Trump Cannot Fight Trade Deficits with Higher Tariffs, Nor Does He Need To

Since the beginning of his second term, Trump has been more gung-ho on tariffs than he was during his first term. Not only did Trump threaten tariffs on U.S. allies Mexico and Canada under the guise of fighting fentanyl, but he implemented 25 percent tariffs on steel and aluminum. A couple of weeks ago, Trump passed an executive order for reciprocal tariffs. Trump stated that he needed these reciprocal tariffs to deal with the trade deficit, which Trump claims threaten the economy and national security. Too bad for Trump that tariffs do not help with the trade deficit. According to the Peterson Institute for International Economics (PIIE), countries with higher tariffs have higher trade deficits. 

Why is this the case? Tariffs lower imports. This decrease in imports lowers demand for foreign currency, which in turn appreciates the dollar (Furceri et al., 2019). What does that end up doing? Making American exports more expensive for foreign consumers, which lowers sales. Plus, when there are retaliatory tariffs in play, the initial tariffs increase the cost of U.S. exports, which have the potential to cost more jobs at home, much like we saw with the tariffs from Trump's first term. 

None of this addresses the reality that trade deficits are not a bad thing. Trump bemoaned the trade deficit during his first term in office. In reply, I criticized Trump and explained why we should not be worried. In addition to laying out the description of the macroeconomics of trade deficits, I pointed out how a trade deficit can improve our quality of life and how the U.S. economy grew considerably in spite of running a trade deficit since 1975. There is more to an economy than trade balance, not to mention that the trade balance is not a sound metric for economic health. Ultimately, it does not matter whether Trump is imposing tariffs because of national security, fighting the War on Drugs, or because of trade deficits. Tariffs are not the solution. 

Consumers Will Be Fine If Trump Gets Rid of the Consumer Financial Protection Bureau (CFPB)

There has been a flurry of Trump attempting to curtail or eliminate entire departments, whether that is the Department of Education or the United States Agency for International Development. Another department is making its way to Trump's chopping block: the Consumer Financial Protection Bureau, or CFPB. On February 9, CFPB Chair Russ Vought told CFPB employees to not pass any new regulations and to desist any current investigations, as well as stated that the CFPB will not be drawing its next quarter of funds from the Federal Reserve. One federal judge ordered a temporary stay on Trump firing CFPB employees, but the case will be re-heard elsewhere on March 3. Why should we care?

CFPB was enacted in 2011 by Congress as part of Dodd-Frank in response to the financial abuses after the 2007-2008 financial crisis. The intention of CFPB was to the United States' consumer finance watchdog to protect U.S. consumers in the future. Admittedly, I have not written that much on the CFPB. I created a literature review in 2015, but did not come to any concrete conclusion about CFPB. In 2018, I scrutinized Dodd-Frank, including the fact that the costs with regulatory compliance overshadow the benefits that CFPB was claiming about its existence. Last year, I especially criticized a CFPB rule that put overdraft fee caps on banks, which upon examination, harm the consumers they were meant to protect. The fees exist to cover cost and mitigate risk. Banks will find other ways to account for these costs and risks. 

This does not get to the fact that we do not need a CFPB because it is redundant. For one, the state governments already have financial regulation and oversight, a reality that has played out in past prosecutions. Furthermore, the federal government already has numerous financial regulators (see below), including the Federal Trade Commission (FTC), Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Deposit Insurance Corporation (FDIC). 

Aside from redundancy, the CFPB does not have an understanding of what it actually means to protect consumers. This goes beyond the previous example of overdraft fee caps that limit financial services to low-income households:

