Some Links
Scott Lincicome explains that Trump’s tariffs hurt both Wall Street and Main Street. Three slices:
Recent tariff-related turmoil in the U.S. stock market has motivated several Trump administration officials and many of their online allies to shrug it off as unrepresentative of the “real” U.S. economy. Many have argued, in fact, that the scary sell-off of U.S. stocks, bonds, and dollars—one that abated only after Trump pulled back from the tariff abyss last week—was not just meaningless “digital ones and zeroes” but actually good because “Wall Street” losses meant “Main Street” gains. In one narrow sense, the tariff lovers have a point: Day-to-day fluctuations in certain stocks and even entire indices are often disconnected from what’s going on at, say, your local bar down the street. In a broader sense, however, the idea that recent market troubles aren’t related to the “real” U.S. economy or, even worse, that what’s good/bad for “Wall Street” is necessarily bad/good for “Main Street,” is absurd. And populists peddling such myths are either clueless about what the stock market is or are simply desperate to avoid admitting that Trump’s tariffs are harming both it and the “real” U.S. economy more broadly.
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A big drop in a company’s stock price can mean less available capital for funding operations, expanding the business, hiring workers, or paying off debt (equity is one way to finance business operations). It’s also a signal that outside investors—many of whom are trained to evaluate a company’s health and future performance— think it’s in for rough times ahead. And both of these things, in turn, can deter other investors, lenders, and market players from doing business with the firm in the future. All of that is bad for the company and the people who work there.
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Publicly traded companies, big and small, employ millions of Americans and operate in practically every corner of the U.S. economy. When their stocks crater, it affects not only the firms at issue, but the tens of millions of other Americans whose livelihoods and futures depend, at least in part, on “Wall Street” doing well. And that cratering, along with similar currency or bond moves, can both reflect—and sometimes harm—economic conditions in the real world, including for Americans without any direct market exposure.
It’s not just ones and zeroes, after all.
There is, of course, a strong motivation for fans of Trump and his tariffs—the clear causes of recent market distress—to pretend both that their preferred policy/politician is harmless and that there wasn’t any real harm to begin with (quite the two-step, isn’t it?). As usual with this stuff, there’s a nugget of truth buried in such claims, but it hides the bigger, more fundamental truth that’s staring us all in the face: millions of people, including the folks paid big bucks to dig through troves of information and try to estimate the nation’s future economic health, think the tariffs and related chaos will be bad for many real American companies, their workers and customers, and the U.S. economy more broadly. It’s therefore nonsense to claim that the last two months of market trouble—and the trillions in wealth that went poof in the process—doesn’t matter. It almost certainly does. And I’m pretty sure at least some of the economists and Wall Street veterans in the Trump administration know that, too.
My Mercatus Center colleague David Beckworth talks about trade with Scott Lincicome.
Nick Timiraos reports that “Powell warns of ‘challenging scenario’ for Fed as trade war rages.” A slice:
Federal Reserve Chair Jerome Powell warned that the central bank could have less flexibility to quickly cushion the economy from the fallout of President Trump’s trade war, sending stocks down on Wednesday.
Powell said he saw a “strong likelihood” that consumers would face higher prices and that the economy would see higher unemployment as a result of tariffs in the short run.
This would create a “challenging scenario” for the central bank because anything it does with interest rates to address inflationary pressures could worsen unemployment, and vice versa, he said. “It’s a difficult place for a central bank to be, in terms of what to do,” Powell said during a moderated discussion at the Economic Club of Chicago.
Philip Hoxie busts myths about the ridiculous concept of a U.S. “trade deficit” in food. A slice:
When it comes to trade, other countries are quite literally sending us their best. As I discussed in my recent essay, the costs of shipping goods from country to country means that higher value goods from more productive firms are more likely to be traded. This is called selection into trade, an idea pioneered by economist Mark Melitz.
Selection into trade arises because when a good is traded from an exporting country to an importing country, the consumer in the importing country pays both the cost of producing the good plus the cost of transporting the good. If producing firms in the exporting country have differing productivities, then it is the firms that can produce a good the most efficiently that will trade because their products can compete in the destination countries even after paying the transportation costs.
In terms of agriculture, this means that the US tends to export crops that benefit from the scale economies enjoyed by US farms, such as soybeans, corn, and cotton. However, the US imports crops that farms in other countries have a productivity advantage in producing. Some examples include avocados, off-season fruit, and coffee.
Moreover, as the US gets richer it can buy more specialty products that other countries produce better, such as scotch from the United Kingdom or tequila from Mexico. The US can make whiskey and tequila, but distilleries in both the UK and Mexico produce more efficiently than US distilleries. This means that, at the same quality, a bottle of tequila produced in Mexico will be cheaper than a bottle produced in the US before transportation costs. When the bottle of alcohol is purchased in the US, the total price will include the transportation and production costs, and it will be competitive with similar quality US products (side-stepping the issue of what can be called “scotch”).
