Trump's 60 Percent Tariff on China Would Not Only Hurt the Economy, But Could Hurt Government Revenue

For my regular readers, it does not come as a surprise that I despise former President Trump's obsession with tariffs. This is not simply a matter of mainstream microeconomic theory. The negative impacts of tariffs were clear before Trump began his tariff tirade. Trump's tariffs during his first term lowered the GDP by 0.21 percent, lowered wages by 0.14 percent, and reduced employment by 166,000 full-time equivalent (FTE). Making the economy worse off with his tariffs was not enough for him. He would like to take tariffs to a new level. 

In February, Trump proposed a 60 percent tariff on Chinese goods. Shortly thereafter, I showed how such a tariff would cost the economy anywhere between $200 billion and $495 billion per annum. Remember that the economy is not some amorphous blob. It consists of business and producers, as well as consumers like you and me. On average, it will cost the typical U.S. household upwards of $3,492 if this tariffs gets implemented. If that is not bad enough, it looks like this tariff could adversely affect something else: government revenue. 

An analysis from the bipartisan Committee for a Responsible Federal Budget (CRFB) examines the effects that a 60 percent tariff on China would have on government revenue. This seems counterintuitive at first. After all, if we look at a standard supply-demand graph of the effects of tariffs (see below), increased government revenue is one of the main economic benefits of a tariff. 

This CRFB analysis questions that premise in the case of Trump's 60 percent tariff. Why? In short, because it is such a large tariff. Remember that a tariff is a fancy way of saying "import tax." The larger the tax, the more likely it is to distort the economy in what is known in economics as deadweight loss. In the CRFB's static analysis, it assumes $2.4 trillion of government revenue in a decade. The problem with a static analysis is that is premised on unrealistic assumptions. Once accounting for macroeconomic effects and trade flows, we get a more accurate picture. 

In part, higher tariffs with China means less trade with China, which means less tax revenue. This, of course, depends on if certain goods are replaced with domestic or other foreign substitutes. Even assuming some offset from income and corporate tax revenue, CRFB estimates in its more conventional modeling that the tariff has the potential to lose somewhere around $200 billion to $500 billion of revenue over the next decade. 

While there is a possibility that it could bring the government a net positive in tax revenue, the fact that it could plausibly create a net negative in tax revenue should make even tariff sympathizers pause. For those who care about the impacts of tax policy, this finding is another example out a long list of examples of why we should be more than wary of tariffs. 

Measure 110 Had Its Limits, But Oregon Re-Criminalizing Drug Possession Is a Step Backwards

In 2020, the state of Oregon passed Measure 110. The point of this Measure was to decriminalize all drugs. Instead of jail time, the punishment was a $100 fine or a completed health assessment by a qualified center. It took less than four years for this experiment to end. Late last month, Oregon re-criminalized low-level drug possession due to an increase in opioid deaths and nuisances related to public drug use. My reaction is similar to my reaction last week when Idaho got rid of its syringe services programs: re-criminalizing is not going to do any favors. Below are some preliminary findings about the Oregon experiment to make me wonder about Oregon's recent decision.  

Measure 110 did not increase drug deaths. Brown University Professor Brandon del Pozo found that once adjusted for the rapid increase in fentanyl that came to Oregon later than it did the other states, there was no association between Measure 110 and an increase in fentanyl. These findings are consistent with a study from JAMA Psychiatry (Joshi et al., 2023).

Measure 110 did not encourage drug use. There are some preliminary survey data to suggest that this is the case. An RTI International survey of 467 Oregonian drug users found that only 1.5 percent of respondents started using drugs after Measure 110 began. 

There have been fewer arrests since Measure 110. Since Measure 110, there have been 83 percent fewer possession of controlled substances (PCS) arrests (Russoniello et al., 2023). Fewer arrests mean fewer interactions with the criminal justice system, particularly in terms of prosecution and incarceration. This translates into fewer law enforcement costs. 

Postscript. There are limitations to the findings here, at least in part because it has been less than four years. I made that caveat last year when analyzing the public health impacts of marijuana legalization. Between a fentanyl wave that swept the United States, the COVID pandemic, and a delay in funding for harm reduction programs, I am not surprised. It is also an issue that Oregon did not take it far enough. Similar to what I brought up with last year on Maine's partial prostitution legalization, doing it partway can either cause more problems or keep many problems intact. As Cato Institute scholar Jeffrey Miron brings up, "Legalizing [or, to a lesser extent, decriminalizing] possession, but not production, does not eliminate the underground market, so violence and quality control issues remain." Until these drugs are brought to the legal market, consumers are unsure as to the dose or purity of what they are purchasing. 