• Ban medical debt from credit reports. In June 2024, the CFPB proposed to ban medical debt from credit reports to help out those who are burdened by medical debt. Thankfully, it has not been implemented yet. Low-income households are the ones most likely to have medical debt. Lenders are not going to ignore the absence of medical debt on the credit report, but instead will likely assume that there is undisclosed medical debt. This would lead to increasing borrowing rates, which could very well direct low-income households to less conventional forms of borrowing (e.g., payday lenders, loan sharks). Hiding information does not help, much like ban-the-box laws backfired and harmed African-American men who were not criminals and looking for a job.  
• Credit card fees. In 2023, the CFPB wanted to go after credit card fees. The Cato Institute rightly criticized this policy. I also criticized Bernie Sanders and Alexandria Ocasio-Cortez (AOC) for proposing a credit card fee cap in 2018. After examining the history of interest rate caps, I concluded that a) high-risk borrowers will be cut off from the mainstream credit system, and b) lenders will find other clever ways to make up for the loss in their terms and conditions. 
• Payday loans. In 2016, CFPB issued a rule on regulating payday loans, which was overturned in 2020. I am glad this was overturned. I wrote on payday loans a couple of years ago. While payday loans are not an ideal financial instrument, putting the squeeze on payday loans means that these consumers go to less savory options, such as loan sharks, pawn shops, or putting a second mortgage on their home.   
• Anti-arbitration bias. In 2015, the CFPB tried to pass a law banning companies from instating mandatory arbitration agreements, instead of class action lawsuits. In spite of this rule being overturned in 2017, the CFPB continued with its anti-arbitration bias by creating a database in 2023 to help track which companies track arbitration agreements. Not only are private arbitration courts cheaper and quicker (7 months versus 3 years), but there is no evidence between arbitration agreements and being subject to CFPB action (Pham and Donovan, 2023), thereby implying that arbitration agreements are not a threat to consumers. 

I do not even want to get into how CFPB is de facto an unelected regulator with a blank check that has next to no oversight. The CFPB has spent years pushing consumer finance policy that does not protect consumers, but rather harms them and makes it more difficult to have access to mainstream credit. I will conclude today by quoting the illustrious Veronique de Rugy:

Rather than pouring more resources into this bureaucratic black hole, especially one that duplicates the work of other agencies and programs, officials should cut their losses and abolish the CFPB. Let's return to a system based on clear disclosure requirements, competitive markets, and the enforcement of fraud laws. Consumers should be empowered, not infantilized.

DOGE at One Month: Examining Its Tameness on Tackling Government Efficiency

DOGE. Department of Government Efficiency. What started out as a noncommittal remark by President Trump and a half-serious tweet from billionaire Elon Musk has made multiple rounds of the news cycle since Trump's initial executive order brought it to life one month ago from today. Initially, DOGE was created to modernize government-wide software and infrastructure. An executive order issued on February 11 extended that power to workforce optimization, including letting go of hundreds of federal workers. Critics believe that DOGE is an unconstitutional power grab that is going to dismantle the United States government. Proponents believe that DOGE will overhaul federal bureaucracy and bring sanity to profligate government spending and largesse. Which depiction is closer to the truth? 

Since Trump won the 2024 election, I called for the abolishment of the Department of Education, the U.S. Agency for International Development (USAID), and the Federal Emergency Management Agency (FEMA). Furthermore, condensing ministries was part of Argentinean President Javier Milei's plan to reduce government spending. As a result of his plan, he was able to generate a surplus for the first time in over a decade. It is likely that Milei's chainsaw approach to government inspired Elon Musk. In concept, I agree with having a bureaucratic agency focused on making government more efficient. The question is whether DOGE has been successful or will succeed, legal and constitutional challenges notwithstanding. 

DOGE claims that it has already saved the taxpayers $55 billion so far. When accounting for some preexisting improper entries, duplicate entries, and other federal accounting nuances, the figure is closer to $8 billion. DOGE has mainly targeted low-hanging fruit, particularly with waste and fraud. DOGE's workforce optimization is not much better. 

The rule of "one in, four out" for the federal workforce sounds drastic, but it does not do as much as one would think. The military as well as those in law enforcement, public safety, or immigration enforcement are exempt. That exempts 60 percent of the federal workforce. Plus, even if you cut half the federal workforce, the $150-175 billion in savings would not make a sufficient dent to tackle the $2 trillion deficit. 

