Category Archives: Economics

A Better Approach to Tariff Diplomacy

In diplomacy, carrots tend to be more effective than sticks. Yet, two consecutive administrations have used tariff threats to try to achieve their objectives. Former President Trump did four rounds of back-and-forth tariffs against China, and President Biden is trying it now to counter proposed digital taxes from six mostly European countries. The strategy has yet to work. Over at National Review, I take a look at a better way: Rather than threaten new tariffs, promise to remove old ones as a sweetener.

Why not scrap Trump’s steel and aluminum tariffs in exchange for scrapping proposed digital taxes? Carrots are often more effective than sticks.

The metal tariffs will also likely be an issue at this week’s United States–European Union summit. European leaders want a December 1 deadline for ending them. In return, they would end the retaliatory tariffs they immposed in response. A digital tax moratorium should also be part of the deal.

Here at home, the metal tariffs are slowing the COVID recovery by raising auto and housing prices, which were already at record highs. They are also causing needless diplomatic frictions with allies. Removing them is a win-win.

Even if the diplomatic goal fails—there are no guarantees in foreign policy—the lower tariff would still help the U.S. economy. Read the whole thing here.

Boeing-Airbus Dispute Remains Unsolved: Tariffs Gone, Subsidies Stay

The European Union and the United States eagerly announced today that they had resolved their 17-year dispute over aerospace subsidies. They exaggerate their claims. It is good news that both sides are standing down on tariffs for at least five years. But the reason for the dispute in the first place was over subsidies to Boeing and Airbus. Those will remain in place.

The tariffs that each side levied on the other had the explicit goal of stopping the subsidies. The World Trade Organization even allowed tariffs on each side to go through, on the theory that these wrongs were intended to make a right. But as usually happens with tariff-based diplomacy, it didn’t work. As a result, industries from cheese and wine to motorcycles had to deal with tariffs for years over a dispute they had nothing to do with. And now that the tariffs are going away, they didn’t accomplish their actual goal.

Why are the U.S. and EU suddenly OK with each other’s aerospace subsidies? China. China’s aerospace sector is heavily subsidized. Both Europe and the U.S. feel it is better to work together to counter China than to squabble with each other.

Their fears may be exaggerated, though. Industries that rely on subsidies and are essentially government enterprises tend not to be very competitive in the long run. Yes, China’s aerospace market share is increasing, but subsidized and protected industries grow soft. Their corporate cultures are closer to the Post Office than to Silicon Valley startups. So are their rates of innovation.

Still, for the sake of argument, assume that China’s model of government subsidies and control does work in the long run, and Boeing and Airbus become also-rans. Relatively poor Chinese taxpayers would essentially foot the bill for relatively wealthy American and European airlines and travelers. This is income redistribution in reverse. Even this unlikely best-case scenario is unwise policy from China’s perspective.

Most of the 20th century’s economic history showed that state planning doesn’t work. Even if Boeing, Airbus, and their captured politicians think the short term looks scary, there is no reason for this current instance of state capitalism to be any different in the long run.

This week’s decision to remove the Boeing-Airbus dispute tariffs was a wise one. But if the goal is to make the aerospace industry more competitive, President Biden and European leaders did not do that. They need to end subsidies that make companies soft and dependent. The best way to counter China’s state-run enterprises is not with our version of the same thing. It is with actual enterprises.

Some of my earlier commentary on the Boeing-Airbus dispute is here. My papers on the Export-Import Bank, whose billions of dollars in annual assistance to Boeing played a starring role in the dispute, are here and here.

CPI Inflation Indicator Hits 5 Percent: Not Stagflation, But a Useful Warning

The Consumer Price Index (CPI) for May came out this morning. At 5 percent, it was higher than expected. CPI has its flaws as an indicator, but the fact that it is now the highest it has been since the 2008 financial crisis still says something useful. We’re not going back to 1970s stagflation, so nobody needs to freak out, but today’s numbers are a warning. Policy makers should listen.

Trillions of dollars of proposed new deficit spending would further increase inflation, and would mostly stimulate the politically connected. The Federal Reserve should resist political pressure to further flood the money supply in hopes of stimulating a faster COVID recovery.

The timing is also off. Most projects would not kick in until the economy is already mostly recovered anyway. While there is still a way to go, unemployment is already below 6 percent, GDP is working its way back to trend, and the return of in-person schooling this fall will allow more parents to reenter the workforce. Continued progress depends on vaccination rates, not new political projects.

Rather than producing more cash, Congress should enable more production of actual goods and services with a deregulatory stimulus, lowering of trade barriers, and incentives for more vaccinations. Almost a third of occupations now require some sort of license. These keep thousands of would-be small entrepreneurs out of the market, and make it harder for workers to find or change jobs. Financial regulations make it hard for startups and struggling businesses to find capital to grow or stay open—and higher inflation would worsen the problem. Endless permits and years-long environmental reviews are blocking infrastructure projects that could already be underway.

