A tariff is a tax on imports that is used to satisfy a policy goal. Before the federal income tax became law in 1913, the US federal government was funded almost entirely by tariffs and excise taxes. An excise tax is a tax on a good that is produced in the US. The best example of a current excise tax is the federal tax on gasoline. The most infamous excise tax was the tax on whiskey in the early days of the republic that resulted in the Whiskey Rebellion, centered in western Pennsylvania. The tax on whiskey was so unpopular that even George Washington couldn’t enforce it. The tax was rescinded very quickly and the federal government collected zero revenue.
As a source of federal income, tariffs are a cipher compared to the federal income tax. Today tariffs are used as policy tools. There are two competing schools of economic thought, and tariffs are justified under one of these schools of thought and not the other.
John Maynard Keynes (1883-1946) is considered the father of macroeconomics, the school of thought under which tariffs are just another government policy tool. His most influential book was The General Theory of Employment, Interest and Money, published in 1936 at the height of the Great Depression. Keynes called for massive government intervention into the economy, guided by his main conclusion that the world suffered from a “lack of aggregate demand” that would be cured only by government spending. The explosion of war production in the Second World War seemed to validate Keynes’ ideas. During the war the entire world went off the gold standard. All governments printed money, unbacked by gold, and all governments took direct control of their respective economies. The general consensus by the public was that if government can direct a vast expansion of war goods, it should be able to direct a vast expansion of consumer goods in peacetime. Unemployment could be eliminated as all manner of capital and consumer goods would flow from the nations’ factories just as had tanks, warplanes, and all other war goods. Furthermore, there was no need to fear deficit spending. In fact it was incumbent upon government to deficit spend whenever the economy seemed to be slowing down.
It is not hard to see why Keynes’ main thesis was seized upon by politicians and their like-minded economists. Over the years government direction of economic affairs has become so engrained in all major economies that we don’t even realize that there might be a legitimate and superior alternative. We’ll never know whether Keynes himself would have endorsed all that now is called macroeconomics, because he died shortly after the end of the war.
Macroeconomics has certain characteristics. It relies upon statistics to measure whether and to what extent interventions are needed and whether, once initiated, they are achieving government policy. This assumes that economists fully understand which lever to pull on the great economic machine, for macroeconomists view the economy as a machine. Macroeconomists have coined a name for their machine-like model: econometrics. When an economy appears to fall short of econometric expectations, it is merely a matter of adding a little monetary oil here or requiring that businesses comply with some new regulation there and, bingo!, the economy is humming along again! How do we know? Because the statistics that government attempts to move are going in the proper direction!
Some typical tariff policy goals are helping producers (think… steel and/or automobile companies), helping labor (think… lumberjacks), or achieving a favorable balance of payments (think…China buys as much or more from the US as the US buys from China).
But there is another school of economic thought in which tariffs have no role. This school of thought is at least several hundred years old rather than a mere three quarters of a century old as is macroeconomics. This school of thought is the antithesis of macroeconomics. Its technical name is methodological individualism, but for our purposes we’ll just call it microeconomics. This school of thought emphasizes that the goal of all economic life is satisfaction of the individual, not some large group, and especially not producers. Furthermore, unlike macroeconomics, statistics play no role, since it is impossible to quantify an individual’s satisfaction. Satisfaction is subjective, not objective.
There is no single founder of methodological individualism, but Immanuel Kant (1724-1804) provided two wonderful maxims upon which microeconomics stands: the categorical imperative and the humanity formula. The former maxim states that for something to be ethically valid it must be binding always and everywhere regardless of one’s inclination. An example of a violation of the categorical imperative is the government’s claim that its central bank’s money printing powers are justified as good for the economy. If that were so, then you and I should be allowed to print money! But, alas, counterfeiting is a crime, unless committed by the government’s central bank. The humanity formula states that man is an end and can never be used as a means to an end. The most egregious violation of this maxim is slavery, where it is obvious that some men are used as means to satisfy other men’s ends. But there are many such violations all around us. For example, tariffs on foreign steel benefit some men–US steel companies and their employees–at the expense of everyone else.
The Law of Comparative Advantage
Methodological individualism exposes other macroeconomic fallacies. I’ll discuss just a few. David Ricardo (1772-1823) explained that trade is founded on the Law of Comparative Advantage; i.e., that trade expands the specialization of labor to minimize one’s opportunity costs. For example, it makes no sense for basketball star Michael Jordan to skip a few games in order to paint his living room. His opportunity cost would be very high; i.e., he would forgo the opportunity to earn vastly more money by playing basketball than by saving the cost of paying someone to paint his living room. The law of comparative advantage extends infinitely, from the individual to the family to the neighborhood, etc. to cover the entire world. Political boundaries are irrelevant.
Macroeconomics’ invention of “lack of aggregate demand” attempts to deny the validity of Say’s Law or the Law of Markets. Jean Baptiste Say (1767-1832) most clearly explained that supply must precede consumption. In other words, inherent in supply is the wherewithal for consumption. Think of an Iowa farmer who gazes over his vast corn crop. The farmer sees the wherewithal for satisfying all his many needs. He will exchange his corn crop for a widely accepted medium of indirect exchange, money, in order to purchase all the necessities of life. If his crop failed, he would face dire straits. Printing money and giving it to him, as advocated by macroeconomists, merely debases the medium of exchange and causes higher prices for the rest of society, a violation of Kant’s humanity formula.
Frederic Bastiat (1801-1850) pointed out what should be obvious to all; i.e., that state directing of resources may indeed cause certain “seen” statistic to go in the desired direction, but these same resources could have been directed to any number of more highly desired ends. These ends may be less than they would have been absent the state direction of resources. Furthermore, there may be ends that never were realized at all. In other words, if we are forced to pay more for something simply because it is “made in America”, we will have less money for satisfying other desires. Bastiat’s famous essay “That Which Is Seen, and That Which Is Not Seen” was a devastating attack upon Mercantilist direction of the French economy.
Tariffs cannot be justified by methodological individualism. They are a political policy tool within macroeconomics. The net adverse consequences of tariffs are understood by those economists who think of tariffs’ logical results of over longer time frames and over the entire economy rather than the short term impact on cherry-picked statistics to favor politically connected pressure groups. It is the difference between freedom and tyranny.
The Goodnight Vienna Audio file