And that is part of the point. The national deficit for year-to-date is $700 billion. To avoid that deficit spending, we would need to eliminate the Department of Education and USAID five times over. To avoid adding debt and bring a balanced budget, we would need to eliminate the equivalent of ED and USAID thirteen times over. That is how staggering U.S. government spending is! While one could argue that DOGE's spending cuts are worthwhile, they are modest in comparison to the large scale of government spending. 

As the Cato Institute brings up, trying to make government more efficient misses the mark. Why? There are aspects of government that cannot intrinsically be run efficiently, which is why there are multiple parts of federal government that should not exist at all. If you cannot scrap or at least greatly reduce the size of given government agencies, waste and inefficiency will ensue. 

This Cato Institute report to DOGE gets at how to address major cuts to the federal budget. If DOGE does not tackle the major three drivers of the federal budget, which are Social Security, Medicare, and Medicaid, what DOGE can do to make the federal budget great again is minimal. 

This brings up a final point from Reason Magazine, which is that DOGE cannot go in and do it alone. Short of abolishing the Constitution, DOGE will need Congress' help to get the job done because Congress pulls the purse strings and Congress is responsible for determining the scope of the executive branch's activities. Given that Congress can barely pass stop-gap temporary funding, never mind pass all its required bills (last time it did that was 1996), I will not hold my breath in Congress getting its act together to help DOGE with its mission. Without lasting structural reform, DOGE is at best a distraction from the real issues facing the federal budget. 

Trump Didn't Learn From His Steel & Aluminum Tariffs Failures During His First Term

President Trump is not letting up on his trade war. Earlier this month, Trump threatened China, as well as U.S. allies Mexico and Canada, with tariffs. A little over a week ago, Trump decided to implement a 25 percent tariff on all steel and aluminum tariffs, which will take effect in mid-March. 

I roll my eyes not simply because of how unpleasant tariffs are in economic theory. We have already been down this path. At the beginning of Trump's first term, Trump implemented a 10 percent tariff on aluminum and a 25 percent tariff on steel. In 2017, I criticized Trump's steel and aluminum tariffs, scrutinizing his national security argument vis-à-vis Section 232 while pointing out how poorly they worked out when President George W. Bush implemented similar tariffs in 2002. It turns out I was right. 

What was the end result of those steel and aluminum tariffs from Trump's first term? As I detailed last year, less export growth, a lower GDP, the 1,000 steel manufacturing jobs gained caused a reduction in manufacturing employment by 75,000 workers, not to mention more expensive steel and aluminum prices (24 and 31.1 percent, respectively). And guess who paid those higher prices? It was not China, but rather U.S. consumers. Last week, the Cato Institute also highlighted several studies that showed these undesirable effects. Here are some highlights:

• The American Action Forum showed the direct cost of the tariffs ended up being $4.6 billion annually (Lee and Varas, 2022).
• In its 2023 report, the U.S. International Trade Commission calculated that the tariffs caused a) a decline in downstream production of $3.5 billion, and b) that steel and aluminum prices increased an additional 2.4 and 1.6 percent, respectively. 
• The Center for Automotive Research found that his tariffs created a deadweight loss of $4.3 billion, and that the few jobs that the tariffs managed to save cost a whopping $635,000 per annum (Schultz et al., 2019).

Trump does not seem to understand the ripple effect this will have in the U.S. economy. As the Council on Foreign Relations (CFR) shows, there are way many more construction workers that use steel, as well as transportation and packing jobs that use aluminum, than the jobs protected by the tariffs. Reason Magazine reminds us that for every job in aluminum manufacturing, there are 177 jobs in downstream aluminum-consuming industries. 

Reason Magazine also brings up the point that this will harm the energy sector because nuclear power plants are built with steel, carbon steel forges and aluminum tubular products are commonly used to extract oil and gas, steel makes up 69 percent of a wind turbine's mass, and aluminum accounts for 85 percent of solar power components. You want to know what that will mean? Energy prices are going to increase because of these tariffs. 

