination is to either not use that service.
Of course, I could always pay the higher price and many people have to.
Or maybe I can go outside of my little hometown to somewhere in the outlying areas to hire somebody in that profession,
whether it's a county or my doctor or a barber or whatever it happens to be,
I can travel a little ways and avoid the extra cost that that license imposes.
Now, of course, my county could impose the same licensing requirements,
so I'd have to go outside of the county somewhere else in my state to get those same services.
It might mean a longer trip, a greater cost, but I could still save money potentially,
depending on how severe the licensing requirements are.
And so you can see that this domestic local intervention creates an incentive for people to move their business
outside of those local areas.
And of course, eventually, you know, sometimes that leads people not just outside of their hometown
or their home county, but maybe outside their own country to seek professional services or goods.
You know, so like when I was a kid, everybody bought American cars,
but as they became more and more expensive without any offsetting quality improvements,
more and more people started turning to lower cost alternatives from automobiles outside the country.
And of course, eventually that led to calls for, you know, protectionism at the border,
so that the local producers wanted to stop consumers from accessing goods and services from outside the country.
And so that's how domestic interventionism or protectionism leads to international intervention or protectionism.
And then of course, the biggest example of that is putting tariffs on imports.
And of course, once the tariffs go into effect, you've created a situation which almost necessitates a foreign policy
to deal with other countries and to deal with trade.
And then of course, this protectionism creates animosity between the countries.
You know, that these foreign producers who had access to markets and were efficient at producing the goods
were satisfying foreign consumers, and now all of a sudden they've been blocked by protectionist policies from selling their goods.
And so all of a sudden you've created antagonism, and of course that can get aggressive like it did during the Great Depression.
The United States imposed tariffs on foreign countries. Foreign countries turned around and imposed tariffs on U.S. goods.
So it wasn't just a smooth, holly tariff that drove down our standard of living in the United States.
It was also the fact that other countries were responding to our protectionism with their own protectionism.
And then of course, inevitably, it is these trade tensions which are sparked by protectionist economic policies
that create this underlying distrust of other countries' governments, animosity on the part of the citizens versus the foreign governments.
And it just devolves into a very antagonistic situation where foreign policy devolves into a military type policy involving things like sanctions,
but eventually outright warfare. And we saw this clearly with World War I and World War II, but we see this even in the modern context.
It seems clear that countries, and in particular U.S. interventionism abroad, doesn't really have anything to do with any ideals of any sort,
but usually really rests on this basic economic conflict created by governments where people are fighting over oil and energy and pipelines and trade routes and those kind of things.
So that, you know, Mises clearly explained how even domestic interventionism can lead right on past protectionism at the border to outright military conflict.
I have a paper where I summarize and provide a little graphical analysis for Mises' views on protectionism and international trade, which I will link in the show notes to this episode,
and I'll link a lot of other resources on tariffs and protectionism for your further elaboration of this topic.
Well, this has been another episode of the Unanimity podcast. I'm Mark Thornton at the Mises Institute. Thank you for listening.