There is potential for success of decriminalization. As I pointed out last year, Portugal's twenty-plus years of drug decriminalization has been a success. However, without addressing the decriminalization or even legalization of the production, the success for decriminalization is going to be limited, especially in comparison to legalization. 

In spite of Oregon only partially decriminalizing, it beats the alternative of taking the step backwards that Oregon did. Oregon gave up on serious drug policy reform too soon. All re-criminalization is going to do is divert drug users to jails while doing very little to deter illicit drug usage. Prohibition and criminalization compound the effects of what is a public health issue, not a criminal issue. Why Oregon is going to revert back to prohibition, the very policy that got the Beaver State into this mess in the first place, is indeed a puzzlement. 

9-6-2024 Addendum: A study from the JAMA Network released this week found that decriminalization did not cause the overdose mortality; it was the increase in fentanyl (Zoorob et al., 2024).

Idaho Banning Syringe Services Program Is a Stab in the Back of Idahoans

Last week, the state of Idaho took a step backwards in public health. Idaho's Governor Brad Little signed HB617 into law, which repeals the ability for harm reduction organizations to operate syringe service programs (SSP). Also known as "needle exchange programs," an SSP provides a wide range of services, including "access to and disposal of sterile syringes and injection equipment, vaccination, testing, and linkage to infectious disease care and substance use treatment."

Why did Idahoan lawmakers get ride of their SSPs? They were concerned that SSPs increase drug use and opined that there was not enough evidence to show that SSPs incentivize substance abusers to seek treatment. Here is the problem with that line of thinking. According to the National Association of Counties, SSP participants are twice as likely to reduce the frequency of substance use and three times more likely to stop using substances all together. Even so, advocates never promoted SSPs for that purpose. 

The main purpose of SSPs was to provide drug abusers with a cleaner, safer alternative. This "meet them where they are at" approach is meant to reduce the spread of disease. SSPs have been shown to reduce HIV and Hepatitis C by 50 percent. SSPs have reduced syringe litter (Levine et al., 2019), which means less likelihood of being pricked or injured by a needle. In Idaho, the program collected nearly 600,000 needles, which kept them out of public places. Furthermore, SSPs are not shown to increase crime or illicit drug use. As a matter of fact, SSPs save upwards of $7.58 [in 2014 dollars] for every dollar spent (Nguyen et al., 2014). The cost savings for SSPs is quite high (Ruiz et al., 2019). If you want more information on how beneficial SSPs are, you can read this 2023 meta-analysis from the U.S. Department of Veteran Affairs here.

Much like we could not mask our way out of the pandemic, we cannot criminalize our way out of the opioid crisis. As a 2022 research paper from Cato Institute shows, such drug paraphernalia laws obstruct harm reduction. Criminalizing these programs will make users more likely to use dirty needles (Marotta et al., 2021) and cause a rebound in HIV cases (Zang et al., 2022). Instead of keeping those who use drugs safer, re-criminalization will decrease their likelihood to survive. Idaho's abandonment of a program clearly shown to protect those who use drugs, as well as the community as a whole, is putting its citizens at risk. 

How Free Trade and Trade Liberalization Help Out the Poor Domestically and Globally

Last month, the White House released its annual Economic Report of the President. In the report, there was a chapter on International Trade (Ch. 5, p. 173). One of the interesting admissions in the report is how trade with China has improved the purchasing power, especially of lower-income Americans (p. 203). As a matter of fact, the report calculated that 68 percent of those benefits went to low-income Americans. This finding is echoed in a report from the Federal Reserve Bank of Minneapolis that was released just last week (Horwich, 2024).

The author of the Minneapolis Fed report, Jeff Horwich, says that much of the research of international trade on consumer welfare looks at the effects on a national level. Rarely is it done to see the effects of a certain demographic, such as the poor. Even so, the fact that international trade helps out low-income households both in the United States and globally does not surprise me in the least. Why is this the case? How does international trade help out the poor specifically? 