On April 14, the Liberty Justice Center and I filed a lawsuit in the US Court of International Trade challenging the legality of Donald Trump’s gargantuan “Liberation Day” tariffs, on behalf of five US businesses that import goods from many of the countries targeted by the tariffs. The case is entitled VOS Selections, Inc. v. Trump.
In previous posts, I previewed our key arguments and explained why Trump’s partial pause of the tariffs does not end the madness or obviate the need to challenge this usurpation of legislative power in court.
To briefly summarize, we argue that the International Emergency Economic Powers Act of 1977 (IEEPA) doesn’t authorize tariffs at all, that even if it does the bilateral trade deficits targeted by the “Liberation Day” tariffs do not qualify as an “emergency” or as an “unusual and extraordinary threat” (both prerequsites to invoking IEEPA), that Trump’s use of IEEPA for this purpose runs afoul of the “major questions” doctrine, and that—if these actions are authorized by IEEPA—it would violate constitutional limits on delegation of legislative power to the executive. If we prevail on any one of these points, we win the case.
“Tariff uncertainty is stalling the economy.” A slice:
The New York Federal Reserve Bank’s monthly survey of manufacturers, published earlier this week, reported sharp drops in what it calls “forward-looking indicators”—that is, what businesses expect the next six months to look like. The manufacturers in the survey expect to see fewer orders, longer delivery times, declining inventories, and lower levels of employment. About the only lines in the survey that are pointed upward are the expectations about prices.
My GMU Econ colleague Bryan Caplan celebrates America’s “great migration deficit.” A slice:
How then can we explain the unbroken U.S. migration deficit? The answer is obvious: immigration to the U.S. exceeds emigration from the U.S. because the U.S. is a fantastic place to live. Americans have the highest living standards of any country with a population over 10M, plus over 150 years of unbroken domestic peace. Immigration exceeds emigration because the economic wonder of moving to the United States overpowers the legal agony. Reagan spoke truly when he called it “a shining city on a hill.” Do not be deceived by the latest scary stories; for in the words of Adam Smith, “There is a great deal of ruin in a nation.”
Once you concede that the U.S. consistently has migration deficits because the U.S. is a fantastic place to live, you can hardly deny the plausibility of Boudreaux’s thesis that the U.S. consistently has trade deficits because the U.S. is a fantastic place to invest. As I often tell my students, economics is all about empathy. If you put yourself in the shoes of a person born outside the U.S., you can readily grasp why so many foreigners want to move here. Similarly, if you put yourself in a shoes of an investor born outside the U.S., you can readily grasp why so many foreign investors want to move their capital here. If you were a wealthy Mexican, Chinese, or Indian about to buy some American imports, wouldn’t you fret, “Maybe I should buy some American assets instead?”
George Gilder and Gale Pooley make the case for measuring prices in time. A slice:
The original proponent of time prices was Yale economist and Nobel laureate William Nordhaus, who in the 1990s produced a paper showing that traditional economic data have understated progress in lighting technologies—from whale oil to light-emitting diodes—by a factor of thousands. At the same time, economic data fail to capture the rise in living standards made possible by these lighting innovations.
Extending the Nordhaus insight across a range of consumer products and technologies, one of us (Mr. Pooley) and Cato Institute researcher Marian Tupy demonstrated in a book, “Superabundance” (2022), that similar innovations allowing manufacturers to produce goods more cheaply in less time since the Industrial Revolution have made nearly all goods and services drastically more affordable. The Industrial Revolution also brought about a tenfold rise in the global population and an explosion in new knowledge.
[DBx: Mike Cox and Richard Alm proposed – in 1993 – time-price measurement before Nordhaus published his 1998 paper on light.]
The Trump Administration on Monday froze $2.2 billion in funds to Harvard after the university refused to surrender to its sweeping demands. Few Americans will shed tears for the Cambridge crowd, but there are good reasons to oppose this unprecedented attempt by government to micromanage a private university.
Stipulate that the feds have a duty to enforce civil-rights laws, and Harvard failed to protect Jewish students during anti-Israel protests. But the university agreed to strengthen protections for Jewish students in a legal settlement with Students Against Antisemitism, which praised it for “implementing effective long-term changes.”
The Trump Administration nonetheless demanded last week that Harvard accede to what is effectively a federal receivership under threat of losing $9 billion. Some of the demands are within the government’s civil-rights purview, such as requiring Harvard to discipline students who violate its discrimination policies. It also wants Harvard to “shutter all diversity, equity and inclusion” programs, under “whatever name,” that violate federal law.
But the Administration runs off the legal rails by ordering Harvard to reduce “governance bloat, duplication, or decentralization.” It also orders the school to review “all existing and prospective faculty . . . for plagiarism” and ensure “viewpoint diversity” in “each department, field, or teaching unit.”
These reforms may be worth pursuing, but the government has no business requiring them.
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