Right now, Standard and Poor's and the Tax Foundation preliminarily believe that the effects on GDP will be less than 0.1 percent. That might sound like giving Trump a reason to celebrate, but I am not holding my breath. Aside from the lousy history of steel tariffs in this country, there is still concern about how this will affect downstream industries. Standard and Poor's also surmises that the effects will be larger if these tariffs end up triggering trade retaliation, which is certainly plausible given how Canada and Mexico were ready to retaliate with Trump's other tariffs this presidential term. 

There are two reasons to believe the effects of the tariffs will be worse this time around. One, the aluminum tariffs were only 10 percent the first time around. Now, it will be 25 percent. The second one is that the administration has made clear that in contrast to the first term, there will be no exemptions this time around. To emphasize this point, these steel and aluminum tariffs from Trump's first term did not help with national security nor did they boost the economy. How many tariffs will it take for the Tariff Man to finally get the hint that tariffs harm American consumers and businesses?

Why the Government Should Shut Down USAID Permanently

Trump is shaking up the world of international development. On Trump's first day in office, he used an executive order to pause all foreign development for the next 90 days pending review. On February 1, the U.S. Agency for International Development (USAID) website was down. Last week, Trump announced that he is going to fire 95 percent of USAID staff, although it looks like a federal judge has at least been able to pause the order for the time being. All of this made me wonder about whether USAID should be shut down. I will start with some example of USAID mismanaging money to get the conversation going:

• Starting in 2015, USAID spent $280 million on a program intended to empower 75,000 Afghani women and help them find jobs in the Afghani workforce. How many women did USAID end up helping? According to a report from the Special Inspector General for Afghan Reconstruction (SIGAR), anywhere between 0 and about 60 women. 
• According to a SIGAR report, part of $1.46 billion in USAID funds that was meant to divert from opium production "inadvertently" funded poppy production. This on top of the $335 million in USAID for a power plant that was almost never used, $175 million spent on roads that were washed away within a month by a flood, and $7.7 million on an industrial park that had no power (SIGAR).
• As Bloomberg reported last year, USAID gave $29 million to an orphanage for Kenyan children. While it sounds noble to help orphans affected by AIDS, it also turned out that the orphanage who received this money embroiled in a major sex abuse scandal. 
• Then there is the matter of USAID funding the terrorist organization Hamas. The Middle East Forum identified $164 million in grants that went to radical organizations. The problem is bad enough where the USAID's Inspector General has expressed concern that there are lax vetting mechanisms with the oversight of aid going to Gaza. 
• USAID's Global Health Supply Chain program was a $9.5 billion program created to improve a country's ability to obtain medical supplies. It was supposed to be so effective that there would never need to be such foreign aid intervention again. What happened? Most shipments were not completed on time in the initial stages. Even when they got better with shipping items, there were still considerable delays. As this report from the Bureau of Investigative Journalism details, the program was riddled with fraud, undelivered supplies, and certainly did not help countries manage their own medical supplies and equipment supply chains.

Perhaps this list is damning enough. Perhaps we have to look at both the good and bad that USAID has done before making a determination. I am sure that proponents can highlight such program as its work in preventing and treating HIV/AIDS in multiple developing countries, the President's Malaria Initiative, or fighting tuberculosis. There is also USAID's Feed the Future program, which according to its own outcome monitoring, decreased extreme poverty from 7 to 36 percent. 

One could argue that USAID should still exist but still go under considerable reform, as the list of debacles above shows. However, I have a meta-argument about why we should not have an entire government agency devoted to foreign aid. When making this argument, I make the distinction between foreign aid and humanitarian assistance, the latter of which is a targeted, short-term form of aid (e.g., food, water, medical care, protection, shelter), typically in response to natural disasters or man-made disasters in war zones. 

As I detailed in 2016, trade liberalization does a lot better of a job of helping out those suffering in developing countries than foreign aid does. Furthermore, foreign aid has a negative impact on political institutions and democratization, as a World Bank study concluded (Djankov et al., 2007). As I have argued before, corruption erodes economic development. By using foreign aid to perpetuate weak political institutions, USAID undermines its long-term goals of bringing prosperity. 