Tariffs left over from the Trump administration, along with new ones the Biden administration is proposing, are making cars and houses more expensive at a lousy time, and could hit billions of dollars of other goods this holiday shopping season.

Vaccination rates are the single most important factor for reopening the economy. People are itching to get back to normal, but first they need to feel safe. Remember, people didn’t wait for governors’ orders to lock down in the first place. Opening back up is also a decision people are making for themselves. Lifting government restrictions might have some impact at the margin. Politicians are not in the driver’s seat here, but there are still things they can do. Some states have tried incentive programs, like lottery drawings and free goods. These are already having a positive impact in communities, saving lives and letting people open back up. More of these would speed the process more than inflation would.

An inflationary boost is tempting for politicians because it is easy. It takes hard work to make substantive reforms to regulation and trade policy and to reach out to vaccine-hesitant people and ask them to do the right thing. But what is worthwhile is rarely easy. While today’s inflation news is not doom-and-gloom, it is cause for concern. We are at an inflection point. Will Congress and President Biden do the right thing?

For more, see my recent explainer on how inflation works, and my recent op-ed on how to stimulate the economy without new spending.

Stimulating the COVID Recovery without Trillions in Spending

Over at Inside Sources, I make the case that deregulation, freer trade, and continued vaccinations will do more to open up the economy than the trillions of dollars of politicized spending Congress is lining up:

Federal, state, and local regulators eased more than 800 regulations last year that were blocking access to telemedicine, medical supplies, and food and grocery deliveries, along with unneeded occupational licenses that were keeping people out of work. We’ve already seen the benefits. Now policymakers need to continue this important work as entrepreneurs look for ways to adapt to the new normal but find themselves blocked because they don’t have the right permit.

Steel and aluminum tariffs left over from the Trump administration are adding hundreds of dollars to car prices and thousands of dollars to construction costs, at a time when housing prices are becoming unaffordable for many buyers. Congress could get rid of them today if it wanted to. Congress should also stop Biden’s proposed doubling of Canadian lumber tariffs, which would further increase housing prices while alienating an ally with whom we just signed the USMCA trade agreement. He has also proposed an additional $2 billion in tariffs against six mostly allied countries with whom we will be negotiating trade agreements in the near future. These would come into effect in the middle of the holiday shopping season.

My colleague Wayne Crews has a good term for this type of proposal: a deregulatory stimulus. Read the whole thing here.

Jobs Numbers Show Rolling Back Covid-19 Restrictions Would Restore Resilience in U.S. Economy

This press statement was originally published on cei.org.

The Biden Administration’s Labor Department reported today that the United States added 559,000 jobs in May and the unemployment rate dropped to 5.8%.

CEI Senior Fellow Sean Higgins said:

“The Labor Department’s report Friday makes clear that rolling back the restrictions imposed by the Covid-19 outbreak remains the surest way to restore resilience in the economy. The nation added 559,000 jobs in May, bringing the unemployment rate to 5.8% with increases in the leisure and hospitality sector (292,000 jobs) and public and private education (141,000) leading the growth thanks to loosened restrictions. The DOL said that 7.9 million people, down from 1.5 million in the previous month, reported that they were unable to work because their employer had closed or lost business due to the pandemic. That shift dwarfs the May’s job gains, suggesting the nation would be in significant trouble if it hadn’t eased the restrictions.”

CEI Senior Fellow Ryan Young said:

“It turns out the key to the COVID economic recovery isn’t stimulus payments. It isn’t a $6 trillion proposed budget, and it isn’t $2 trillion in infrastructure spending. The key to a quick recovery is people getting vaccinated so they can resume normal activities. There is still a ways to go, since 5.8 percent unemployment is still well above pre-COVID levels. But this week’s news that 63 percent of adults are vaccinated in the U.S. is a sign of continuing progress.

“As the economy continues to trend back to normal, there are still things policy makers can do to help. They should get more never-needed regulations off the books, and they should get rid of Trump-era trade barriers that raise consumer prices on everything from cars to housing. Not only would these provide an additional economic boost, they would do it without any new deficit spending.”

In the News: DC’s Amazon Antitrust Case

Canada’s Les Affaires quotes me, in French, on the DC attorney general’s Amazon antitrust case that he filed yesterday Note that I am not sophisticated enough to speak French, and can barely read it well enough to get the gist of it. This is translated from an earlier statement:

Cela nuirait aussi aux PME, qui sont déjà suffisamment en difficulté en ce moment», a abondé Ryan Young, un analyste du centre de réflexion Competitive Enterprise Institute. 

