Category Archives: Economics

Minimum Wage Proposal Divides D.C. Workers, Voters

Washington, D.C. has a $12.50 per hour minimum wage, increasing to $13.25 on July 1. But for tip-earning workers, such as servers and bartenders, the minimum is $3.33 per hour ($3.89 as of July 1)—tips are supposed to make up the difference. And if they don’t, then employers make up the shortfall. Ballot initiative 77, due for a vote on Tuesday, would raise tipped workers’ minimum wage to match non-tipped workers’ minimum wage in steps through 2026. It would also index D.C.’s minimum wage to the Consumer Price Index so it would automatically annually increase after it reaches $15.00 in 2020. The proposal has divided the restaurant community.

Both sides have good points. Some restaurant owners favor a set wage because it gives them more stability in planning their costs. Some workers prefer that arrangement, too. They know, coming into work, roughly how much they’ll make on a given shift.

But some restaurant owners would rather pay the low wage, even if they sometimes have to randomly supplement it if business is slow or customers are stingy tippers. It lets them print lower prices on their menus, and there can be tax advantages in reporting lower wages. And some servers also prefer lower wages with higher tips because they walk out of work every night with cash in their pocket. They don’t have to wait two weeks for a paycheck. And if they go the extra mile for a good customer, tips can be very lucrative.

So who’s right? They all are. And that’s why ballot initiative 77 is a bad idea. It’s anti-choice.

Restaurateurs and their employees should be allowed to agree on any working arrangement they both see fit. Nothing is stopping restaurants from having a policy of paying its servers a higher wage and discouraging tipping. If that’s what some people prefer, they should be free to choose it, and are. And if some restaurants and workers prefer the low wage/high tip model, they should be free to pursue that, too. The choice should be made by people, not by legislation.

Customers are just as divided. Some prefer walking into a restaurant knowing that what’s printed on the menu is what they’ll pay. Others prefer being able to reward good service with a high tip, or repay bad service with a small tip. Everyone’s different. And they shouldn’t all be shoehorned into one model.

As for the other part of ballot initiative 77, indexing the minimum wage to inflation so it automatically goes up every year—voters should tread carefully. Some workers will benefit, but at a cost to others. Hour cuts, firings, workers never hired at all, non-wage benefit cuts, cuts to on-the-job perks like free parking and meals, and more are all unintended consequences that follow minimum wage hikes. Iain Murray and I have written about those tradeoffs here and here.

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An Honest Politician

From page 427 of Douglas Irwin’s Clashing Over Commerce: A History of U.S. Trade Policy:

When asked why he had supported President Hoover’s bid for a flexible tariff provision but now opposed Roosevelt’s similar request, Harold Knutson (R-MN) replied: “Frankly, I know the purpose of this legislation is to lower rates. If I thought for a minute that it was proposed to raise rates to meet the present conditions, I would vote for this legislation and be glad of the opportunity to do so.”

Both sides have good points in the strategic debate over achieving short-term results vs. the long-term sanctity of process and procedure. I personally lean towards preserving process, even when it leads to defeats on policy issues. Never give yourself powers you wouldn’t want the other side to have, and all that. Kudos to Knutson for being the rare man in Washington who made plain where he stood, even if it’s opposite me.

On the Radio

On Monday, June 11, I was on Paul Molloy’s Freedom Works show to discuss tariffs.

I was also on the Alan Nathan Show to discuss tariffs. My segment starts at about three minutes in.

On Tuesday, June 12, I was on the David Webb show on Sirius/XM, with Kerry Picket guest-hosting. I couldn’t find audio, but maybe they’ll put it up here.

Will Trump’s Tariffs Spell the End of Free Markets?

The short answer: no. But the new and upcoming tariffs certainly don’t help matters, here or abroad. I tackle that question in a piece for Inside Sources:

The president’s threats must be fought, but the good news is America’s fundamental institutions will withstand Trumpian bluster. For one thing, our economy remains a powerhouse. America’s $19 trillion economy already withstands an annual $1.9 trillion in annual regulatory costs from Washington. On top of that, Trump’s tariffs will cost “only” a few billion dollars. In short, the economy is dragging along a big, deadweight burden, but it can still get the job done…

Even in trade, where the Trump administration poses the greatest threat to free enterprise, America has been liberalizing for more than 75 years. The Smoot-Hawley tariff bill of 1930 raised America’s average tariff to more than 60 percent and worsened the Great Depression. But today tariffs are closer to 5 percent (source: Douglas Irwin, “Clashing Over Commerce: A History of U.S. Trade Policy,” p. 8), and Trump’s targeted tariffs likely won’t raise that figure more than a decimal point. Trump is reversing a long history of openness, but so far it’s small potatoes. If economists, Congress, and the World Trade Organization all do their jobs, it will stay that way.