As Cato Institute scholar Ian Vázquez points out, economic development is not a top-down process, as is implied by USAID's wealth transfers to poorer countries. The Cato Institute points out in its Handbook for Policymakers that foreign aid does not address the byzantine regulations and red tape, the trade protectionism, price controls, nationalization of industries, restrictions on investment, or inflationary monetary policy. As such, foreign aid keeps developing countries in a state of misery by continuing with poor policies, greater corruption and debt, and the inability to tackle the given country's problems head-on, particularly those problems that USAID proponents believe justify USAID's continued existence. 

It does not matter that the USAID budget is less than one percent of the $6.75 trillion U.S. federal budget. Since foreign aid is not accomplishing its goals, the agency should be nixed, shut down, cease to operate. Humanitarian assistance should be provided by the State Department. As for trying to use foreign aid to promote democracy or try to improve economic development, that is the sort of work that should not be part of U.S. foreign policy because it is a waste of taxpayer dollars.

Why I Have Mixed Feelings About Trump's Plan to Annex Gaza

Trump has been in office for less than a month and he is already shaking things up. In the cases of immigration and international trade policy, it has not been for the better. Those topics notwithstanding, how he is approaching foreign policy is noteworthy. As the American Enterprise Institute brought up, Trump is not contending with a single school of thought when it comes to foreign policy, but five. He has floated acquiring a number of pieces of land, including purchasing Greenland. 

Last week, Israeli Prime Minister Binyamin Netanyahu met with President Donald Trump for a press conference. You would think that Trump would want to discuss the ceasefire or U.S. policy with Iran. Instead, Trump decided to throw in a curveball: the possible U.S. annexation of Gaza. His thought is that by taking over the Gaza Strip, the U.S. can dismantle the bombs, missiles, and network of tunnels; rebuild Gaza; and create economic development that will convert Gaza into the "Riviera of the Middle East." 

From someone who really likes Israel, I like the prospect of removing a legitimate threat to Israel and turning Gaza into a developed and peaceful part of the world. It has some parallels to how the United States dealt with Nazi Germany post-World War II by re-educating the citizenry while implementing the Marshall Plan. Instead of starting World War III, Germany ended up being a democratic nation-state with a growing economy. I have documented how anti-Semitism is a prominent feature of Palestinian society and not simply a bug or an abnormality (see here and here). Another Palestinian survey finding to throw into the mix is that in response to the October 7 attacks, 98 percent of Palestinians were more proud to be Palestinian (Arab World for Research and Development). 

Quite frankly, I am sick of seeing these wars in the Middle East. It is exhausting to see the numerous times that Palestine (and in pre-1967 terms, other Arab polities) have refused to accept a peace deal with Israel because they don't want a two-state solution, but all the land....from the river to the sea. Back in 2012, I brought up that unless the Palestinians want peace with its Israeli neighbors, there will be a perpetual stalemate. Not only does war come with death tolls, it is a subpar usage of one's resources. Getting along and working together is a much better use of time, resources, and effort than warfare. Trump realizes that the situation in Gaza is untenable and that something needs to change. As out-of-the-box as this idea is, this shift in paradigm and actual foreign policy might work for the Middle East in the long-run. That being said, I have to wonder if this is a good idea. 

Back in 2022, I made an argument that the United States should not militarily intervene in Ukraine. I am taking a similar approach to Gaza. Yes, Israel has been an essential part of the United States' Middle East policy since Israel became a nation-state in 1948. In 2013, then-Vice-President Joe Biden argued that support of Israel was both a moral and strategic commitment. 

Where I hesitate in part is based on how the surrounding Arab nations will react. Will they be supportive of Trump's plan? Will a U.S. military presence in Gaza escalate the situation into a regional war or undermine the Abraham Accords that were a success from Trump's first term? It is a gamble because a U.S. military presence can either stabilize the region or it can make matters worse. The military interventions in Iraq and Afghanistan are good examples of the doubt I am expressing. 