Il estime en outre qu’Amazon fait déjà face à de la compétition de la part de Walmart, qui a sa propre plateforme de e-commerce ouverte aux tiers, ainsi que d’autres sites comme Ebay, Etsy ou Shopify.

In the News: Inflation

About a week ago, I was quoted in another Center Square story on inflation.

Steel Companies Lobby for Steel Tariffs, Biden to Double Lumber Tariffs

One of the first things President Biden should have done upon taking office was to eliminate the Trump tariffs. This would have provided potent economic stimulus without any additional spending. Instead, as my colleague Iain Murray points out, Biden is making the Trump tariffs his own—along with all of the consumer harm, corporate cronyism, slowed recovery, and diplomatic strain that tariffs cause.

It is easy to see why some steel producers are lobbying to keep steel tariffs in place. Steel prices are at record highs, and U.S. steel companies don’t have to worry about customers getting a better deal from someone else. However, steel-using industries, from autos to construction, are paying record-high costs, and passing them on to consumers. Steel’s gain is offset by everyone else’s loss, to the tune of about $900,000 per steel job saved.

Meanwhile, President Biden is proposing to double tariffs on Canadian lumber, at a time when lumber prices are also at record highs. First, this is a dubious foreign policy gesture. Canada is an ally, with whom we just signed the USMCA trade deal. Second, and closer to home, housing prices are increasing rapidly, up and out of reach for many families. The administration has some explaining to do about why it wants to make housing even less affordable when the economy is still in recovery mode.

Congress should not let President Biden copy his predecessor’s mistakes. They should reclaim the tariff-making authority they mistakenly gave away to the president. Congress can do this by repealing Section 232 of the 1962 Trade Expansion Act and Sections 201 and 301 of the 1974 Trade Act. These are what made the Trump-Biden tariffs possible, and apparently it will take Congress to stop them. The time to act is now.

For more on how to improve trade policy, see the trade chapter in CEI’s recently released Agenda for Congress.

Microsoft to Retire Internet Explorer: Lessons for Today’s Antitrust Cases

Microsoft just announced it will retire its Internet Explorer browser next year. This is the same program that was at the heart of an antitrust lawsuit against Microsoft in the late 1990s. There are two lessons here for today’s calls for expanding antitrust enforcement. One is that making something the default option does not guarantee that people will use it. The second is that the difference between a 90 percent market share and a laughing stock can be as small as a few years.

Internet Explorer was bundled into Microsoft’s Windows operating system, and Microsoft would not allow computer manufacturers to unbundle it. It was also set as Windows’ default browser in every new machine. It had a 90 percent market share in 2001, when the case was still active. The antitrust case argued that Microsoft’s inclusion of Internet Explorer with Windows was illegal tying—requiring consumers to buy two products together, even if they only want one of them.

The case more or less ended in a draw. The initial decision to break the company up was overturned on appeal. In the final settlement, Microsoft made some minor concessions to the government and paid about $3 billion to competitors who had sued it in separate private antitrust lawsuits.

Just a few years later, Internet Explorer’s 90 percent market share cratered. It turns out that making something the default option is not enough to make people actually use it. A succession of superior browsers, including Mozilla’s Firefox and Google Chrome, have taken turns as the leading browsers. Chrome is the current market leader with about a 65 percent market share.

As a response to the competition, Microsoft launched Edge, a new browser, and made it the default Windows browser. Its market share is currently about 3 percent. Internet Explorer is around 1 percent.

Microsoft’s real-world experience puts a damper on today’s antitrust claims that Google, Apple, and Amazon giving preferential treatment to their in-house offerings is an effective anti-competitive strategy. This is because of what I call the dozen keystrokes argument—that’s about how difficult it is to download a different browser, type in a different search engine’s URL, join a new social network, or find a different product in a search.

Internet Explorer’s journey to the pasture is not the only news story poking holes in populist antitrust arguments. AT&T is selling its WarnerMedia division for about half of what it paid for it just three years ago. The deal was nearly blocked, with critics arguing that combining network infrastructure and media content in the same company would devastate competition. Now AT&T is refocusing on networks, while WarnerMedia is attempting to compete with a raft of streaming services, many of which did not exist just a few years ago. Antitrust regulators’ cries of foul will never change, but markets always do. Just ask Microsof and AT&T.

What Inflation Is, and What It Isn’t

It looks like we’re in for a bit of inflation. After decades of stable 2 percent inflation, the latest indicators say it’s moving up to about 4 percent. While fears of Carter-era stagflation are overblown, even a modest jump in inflation would be harmful. The warning signs are clear, and policy makers should act to avoid it. They probably won’t. Even so, a lot of people need to chill out on their inflation fearmongering.

