Tariffs Catch-All

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lawtig02 said:
Bessent knows beyond any shadow of a doubt that tariffs are inflationary. I'll never understand why so many smart people sell their souls to find favor with Trump, but it's endlessly nauseating.
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Not beyond a shadow of a doubt. I had insomnia last night and was specifically thinking about this issue for a while. There is a paper out there by Miran, put out last fall, that argues tariffs aren't inflationary. I don't know what to say about the paper. Miran is, or was, a serious person. And if you don't read the paper too carefully, it could be convincing.

But I dug into it and there's a fundamental contradiction: it relies on US dollar being both stronger and weaker. That is, it posits an increase in the dollar, which is why it wouldn't be inflationary; but then it envisions all these special trade deals by which foreign governments stop buying US debt, so the dollar falls for export purposes. He puts these effects in a time series: first dollar appreciation; second, Mar-A-Lago accords; then paradise. I don't know. I'm reluctant to say something too harsh before I can make sense of what he's saying -- I'm not sufficiently expert in this field where I feel 100% confident when seeing what appears to be a glaring contradiction.

So it's possible that Bessent quaffed this magic elixer and now believes what Miran was saying. It's worth noting that Bessent has been a currency trader, so perhaps he's inclined to believe that currency adjustments can have huge, magical macro effects. It's also possible he's bullshitting.

In any event, the sharp decline in the dollar undermines the thesis. Note: Krugman also highlights this contradiction. I read Krugman after thinking it through, so these are two independent data points: Krugman finding a contradiction, and me with the same one. How much you think "Krugman + super" improves on "Krugman" is perhaps subject to interpretation. Personally I don't think I'm nothing. I'm not Krugman, duh, but as long as my analysis has positive value then I think it makes at least a little bit of difference that he and I came to the same conclusions.

I've also been working with ChatGPT on this. My instructions are Make Miran Make Sense (basically), and it's been doing a good job of laying out the theory. But the contradictions become apparent with some prodding.
 
superrific said:
Not beyond a shadow of a doubt. I had insomnia last night and was specifically thinking about this issue for a while. There is a paper out there by Miran, put out last fall, that argues tariffs aren't inflationary. I don't know what to say about the paper. Miran is, or was, a serious person. And if you don't read the paper too carefully, it could be convincing.

But I dug into it and there's a fundamental contradiction: it relies on US dollar being both stronger and weaker. That is, it posits an increase in the dollar, which is why it wouldn't be inflationary; but then it envisions all these special trade deals by which foreign governments stop buying US debt, so the dollar falls for export purposes. He puts these effects in a time series: first dollar appreciation; second, Mar-A-Lago accords; then paradise. I don't know. I'm reluctant to say something too harsh before I can make sense of what he's saying -- I'm not sufficiently expert in this field where I feel 100% confident when seeing what appears to be a glaring contradiction.

So it's possible that Bessent quaffed this magic elixer and now believes what Miran was saying. It's worth noting that Bessent has been a currency trader, so perhaps he's inclined to believe that currency adjustments can have huge, magical macro effects. It's also possible he's bullshitting.

In any event, the sharp decline in the dollar undermines the thesis. Note: Krugman also highlights this contradiction. I read Krugman after thinking it through, so these are two independent data points: Krugman finding a contradiction, and me with the same one. How much you think "Krugman + super" improves on "Krugman" is perhaps subject to interpretation. Personally I don't think I'm nothing. I'm not Krugman, duh, but as long as my analysis has positive value then I think it makes at least a little bit of difference that he and I came to the same conclusions.

I've also been working with ChatGPT on this. My instructions are Make Miran Make Sense (basically), and it's been doing a good job of laying out the theory. But the contradictions become apparent with some prodding.
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I appreciate this response, and I'll try to find that paper and read it this weekend. I don't understand intuitively how tariffs could not be inflationary, but I'm not anything resembling an economist and I'm happy to be educated about it.
 
lawtig02 said:
I appreciate this response, and I'll try to find that paper and read it this weekend. I don't understand intuitively how tariffs could not be inflationary, but I'm not anything resembling an economist and I'm happy to be educated about it.
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1. I would not recommend reading that paper. I did so you wouldn't have to. Or get someone to summarize it. It is not well written; it is disorganized; and it goes on Trump-fluffing derailments from time to time.