Then there is the price tag to consider. Both a senior economist at the think-tank RAND Corporation and a program chief at the United Nations Development Program (UNDP) estimate that rebuilding Gaza will cost $80 billion. This would be a low-bound cost estimate of Trump's plan because that is the cost for merely rebuilding Gaza. This does not include the cost of military intervention. As I have brought up on this blog numerous times, the United States is dealing with trillions in debt, a debt that is only projected to climb. Does the United States really need to get involved in geopolitics on the other side of the globe when it cannot manage its own finances? Conversely, the cost paid for this plan now could be a lot smaller than future costs if conflict continues or escalates in that region. Also, if this plan could result in actual peace in the region, the peace, stability, and increased economic transactions could offset the plan's costs in the long-run. 

Regardless, I do not only refer to that cost in terms of dollars and cents. If the U.S. military enters Gaza, do you think Hamas is simply going to lay down its arms and surrender? The Palestinian cause is about wiping out Israel to create a unified Palestinian state. Hamas spent so much on a military infrastructure and building tunnels instead of economic development and peaceful trade with its Israeli neighbors. Since the Arab world is an honor-based society (شرف), Gazans are going to be even more reluctant to lose face when they have spent so much time and resources trying to wipe out Israel. More blood will be spilt if Trump goes ahead with this plan, whether that is that of Israelis, Gazans, or American soldiers. Will Trump be able to maintain the political support for annexing Gaza as U.S. soldiers are dying, especially since he promised no new wars during his second term? A poll from YouGov conducted last week shows that 22 percent of Americans support the plan, if that gives you a sense of political feasibility. 

There is also the matter of where two million Gazans would relocate. Arab nations already expressed their opposition to this plan because they do not intend on absorbing Palestinian refugees. As the Brookings Institution mentions, that opposition makes sense since a) they do not want to have to pay to support more refugees, and b) the Palestinian national cause has been a central cause of Arab polities for decades, "often to the cynical benefit of their rulers." Jordan is especially going to be opposed because it could open up a Pandora's box for letting Palestinians in and threaten regime stability. 

On the other hand, nations were able to absorb refugees from the Syrian Civil War, including Turkey, Egypt, and Jordan. Unless there is some other underlying reason, there should be no reason why Arab nations cannot help out their Arab brothers and sisters in a time of need. On the third hand, this has the potential to undo Israel's peace treaties with Egypt and Jordan if there is pressure from Trump to relocate the refugees to either Egypt or Jordan.

I do not have a crystal ball, so I do not know the answers for some of the questions I am asking because I do not have clairvoyance and foresight can only get you so far. The wars that have been fought simply because Muslim Arab neighbors have had difficulty handling the reality that there is a Jewish state in their midst is unfathomable. Something drastic needs to be done to end the cycle of violence in that region of the world to usher in an era of peace. At the same time, I am not 100 percent convinced that turning Gaza into another of Trump's real estate projects is the way to handle to the Middle East conflict. It will be interesting to see how this proposal develops in the upcoming weeks. 

Trump Revives His Trade War, This Time Under the Guise of Fighting the War on Drugs

The Tariff Man is at it again. Last Saturday, Trump imposed 25 percent tariffs on Canada and Mexico, as well as an additional 10 percent tariff on Chinese imports. The justification Trump used was to address the threat posed by fentanyl, and to use the Emergency Economic Powers Act to do it. So why China, Mexico, and Canada? Because according to Trump, the fentanyl comes from China and passes through Canada and Mexico before it comes to the United States. Granted, he was able to delay the tariffs on Mexico and Canada for a month because he received some concessions about border security as it pertains to fentanyl. Whether they resume in a month remains to be seen. At the same time, here are some reasons why this latest round of tariffs is ridiculous:

• China, Mexico, and Canada will not be paying these taxes. It is not the foreign countries that bear the majority of the tax burden for tariffs, but it will be the American consumers and American businesses. There were a dozen studies showing that tariffs during the first Trump term were almost entirely paid by U.S. consumers and businesses. The fact that U.S. citizens and enterprises will get hit much harder than China, Mexico, or Canada ever will undermines the argument. 
• Trump is undermining his trade agreement from his first term. Trump touted the United States-Canada-Mexico Agreement (USMCA) as the fairest and most balanced trade agreement the United States ever signed into law. This bout of tariffs violate his promise with USMCA, which can make him less trustworthy in future engagements with other countries. 
• This trade war will increase further trade retaliation. Other countries can and do retaliate in response to tariffs. The Federal Reserve concluded that retaliation helps offset what little benefit that tariffs develop. The Peterson Institute for International Economics found that the GDP of all countries involved will lower as a result of the tariffs and subsequent retaliation. 

