Milton Friedman once opined that "Inflation is always and everywhere a monetary phenomenon." He hadn't seen an 'edge case', but we have. It's analogous to Einstein's revelation that, at speeds approaching c, mass increases and time contracts. Within limits, Newtonian physics works fine; beyond those limits, it's a different universe entirely.
'Conventional wisdom' holds that tariffs cause inflation. The mechanism is that tariffs are a tax paid to the government of the importer and which raise the price of imported goods to the consumer. This doesn't cause inflation per se because the government is being funded via the tax, but it provides cover for domestic producers to raise prices. Thus, things appear to be getting more expensive, but the inflation is merely 'apparent'. The extra money that the consumer is paying is being funnelled straight back into the consumer economy, but in a different place. Producers are subsidized by the tariff, and this creates an incentive to produce.
What happens if the foreign seller considers "the opportunity to sell within your market" to be too valuable to risk losing it? The answer is that the foreign seller will 'eat' the tariff to keep the price to the importer low. In that case, the ultimate consumer doesn't see prices of either domestic or imported products rise, and there is no apparent inflation.
For the longest time, my wife, an ardent big-government fan, would point to Europe: "They have universal healthcare; they have 6-month paid maternity leave; they start work at 9am, not 7am, and they take 2-hour lunches, and pack it in at 4pm; they have ..." and I never had an answer as to why we didn't have the same 'advantages' as Europeans.
Now I have an answer. After WW-II, the U.S. instituted 'The Marshall Plan', a device meant to get European economies back on their feet after the unspeakable destruction of the war. One feature of the plan was that we, the U.S., agreed to eat the tariffs Europe imposed on goods imported from the States, and that European governments could fund themselves with — essentially — a huge monetary gift amounting to Billions of dollars each year — for 80 years. At the same time, we minimally tariffed European imports, just enough to cover the cost of customs inspections.
Along comes Trump whose economics education was imparted in conference rooms where contracts and architectural drawings littered the main table. He understands 'leverage' perhaps better than any Chief Executive this country has ever had. He sees The Marshall Plan and realizes his country is getting a very poor deal, not because of any trade imbalance, but because of a huge tariff-imbalance. In an ideal world, a world in which 'free trade' actually exists, there would be no tariffs, or they would be small enough to be considered economically insignificant. Alas, that is not the world we live in.
It is said that nothing squeals louder or longer than the brakes on The Gravy Train.
Every European government (with a few exceptions) hate Trump, and they hate him for one reason: he has not simply applied the brakes to the gravy train, he's derailed it. Suddenly, the billions of dollars that funded zero-carbon industrial policy, 6-month paid maternity leave, and universal health care has dried up, not over the course of decades, but over the course of months. European governments have taken a huge economic 'hit' and they're feeling the pinch. Not only are their tariff revenues shrinking, but their industries are now disadvantaged by U.S. tariffs on their products, and Americans are now feeling pressure to avoid those high-priced imports. Their annual tariff benefit, that previously could be injected into their consumer side, has largely disappeared.
The same thing is happening with pharmaceuticals. Trump has insisted that the American consumer get the best deal on imported pharma. Where previously a pharma manufacturer could low-ball the price to (say) India and make up the difference by charging Americans the highest prices across all markets because "they're rich; they can afford it", now if India is getting it for seven cents a dose, so will we. Where will pharma make up the difference now? The short answer is that everyone is going to be paying $1.45 per dose. We're not going to be treated better than anyone else; we're going to be treated the same as everyone else. We're getting Most Favored Nation prices... because we are, in economic terms, the most valued nation. We have the most valuable consumer economy anywhere. Producers cannot afford to lose access to the American market. Europe can't, and Canada can't. Mexico has already figured that out and they are frantically working at making a deal with us.
And this is where the Newtonian tariff rules come smack up against Einsteinian tariff rules: If a foreign producer loses access to the U.S. consumer, the economic consequences could be fatal, and they know it. They cannot afford the hit to the P&L that accompanies it, so they now absorb the tariff; they do not force the importer to write that check; they write the check for the importer, and they move lots of product through Customs.
Trump, realizing the importance of the American consumer, has leveraged our eagerness to consume into an economic boom-time. The Dow-Jones Index crossed 50,000 this week. It was 41,700-something on Election Day 2024. That's an almost-20-percent jump in 14 months of Trump. He has, not to put too fine a point on it, rewritten the rules, and established a new 'conventional wisdom'.
Now watch the Democrats fuck it up.
Posts