2. Remember that, at bottom, inflation is a reduction in the purchasing power of a dollar. Which is to say that, if all else remains equal, it could be expressed in different ways. One is through higher prices. But it could also come from the same number of bucks but less bang. For instance, suppose Trump put in universal 1000% tariffs. All foreign trade would stop. It wouldn't necessarily be inflationary in the US, but it would reduce our purchasing power because we have a much more limited set of choices. One way or another we would lose wealth.

3. There is an edge case where we might see something different. Let's say that all trade is like Bosch dishwashers. Now, Bosch is a premium brand in a field that isn't particularly competitive. It might be possible that, in a specialized sub-market, Bosch has tremendous market power. 20 years ago, you wouldn't think of building a high rise apartment building in New York without Bosch appliances where possible. No idea if that's true today, but this is just an illustration.

So in other words, Bosch has pricing power due to a semi-monopolistic position in a niche market. If it does, that means last year it was charging a price higher than in a competitive market -- and also that its price strategy is to maximize revenues at a low enough price so as to not encourage entry. So it has slack. Tariffs come in, and Bosch wants to preserve its market so it lowers prices -- which is can do, because it was charging elevated prices in the first place due to market power.

Thus, if all imports were like Bosch appliances, then tariffs could be non-inflationary, basically forcing niche-dominant foreign producers to eat lower price markups.

4. So are foreign goods like Bosch appliances? You would not think so for Chinese products that get sold at Wal-Mart. If nothing else, there would be competition between Chinese producers that will have already forced the price down. BUT we also get stories about how US firms can't get parts except from China -- e.g. windmills, rare earths, chip fabrication, etc. So presumably some Chinese firms had niche-market dominance. What % of Far East trade is like that? I would think very little, but who knows.

It's definitely not the case for places like Vietnam or Bangladesh. Nor, I would imagine, for Canada and Mexico.

5. If the economy is slowing -- as it sure seems to be, even per the weird jobs report that looks more like statistical artefacts than anything real -- then you wouldn't expect to see inflation. You'd expect disinflation. So if there are tariffs slowing the economy, they would cause disinflation; but they aren't, because they are also causing inflation.

Again, inflation is the result of a decline in welfare. If that decline is realized through some other channel -- i.e. a smaller economy -- then the inflation isn't necessary. It just means we get a recession instead of stagflation.
 
lawtig02 said:
I appreciate this response, and I'll try to find that paper and read it this weekend. I don't understand intuitively how tariffs could not be inflationary, but I'm not anything resembling an economist and I'm happy to be educated about it.
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I should add that the Miran model, if it works, predicts higher interest rates (it doesn't say that, of course). Which is what we're seeing.

No free lunch. Gotta pay for them somehow. Maybe it's through higher interest rates (which presumably would cause a lower GDP, which negates inflation in the short term).
 
This tariff situation will ultimately end in better US trade deals. The fact that China, the second largest economy in the world gets special treatment from the WTO is dumb. Middle class in US has been hollowed out. Can the fix it? We’ll see.
 
JosephFreeman said:
This tariff situation will ultimately end in better US trade deals. The fact that China, the second largest economy in the world gets special treatment from the WTO is dumb. Middle class in US has been hollowed out. Can the fix it? We’ll see.
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I agree that there are issues and concerns that need to be worked out, with several countries, but trump has no actual plan. If we end up better of, it will be luck considering the approach.
 
JosephFreeman said:
This tariff situation will ultimately end in better US trade deals. The fact that China, the second largest economy in the world gets special treatment from the WTO is dumb. Middle class in US has been hollowed out. Can the fix it? We’ll see.
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The hollowing out of the US middle class was accomplished to a much greater significance by decades of regressive tax policy than unfavorable trade policy.
 
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