Improved quality of life with greater imports. As this article from the Houston Chrolinc brings up, it can be cheaper for a country to import goods or services than it can be to produce them. To quote the Australian Department of Foreign Affairs and Trade (DFAT), "trade expands the markets local producers can access, allowing them to produce at a more efficient scale to keep down costs." This ensures a constant flow of more goods, which can improve the quality of life and give options they otherwise would not have. 

Lower prices lead to greater purchasing power. To quote the International Monetary Fund (IMF) from 2001: "Trade liberalization helps the poor in the same way it helps most others, by lowering prices of imports and keeping prices of substitutes for imported goods low, thus increasing people's real incomes...An open trade regime also permits imports of technologies and processes that can help the poor." 

I was first criticizing Trump's obsession with tariffs in March 2016, which was before he was president. I pointed out that tariffs decreased economic welfare. Conversely, countries with fewer trade barriers had less poverty. To quote DFAT, "Removing tariffs on imports gives consumers access to cheaper products, increasing their purchasing power and living standards, and gives producers access to cheaper inputs, boosting their competitiveness by reducing their production costs."

Free trade improves innovation and efficiency. The Mercatus Center mentions a good point in its brief on the benefits of free trade: "Over time, free trade works with other market processes to shift workers and resources to more productive uses, allowing more efficient industries to thrive. The results are higher wages, investment in such things as infrastructure, and a more dynamic economy that continues to create new jobs and opportunities." Those wage increases help out the poor, as well. 

Postscript. As a 2015 report from the World Trade Organization illustrates, free trade creates new job opportunities for the poor, raises the real wages of unskilled labor, lowers prices of goods consumed by the poor (which means greater purchasing power), and improves access to external markets for the goods that the poor consume. All of these phenomenon aggregately improve the quality of life for the poor. 

Freer trade is vital for the poor because, as the World Economic Forum states, "Open trade is particularly beneficial to the poor, because it reduces the cost of what they buy and raises the price of what they sell." Farmers and manufacturers especially can reach a wider market when there is open trade (ibid.). As the World Bank has brought up, free trade has lifted over a billion people of poverty. The Heritage Foundation, amongst many others, has shown how greater economic freedom creates greater economic growth while lowering poverty (see below). This is a truth I detailed when showing how trade liberalization does a much better job than foreign aid at alleviating poverty. 

With the overwhelming evidence in favor of greater international trade, it does beg a question for the upcoming presidential elections. If the relatively lower tariffs from Trump's previous administration made items more expensive and made Americans poorer, what will Trump's proposed universal 10 percent tariff or 60 percent tariff on China will do to the poor both in the United States and abroad? This November's election is between a Republican whose tariffs will make Americans poorer and Bidenomics that has increased inflation in a way that has made life more expensive for the poor. And let's not forget that Biden has maintained many of Trump's tariffs. While it is clear that free trade helps out those in low-income households, it is also clear that we are in an age of protectionism, regardless of who gets elected this November. It is the everyday citizen, especially the poorer ones, that suffer because politicians on both sides of the political aisle ignore the fundamentals about the benefits of free trade.

CBO 2024 Fiscal Outlook Is Grim: Will the U.S. Government Finally Address Rising Federal Debt?

Last week, the Congressional Budget Office (CBO), which is the gold standard of U.S. federal legislative analysis, released its Long-Term Budget Outlook. This outlook projects the nations' fiscal and economic outcome for the next three decades. What fun and joy does the CBO predict for the upcoming thirty years? 

Debt will reach 166 percent of GDP in 2054. As the CBO's graph shows below (p. 10), this amount will be significantly higher than World War II. It will be in 2029 that debt will reach its highest levels and go up from there. 

Entitlement spending is why expenditures continue to outpace revenue. Until the government gets its spending habits under control, there will continue to be a growing deficit. Social Security and Medicare are the two largest culprits of this spending binge. By 2054, these two programs will account for 41.4 percent of federal spending (p. 4).

Interest outlays will more than double. The U.S. government already spends more on interest outlays than it does national defense. By 2054, we will be paying 6.4 percent of GDP (or 23.1 percent of government spending) towards interest payments (p. 10). As I have mentioned before, not only do higher interest payments hamper economic growth, but it means that we could spend that money on something other than interest outlays. 