• Previous tariffs hurt the American people. When Trump implemented the tariffs in his first term, what happened? Trump's tariffs cost the country $51 billion in economic output, a reduction of wages by 0.14 percent, and employment decreased by 166,000 jobs. Bush Jr.'s tariffs cost 200,000 jobs and $4 billion in lost wages. What about the tariffs of Trump's tariff mentor, William McKinley? They resulted in lower productivity and higher consumer prices.
• Trump's tariffs are likely to hurt the American people again. Last week, Trump justified the tariffs by saying that they will make America rich and very strong. Too bad he is wrong on that front. Not only did tariffs not work in the past. The Tax Foundation estimated that these tariffs would shrink economic output by 0.4 percent over the next decade while amounting to a tax of $800 on the average household. The Peterson Institute for International Economics calculated that it will reduce the average household's purchasing power by $1,200 per year. Trump still has not learned that you cannot tax your way to prosperity. 

• Trump's argument about tariffs and economic prosperity does not hold. If tariffs are so great, why does Trump simply implement them no matter other nations decide to do? Why did he take them off the table instead of go ahead with the tariffs if they are so great? If tariffs are simply tools to threaten other nations with and then Trump removes them upon compliance, then tariffs were never about economic prosperity. 
• Nor does his argument about stopping border crossings. Trump also said that he wanted to implement these tariffs because he wants to "stop the flood of illegal aliens." This is humorous because a tariff is a subpar way of going about it. Why? As the American Enterprise Institute (AEI) brings up, tariffs appreciate the value of the dollar. A dollar with a higher value makes working in the United States more attractive to immigrants, thereby increasing border crossings. 
• And fentanyl will get cheaper. More immigration will not be the only result of the appreciated dollar as a result of the dollar. To quote AEI again, the exchange rate appreciation would lower the dollar price of fentanyl because the fentanyl would not be subject to tariffs. Cheaper fentanyl would mean greater consumption, more substance abuse, and more overdoses, which is exactly what Trump purports to be preventing. 

Conclusion. These tariffs are not about generating prosperity for all, but about inducing fear and compelling behavior. Not only do tariffs harm the economy, but these particular tariffs will undermine Trump's goals of stopping fentanyl consumption and border crossings. Furthermore, Trump's actions effectively gives him the ability to start economic war without notice or oversight. To quote Charles Cooke from National Review, "They [the tariffs] are constitutionally suspect, statutorily usurpative, diplomatically toxic, and culturally chaotic." Instead of making America great again, Trump's tariffs will make all countries involved worse off.

Trump Is On to Something With Wanting to Eliminate FEMA (Or At Least Greatly Reducing Its Size)

In the first week of his second term, President Donald Trump visited North Carolina to see the western part of the state that was affected by Hurricane Helene, and also visited Los Angeles to assess the damage by the wildfires. His takeaway from the visit? That the Federal Emergency Management Agency (FEMA) should be reformed or eliminated. He even signed an executive order to commission a comprehensive review of FEMA. My reaction? I think he is on to something. 

The federal government is not the best to handle disaster management. As the Congressional Research Service accurately points out, "The responsibility for responding to disasters begins at the local level with survivors, elected officials, and emergency service personnel. If local government resources are overwhelmed, nongovernmental voluntary organizations in the community and governments in neighboring jurisdictions may be called upon to provide assistance." State and local governments are closer to the action, and thus able to respond more quickly, than the federal government. Plus, FEMA is not a first responder agency; their primary function is to provide disaster aid. 

