The Hazlitt Series
This latest stewardship post is a continuation of our monthly exploration and modern application of the economic writer Henry Hazlitt, and his seminal work, Economics in One Lesson. This work draws heavily upon the insights of the great French economist Frederic Bastiat. His key insight was to look at that which is not seen. So, for example, do not simply look at the benefits of a trade restriction of say wool, but also look at the costs to the rest of the economy. Hazlitt updates this insight with a more modern take to look not just at the short-run effects on a small group, but also the long-term effects for the whole economy. Hazlitt then applies this lesson to a variety of topics. Each installment will pay homage to this superbly clear economic thinker and writer by applying each of his applications to our world today.
The Fallacy & Reality of Keeping Tariffs
Tariffs are much in the news these days as both parties, and their presidential candidates support using these tools to supposedly support the economy and protect US workers. Most people seem to go along with these ideas, believing that tariffs will do just that.
The fallacy is, as with all the fallacies exposed in this series, born out of the fact that people only look at the short-term effects for a small part of the economy, rather than the long-term effects for the whole economy. That is, they only look at what is seen, not what is unseen.
Let us start with the fallacy that if you remove a tariff, or fail to enact one, there will be business (particularly manufactures) that may go out of business. This will cause a loss of employment and purchasing power. These are usually factually incorrect arguments put forward by the affected industry to keep a policy in place that makes it easier for them to compete.
The reality is that if a tariff is repealed on say sweaters, a manufacturer may very well go under, and fire, let’s say 1000 workers. The flip side is that sweaters that cost say $50 now go to $40. The same quality is now available for less, or a higher quality is now available for the same price. The money that is saved from the new lower price of foreign sweaters frees up money to spend on other products that create other lines of employment. Foreigners will now have our money. They must do one of two things with those dollar balances. They can either buy US goods for export, or they can invest those dollars in US assets like factories or real estate. Briefly, there is a third option. They could exchange those dollars for another currency. The new holders of the dollars are then faced with the same two choices I just outlined. Labor in both countries is now more efficiently employed by producing more with less resources.
The Fallacy & Reality of Imposing Tariffs
The same fallacy exists when a tariff is imposed. The argument is that a new domestic industry will be brought into existence, or an “infant industry” can be brought to maturity. This will increase employment and therefore purchasing power.
The reality is that these “new” jobs would be visible. They would be in a concentrated sector of the economy, whose benefits are also concentrated. The costs would be diffused throughout the economy, so not visible. There would be no net increase in wages or an increase in productivity. In fact, productivity would go down, because you are now producing less with more resources. That is, the domestic industry is producing things it is less efficient at producing. The consumer is now able to buy less with their money. So, while wages in the protected industry would go up, overall wages would go down. Many times, this is not even true, as consumers of the protected industry will be able to purchase less and/or substitute with less expensive items. Anyway, since the economy will be producing less, it will also be consuming less. The effect is to create less wealth and material prosperity. Certainly, those in the protected industry may be helped but it hurts all others, especially those with a large potential export market. All this changes the structure of domestic production and makes it less efficient. In effect the protected producers are now subsidized by the consumers. It is a tax on consumers.
Many will respond that we can simply even out these effects by placing a tariff on all foreign goods. This will not help everyone uniformly, as there will be those that can already outcompete foreign goods that will see no benefit from this policy. Also, since domestic producers will be protected from foreign competition they will innovate less and will tend to act as a cartel. They can gain monopolistic prices because of the insulation from global competition.
All this is borne out by the data on the effects of tariffs. Of course they raise prices, if not what would be the point. It is also clear that consumers of the “protected” country bear the burden of these costs. Good reviews of this phenomenon can be found here and here. In both theory and practice tariffs do nothing but act as a tax on consumers and divert resources to inefficient producers, which lowers our material prosperity.
Charting a Saner Path
As with all the fallacies we have discussed in this series, we sacrifice the long-term benefits of the entire economy for the short-term benefits of a small slice of the economy. We focus only on what is visible and not on what is unseen and make ourselves poorer in the process. Sound stewardship is not about trying to play God and reordering the nature of the human economy or the human psyche. It is about recognizing how God made us and leaning into that reality to make this a better, more prosperous and comfortable world for all God’s children.
Praise Be to God