Two silver linings. One is that the Old Age and Survivors Insurance (OASI) Fund with Social Security with Social Security will expire in 2034, which is one year later than previously projected. But still, it is not good (see below). Two, debt-to-GDP ratio projections are at 165 by 2054, which is 17 percentage points lower over a comparable period than when the CBO released last year's report. Nevertheless, as previously alluded to, it is still a perturbingly high amount of debt.

Postscript. All in all, this unsustainable fiscal path is a quagmire waiting to happen and it shows no signs of slowing down. It reminds me why credit rating agency Fitch's downgraded the U.S. credit rating last year. As the bipartisan Committee for a Responsible Federal Budget (CRFB) enumerates, high debt results in threatened economic vitality, increased budget strains, geopolitical challenges, punishing younger generations, and making it more difficult to respond to emergencies and recessions. Addressing the national debt needs to be a priority if the United States wants to continue being a beacon of economic prosperity. If policymakers continue to kick the can down the road, future policymakers will have to make difficult decisions similar to those that Argentinean President Javier Milei is having to make. I think Argentinean culture is by and large great, but fiscal irresponsibility is one feature of Argentina the United States should not emulate.

Declining Fertility Rates: Another Reason to Really Open Up Immigration to the United States

Much like with other developed countries, the United States is experiencing demographic challenges. Aside from an aging population, the United States has a lower fertility rate. This decline in fertility rate can be explained by a number of factors, including more education and career opportunities for women, greater access to contraceptives, less stigma surrounding living child-free, and increased costs of children or other macroeconomic forces. Declining fertility rates are contributing to economic and social pressures as a result of labor shortages. 

Having more children seems like a reasonable solution to the problem. However, as Cato Institute research shows, "once a country's birthrate has fallen below the replacement rate, recent history indicates that it tends to remain there." This leads me to recommend a more salient solution to the demographic issues: more immigration. Historically, the United States by and large allowed for a greater number of immigrants to enter the country. That changed with President Trump when he substantially limited legal immigration to the United States. Unfortunately, President Biden has largely kept those caps comparable to the Trump administration. 

Last week, the premier business school, Penn State University's Wharton School of Business, released a paper entitled "U.S. Demographic Projections: With and Without Immigration." One finding is that the total fertility rate (TFR) is projected to be an average of 1.7 over the next few decades. This is problematic because the TFR is below the replacement rate, which means a decline in population (see below). 

Why would greater immigration be good for the United States to help alleviate the demographic crisis? The data above provides a good hint. Aside from migrants being typically younger than the receiving country, the International Monetary Fund (IMF) provides an explanation: "It [greater immigration] would reduce population decline, keep the size of the labor force from shrinking, improve age dependency ratios, and produce positive fiscal gains." 

What we see from the Wharton School [below] is that we would need to more than triple current immigration to maintain our current worker-to-retiree ratio of about 3:1 by 2070. If we go with status quo, that ratio will fall below 2:1. This ratio decline is important considering that Social Security and Medicare are two major drivers of the U.S. federal budget. France illustrates that Social Security benefits cannot be sustained with a low worker-to-retiree ratio. Japan also ceased its historically limiting immigration policy because it hit demographic reality and shows what happens when an aging policy shuts its doors off to immigration.

The solution from certain anti-immigrant elements is to secure the border and further restrict immigration to this country. I am not going to cover the situation with the U.S.-Mexico border here today. What I will say is this. Allowing for more immigrants will help with demographic woes in the long-run. By extension, immigrants will improve economic outcomes by creating greater dynamism. A paper from the University of Chicago estimated that full immigration liberalization would translate in increasing economic welfare by about threefold (Desmet, 2018).

As I brought up as recently as December, more immigration would create macroeconomic growth, not to mention alleviate the current labor shortage that the United States is experiencing. The United States has historically developed a strong economy and a robust labor force with greater immigration than its peers. If the United States wants to continue to be that shining city on a hill, it will create comprehensive immigration reform that will allow for greater immigration. Not only will this help the U.S. economy, but it will mitigate the effects of a lower total fertility rate. 