Nonprofits and private-sector entities are more responsive and agile than FEMA. Given the lengthy government hiring process, FEMA cannot quickly expand hiring when disaster strikes. Private disaster management companies, such as Civix, AAECom, and Deloitte, can move much more quickly. Nor does government contracting permit laying off workers during a slow disaster season, thereby creating greater inefficiency from FEMA. 

FEMA does not have a good track record. The Government Accountability Office (GAO) detailed in a 2019 report how the federal government has challenges in helping communities recover from disasters, particularly when it comes to disaster resilience and long-term recovery. Another issue with FEMA, according to GAO, is poor advanced planning. 

This GAO report points out a greater trend with FEMA intransigence. After Hurricane Sandy in 2012, DHS' After-Action Report illustrated how FEMA had challenges with coordinating with various partners and meeting survivor needs. FEMA seems to at least have done a better job with Hurricane Sandy than it did with Hurricane Katrina. A bipartisan committee report concluded that FEMA's response to Hurricane Katrina in 2005 was riddled with unpreparedness, slow response time, miscommunication, and mismanagement of resources. Time will tell with how FEMA's performance with Hurricane Helene will fare in the eyes of evaluators.

Then there is the spending aspect. In its 2024 budget, FEMA was allocated $30 billion dollars. $20 billion of that $30 billion was spent on direct disaster relief. The remaining third was spent on bureaucracy, insurance, and grants. I could not imagine a private-sector firm or nonprofit spend with such profligacy and stay in business.

Another aspect I found of interest is that FEMA paid $7.4 billion to individuals for home repair assistance through the Individuals and Households Programs (IHP) from 2003 to 2018. The DHS Office of Inspector General found that $3 billion of that $7.4 billion, or over 40 percent, was either improper payments or fraud. 

2-6-2025 Addendum: This lovely report from the Office of Inspector General (OIG) was released on January 30, 2025. In it, the OIG details how FEMA partook in $9.6 billion in wasteful spending during the COVID pandemic. $8.5 billion of that was questionable spending and the other $1.5 billion was over-obligated spending. Way to go, FEMA!

FEMA creates perverse incentives for states being prepared for disasters. The Stafford Act, which is the Act determining the laws behind disaster aid, covers 75 percent of disaster costs when the U.S. President declares an emergency. As the Heritage Foundation points out, the Stafford Act words what constitutes an emergency is that it is "beyond the capabilities of the State and affected local governments and that Federal assistance is necessary." That vague standard creates a disincentive for states to be underprepared, thereby setting a lower threshold for what constitutes as an emergency. It would explain why the Congressional Research Service found an increase in disaster declarations since FEMA first started in 1979 (see below). 

In economic terms, the phenomenon of removing the incentive to guard against risk is moral hazard. I have illustrated how moral hazard has been a problem with student loan forgiveness, unemployment benefits, COVID-era bailouts of state governments, the federal government paying for flood insurance, and moral hazard in the banking industry. Aside from incentivizing states to be underprepared, this increase in declarations spreads FEMA funds thin and strains its resources, thereby reducing its efficacy. 

Flood Insurance and Moral Hazard. FEMA does not only create moral hazard through the Stafford Act, but also through its flood insurance program: the National Flood Insurance Program (NFIP). You can read my 2017 analysis on the NFIP and why we should privatize flood insurance. Essentially, the federal government promising to cover costs in the event of flood incentivizes people to move to hurricane-prone areas, which further increases the costs both in the market and to the government. The flood insurance program is so problematic that the Left-leaning Washington Post scrutinized it last October after Hurricane Helene struck. 

Postscript. FEMA programs have created moral hazard while being inefficient with taxpayer dollars. At a minimum, I would implement considerable reforms, such as increasing the threshold to which states are eligible for FEMA funds so that FEMA could focus on the most intense and destructive disasters. At the same time, I can see an argument for abolishing FEMA while allowing for its unique functions, e.g., flood mapping, to be covered under other federal agencies. Bringing disaster management back to the states could help make states more prepared and responsive to natural disasters instead of expecting the federal government to swoop in and take its sweet time to assist state and local governments.