In the meantime, defenders of the classical liberal enlightenment traditions of international openness and free trade will be very busy standing up to the administration’s latest populist outburst. Read the whole thing here.

For more CEI tariff coverage, see here by Iain Murray and here by me. For more on Trump’s threat to the values that made America great, see Steven Pinker’s book “Enlightenment Now: The Case for Reason, Science, Humanism, and Progress.”

Media Appearances

Trade and regulation have both been hot issues lately. Since those are two of the main issues on my beat, I’ve been pretty busy lately:

  • Inside Sources is syndicating an op-ed arguing that America’s classical liberal institutions are stronger than Trump’s passing populist fancy.
  • CEI press release on President Trump’s steel and aluminum tariffs.
  • Which was quoted in an Investor’s Business Daily editorial.
  • And in City AM, a daily newspaper in London (see p. 3, cont’d from a story on p. 1).My recent post about Trump economic adviser Peter Navarro was quoted on CNN. Don’t know what day or which program, but one of my colleagues sent along the following transcript:

[00:25:07] To put it another way, it cost about $400,000 per job saved in the steel industry. OK, and the outcome this time doesn’t look much better. According to the Competitive Enterprise Institute, the levies could save as many as 33,000 jobs in the steel and aluminum industries, this comes at a great cost. Downstream industries that use steel and aluminum such as automobiles, construction (inaudible) will face higher costs, passed on to consumers with higher prices, could cost those other industries 179,000 jobs.

I’ll post more as they come.

Here We Go Again: Steel and Aluminum Tariffs and Peter Navarro

A new 25 percent steel tariff and a 10 percent aluminum tariff have come into effect. The levies are aimed at our allies, such as Canada, Mexico, and the European Union. They are a bad idea for three reasons:

Tariffs hurt more than they help. While the levies could save as many as 33,000 jobs in the steel and aluminum industries, this comes at a great cost. Downstream industries that use steel and aluminum, such as automobiles, construction, and food and beverage production, will face higher costs. These will be passed on to consumers with higher prices, and could cost those other industries an estimated 179,000 jobs. In other words, the Trump administration is willing to shed five jobs to save one job.

Tariffs invite retaliation. Mexico has already announced it will introduce retaliatory tariffs. Affected goods range from pork bellies to cheese and steel. Europe is placing levies on iconic products such as Kentucky bourbon (Senate Majority Leader Mitch McConnell’s home state), blue jeans (Levi’s is from San Francisco, House Minority Leader Nancy Pelosi’s hometown), and motorcycles (Harley-Davidson is from Wisconsin, Speaker Paul Ryan’s home state). Canada announced intentions to impose $12.8 billion in retaliatory tariffs against U.S. goods.

The Trump administration’s unpredictability is creating economic uncertainty. And uncertainty has a chilling effect on investment. While the economy is doing well right now, this uncertainty could hurt down the road. After all, there’s no sense making a long-term investment if there is a very real possibility the administration might pass some policy out of the blue that kills your market. It is hardly surprising that the Dow Jones Industrial Average fell 200 points when the new tariffs were announced, despite steel stocks going up.

Economists are virtually united as a profession against the new tariffs. A March 2018 University of Chicago Booth School survey of professional economists found not a single respondent agreeing with the statement “Imposing new US tariffs on steel and aluminum will improve Americans’ welfare.” When the National Taxpayers Union circulated a letter opposing the Trump administration’s protectionist turn, more than 1,100 economists signed on (I am one of them).

One of the Trump tariffs’ few defenders is Peter Navarro, one of the president’s economic advisers. Even in the White House, Navarro cuts a lonely figure, with other presidential advisors such as Larry Kudlow openly preferring more open trade policies. Still, if Navarro has only one ally, he has the one who counts: President Trump.

Navarro defended the new steel and aluminum tariffs in a May 31 USA Today piece. Both what he said and what he didn’t say are revealing.

By way of background, Henry Hazlitt’s famous Economics in One Lesson is a simple one, and very relevant to this discussion: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” (p. 17)

If you want the even shorter version: look at how a policy affects all people, not just some; and look at both short-term and long-term effects. Not one or the other; both. Hazlitt’s Lesson is a must-read for any aspiring economist. It is regularly assigned in college courses, and has remained continuously in print since 1946. The paperback edition published in 1988 boasts of having sold a million copies—and that was thirty years ago. Despite Hazlitt’s ubiquity, Navarro, who was a college economics professor before taking his current job, makes it clear he has either never read, or never understood Hazlitt’s basic lesson.

Navarro opens by praising his boss, then segues to a story about a new aluminum mill opening up in Ashland, Kentucky. He also gives examples of several other plants that will be opening in the near future.