Lessons Public Health Officials Should Learn from the COVID Pandemic But Probably Won't

Last week was the four-year anniversary of when the World Health Organization (WHO) declared the COVID-19 outbreak a pandemic. For those who have been reading this blog, you will know that I have been highly critical of the government's response to the pandemic. That is why it was nice to read this report from the Committee to Unleash Prosperity that is entitled "COVID Lessons Learned: A Retrospective After Four Years." The co-authors of this report include Steve Hanke from Johns Hopkins, Casey Mulligan from the University of Chicago, and former Trump advisor/current health policy fellow at Stanford University Scott Atlas. Here is a list of the lessons that they thought to be most important. 

1. Leaders should calm public fears, not stoke them. This is good advice even when it is not a pandemic. If we exaggerate fears without considering the costs, we get the catastrophic impacts that fear-obsessed decisions wreak, as we will see in subsequent points. 
2. Lockdowns do not work to substantially reduce deaths or stop viral circulation. This was established epidemiological knowledge and was part of pandemic guidance provided prior to the pandemic. Leaders and decision-makers across the world ignored the advice and gave into panic. Unsurprisingly, lockdowns did little to reduce COVID deaths. If anything, lockdowns increased excess deaths.  
3. Lockdowns and social isolation had negative consequences that far outweighed benefits. Sadly, I called this one in May 2020, as well as pointing out in April 2020 how the lockdowns would adversely affect the economy. Lockdowns ended up causing or exacerbating multiple negative consequences, including deteriorating mental health, increased child and domestic violence, greater food insecurity, widened economic inequality, social polarization, unhealthy lifestyle choices, and erosion of liberal democracy. 
4. Government should not pay people more not to work. Here is another one I called in early 2020.  The more the government pays to stay at home, the less likely they will want to work. As I wrote in 2023, that ended up being the case, much like it was during the Great Recession. 
5. Shutting down schools was a major policy mistake with tragic effects on children, especially the poor. I expressed my issues with school closures in July 2020. It turns out that school closures ended up doing considerable harm to children. Even the Left-leaning New York Times got around to admitting as much this week. 
6. Masks were of little or no value and possibly harmful. I was mildly for a temporary face mask mandate at the beginning of the pandemic, even in spite of conflicting information. That is because there was at least mechanistic plausibility that they could work, which is better than the lockdowns (See Point #2) or school closures (See Point #5). But my support waned to the point of being against the mandates. Then I was against using face masks to fight COVID because it became clear that face masks were ineffective in slowing the spread of COVID.  
7. Government should not suppress dissent or police the boundaries of science. Attempts to shut down discussions under the guise of "fighting information" not only led to the erosion of scientific inquiry, but also democratic norms. 
8. The real hospital story was underutilization. As the authors bring up, the real issue was that hospitals were underused because hospitals were doing as little as possible to treat non-COVID disease. Postponing preventative healthcare in 2020 has created problems to this day. A whole slew of preventible diseases went undiagnosed, which has resulted in a backlog that still affects our public health systems.
9. Protect the most vulnerable. It was clear as early as March 2020 that COVID had a profound differential in risk between the elderly and the immunocompromised versus everyone else. We should have had different protection for the vulnerable while allowing everyone else make their own choices based on their own risk tolerance so we can avoid the societal disruptions and havoc that the blanket mandates caused. 
10. Warp Speed: Deregulate but don't mandate. There were considerable regulations that existed prior to the pandemic that made our response to COVID worse. That is why it was nice to see the government cut red tape to make the vaccines happen. As the authors bring up, "the original vaccine was well-matched to then-circulating variants, and there was a sharp drop-off in hospitalizations and deaths." In spite of the earlier vaccines' success, the government had no business mandating vaccines, especially since the vaccines did nothing statistically significant to stop COVID transmission. 

As you can tell from this list, public health mandates in response to the pandemic were one fiasco after another. Former NIH Director Francis Collins eventually issued a mea culpa in which he realized he was too close-minded when it came to COVID restrictions. Fauci recently admitted that social distancing at six feet was bunk and that vaccine mandates increased vaccine hesitancy. Even so, I have not seen anything to suggest that public officials have asked the tough questions to the point of making significant change. I think in part, ego will play a role because it is difficult for a politician to admit they contributed to one of the worst peacetime public policy decisions in human history. Another factor is that it is election year and there are many other topics to focus on now that the pandemic is in the rearview mirror. As much as I wish they would learn from past mistakes, I would not be surprised if a similar level of stupidity took over during the next pandemic.