We’re not going to become Argentina or Zimbabwe. We’re not even going back to the 1970s, when inflation was in the double digits. Part of the confusion is that many people seem to be confused about what inflation is, and what it isn’t. This post will try to clarify that in plain English.

The late Nobel laureate economist Milton Friedman famously said that “inflation is always and everywhere a monetary phenomenon.” That means inflation has to do with money itself. When the money supply changes, but the amount of actual goods and services doesn’t, the price level changes. This can happen when the government prints more dollars, adjusts interest rates on loans, and engages in heavy deficit spending.

Other types of price changes are not inflation. The recent hike in gas prices following the Colonial Pipeline hack was not inflation. That was supply and demand. The supply of gas was cut off, so its price went up. Since this didn’t involve the supply of money itself, it wasn’t inflation.

Computers are another example of non-inflation price changes. Most people are familiar with Moore’s Law, which states that computing power at a given price doubles every two years or so. On paper, this continual price drop looks like deflation. It is not. The price is going down because of technological improvements. Money supply has nothing to do with it. Again, if a price change isn’t monetary, it isn’t inflation.

Some of this confusion is baked into the indicators we use to measure inflation, such as the Consumer Price Index) and the Personal Consumption Expenditures Price Index. These take a basket of common goods and track their prices over time. While this is good for tracking overall price changes, they can’t precisely suss out how much of those price changes are due to monetary factors like deficit spending or dollar printing, versus how much is caused by non-monetary factors, like broken pipelines or technological progress. These indicators are useful and can give us a general idea of what is happening. But they are not perfect, and most economists believe they overstate inflation.

Many people are worrying about gas price increases as a harbinger of inflation. There is a psychological reason for this—for a lot of people, the oil price shocks of the inflationary 1970s are within living memory. Today’s shocks are bringing back some bad memories, and it is natural to make that association. But if it isn’t monetary, it isn’t inflation. The recent price shock was a supply and demand shock.

The rapid gas price increase also comes after people had gotten used to enjoying a year of low gas prices due to the pandemic. Coming up from a lower baseline makes a sharp increase feel even sharper. But again, this price change wasn’t monetary. People weren’t driving as much during lockdowns, so demand for gas was down. Money supply had nothing to do with it.

People shouldn’t be so jumpy, though it’s understandable that they would be. While 4 percent inflation is not cause for alarm, it will still cause harm. Inflation is a regressive tax that hits everyone, but especially the poor. When your dollars buy less for reasons having nothing to do with supply and demand, that is unfair—especially if you are already having trouble making ends meet.

Inflation also causes long-term harm. Prices are information signals. Even if people had no idea the Colonial Pipeline had been hacked, seeing a $16 per gallon price told them to buy less gas, and save supply for people who really need it. The hoarders the Internet has been making fun of are the exception, not the rule. Some of the images are also fakes.

Inflation messes with those signals. When a fake price signal tells people to buy one good instead of another, businesses will shift resources to meet that fake demand. That leaves everyone worse off—consumers and businesses alike. When people make long-term investment decisions based on faulty signals, the result is malinvestment—and fewer resources available for good investments.

How can policy makers keep inflation in check? One way is to spend less. When government engages in deficit spending, it increases the money supply. Part of the cost of the trillions of dollars of stimulus and infrastructure spending will be extra inflation—not enough to bring back bellbottom jeans, but enough to cause some harm.

Unfortunately, neither party is interested in spending restraint. Fortunately, even a $2 trillion infrastructure bill, if spread out over 10 years, will not have a major inflationary effect on an economy that is expected to produce more than $200 trillion over that time. It might be enough to add 1/10th of a percentage point or two to inflation, depending on how other factors play out. But it is not enough to cripple the price system.

Another way to keep inflation in check is through the Federal Reserve. The best policy for the Fed would be to adopt a strict rule like the Taylor rule or Nominal GDP targeting. These work by giving the Fed set instructions on how to respond to economic conditions. A simplified version of how these rules work is that if the economy grows by a certain amount, the Fed increases money supply by a certain matching amount specified by the rule.

This would accomplish two things. First, it would keep the level of inflation relatively low. All else being equal, a lower inflation rate is better than a higher one.

Second, sticking to a rule would keep inflation predictable. That is more important. If inflation is stable, it can’t do very much harm, even if it is relatively high. People can plan around steady inflation by factoring it into interest rates and cost-of-living pay increases. But if inflation is jumping all over the place, how can a small business taking out a 10-year loan calculate a fair interest rate?

While the Fed is unlikely to adopt a formal rule, it can at least resist political pressure to mess with inflation levels on election-minded politicians’ changing whims.

The recent news about inflation is not good, but it is also not apocalyptic. While inflation and monetary policy are a lot more detailed than described here, even a little bit of knowledge can show that while people should keep an eye on the new inflation, they also do not need to panic.