In fact, the groundbreaking ceremony at the Ashland mill will be held today. While this is great timing for an op-ed newshook or a press conference, if the groundbreaking is only happening now, that means that the planning process for opening this mill began long before the new aluminum tariff was proposed, and likely before the Trump administration itself. Infrastructure and environmental impact reviews, among other regulatory hurdles, often take years to complete. So Navarro’s lead anecdote does not actually help his case.

The larger problem is that this anecdote and the others Navarro shares look only at how the tariffs affect some people, and not all people; he forgets his Hazlitt. There is a reason Navarro argues by anecdote, and not with data: the data say that tariffs are bad policy. This particular round of tariffs will cost roughly five jobs for each one saved or created. To benefit 33,000 steel and aluminum jobs, Navarro must be willing to destroy 179,000 jobs elsewhere in the economy, and charge higher prices to more than 300 million consumers, and reduce by billions of dollars the amount of capital available to other economic sectors. This is all because he forgets to look beyond those immediate short-run benefits to a favored few. The wider costs to the rest of the economy in the long run are less visible than the freshly cut ribbon in Ashland, Kentucky, but they are no less real.

Navarro also ignores consumers. And remember, the whole point of economic production is to create things consumers want. Producers exist for consumers’ sake, not vice versa. He does mention consumers once in his piece: “Critics at the time warned the move would hurt consumers, but the tariffs have been a boon to the U.S. worker.” By the time Navarro is done with the economy, it may well have just one worker left with a job, who then literally would be “the U.S. worker.”

Grammatical gripes aside, notice that Navarro deliberately chooses the word “worker” and not “consumer” when he says who gets the boon. He then goes on to not describe how tariffs help consumers. He can’t, because they don’t. So he changes the subject. But Navarro’s elision doesn’t change the fact that higher steel prices mean cars will be more expensive, construction costs will be higher, and so will rents for stores and apartments.

Higher aluminum prices will likely add about a penny to the cost of a twelve-ounce aluminum can. Paying an extra quarter or so for a 24-pack of Diet Coke doesn’t sound like a lot, but it adds up on a family’s grocery bill, especially in the long run that Navarro ignores.

The craft beer industry is scared that its comparatively expensive products will become still more expensive compared to its larger competitors, costing the industry jobs, and depriving consumers of choices they might otherwise enjoy. For smaller producers who operate on thin margins, Trump’s tariffs are an existential threat. Producers are already looking at alternative packaging materials such as plastic and glass bottles, which would hurt the very aluminum industry the administration intends to help. Navarro does not mention these downstream industries harmed by the tariffs.

One of the strongest arguments at Navarro’s disposal is the national security argument. For example, the Defense Department requires an enormous amount of steel for its aircraft carriers, fighter jets, military bases, and more. That’s why the U.S. steel industry needs to be healthy and vibrant—if, during a war, steel imports get cut off, domestic production could mean the difference between victory and defeat. Fortunately, some simple math defuses this bomb, assuming it wasn’t a dud in the first place.

Imports currently account for roughly 30 percent of steel used in the United States. That means domestic production is roughly 70 percent. The military needs roughly 3 percent, or less than a twentieth of domestic production alone. In fact, without the new tariffs, domestic steel production is already above its 40-year average, and U.S. manufacturing output as a whole is near a record high. So the national security implications of the new tariffs are approximately zero. They can safely be called security-unrelated tariffs.

It is possible that Navarro knows better. In a May 31 conference call about the decision to enact the tariffs, one caller asked Navarro if he was open to retrospective review of the tariffs. In other words, once the tariff has been in place for a few years and there is real-world data on how it is working, would Navarro be open to analyzing what the effects have been, and whether they were good or bad on net? He refused to answer.

If Navarro was truly confident that steel and aluminum tariffs would benefit the economy, he’d be eager to put them to the test. Since his own profession is almost unanimously against him, surely he would welcome the chance to rub it in his opponents’ faces. But he isn’t, and that says a lot.

I’m not sure which possibility says worse of Navarro: if he genuinely believes what he says, or if he doesn’t. Either way, while a small constituency will benefit in the short term from the new tariffs, the larger American economy will suffer, as will our allies. And as Hazlitt reminds us, this will be true in both the short run and the long run. Someone really should send Navarro a copy of Hazlitt. The White House’s address is 1600 Pennsylvania Avenue NW, Washington, DC, 20500, c/o Peter Navarro.

For more in-depth looks into Navarro’s mistaken trade ideology, see here by me and here by Adam Smith. An Investor’s Business Daily editorial quotes me on the new tariffs here. And CEI’s press release on the new tariffs is here.

Dad Jokes in Economics

Even trade economists are not immune to making the occasional awful pun.

“Poland’s exports of golf carts to the United States were challenged on anti-dumping grounds… the Poles did not even play golf, so there were no domestic prices to work with: the Poles had put the cart before the course.”

-Jagdish Bhagwati, Protectionism (1988), p.51.