Here's my take.
For a
third straight
month, inflation
has been higher than expected,
suggesting that the Federal Reserve
will find it difficult
to lower interest rates,
which could slow down the economy.
And that endangers President Biden's
reelection prospects.
Economists are unsure
as to why inflation has persisted.
Some of it is surely
a persistent hangover from the pandemic,
but some of it could
well be
that a feature of recent economic policy
of both the Trump
and Biden administrations
has been to ask consumers
to pay more for goods and services.
Both administrations
goosed the economy with large
pandemic relief packages,
which without question added
to inflationary pressures.
But beyond those bills which have by now
probably worked their way
through the system,
there is another possible cause.
Donald Trump
had few tangible achievements in office,
but he can credibly point
to breaking
with decades
of bipartisan economic policy.
On tariffs, Trump raised tariffs on China
as well as on many of America's
closest allies in the West,
while candidate Biden
criticized those tariffs.
President Biden has kept most in place.
In addition,
the Biden administration
has imposed tight
Buy America provisions in large
spending bills
such as the Inflation Reduction Act
and the Infrastructure Act.
All of these policies ask Americans
to pay more
to achieve certain political goals.
Less dependance on China.
Greater resilience.
Subsidizing green energy.
Boosting domestic manufacturing.
Even the IRS, as three economists
have persuasively
shown, is about five times more expensive
as a way to cut carbon emissions.
Compared to a simple carbon tax,
all of the political
goals Biden is promoting
might well be worthwhile.
But they do come at a cost
and one wonders
if the cost
will be permanently higher inflation.
The tariffs are the most egregious
of all these policies.
Despite Trump's rhetoric to the contrary,
they are a tax on American consumers.
US Customs and Border
Protection estimates
that so far Americans have paid
more than $230 billion in these taxes.
In addition,
tens of billions of dollars
have been handed out to farmers
to compensate for their losses
in agricultural exports
as a consequence of China's
retaliatory tariffs.
It's hard to find anyone who believes
that tariffs have been effective.
They have not altered
China's policies one iota,
and they have cost
the American economy
in money and lost jobs.
According to the Tax Foundation,
each year,
the tariffs cost
the US economy nearly 200,000 jobs
and point to 5% of its GDP, or roughly
$70 billion in annual output.
Or, to put it
another way,
enacting a modest set of liberalization
policies proposed
by the Peterson Institute in 2022
would reduce inflation
by about 1.3 percentage points,
which works out to almost $800 of savings
per American household.
The Office of the US Trade Representative
promised to review the tariffs
to determine
whether they have been effective or not.
It has been working on this review
now for over two years
with no end in sight.
Despite apparently
having little on its agenda these days
since it has abandoned
its core business of promoting trade,
a senior administration
official confessed to me
that the reason is that
if the USTR admits
that the tariffs have failed,
it will also have to recommend
that they be lifted,
which the Biden team does not want to do.
There is also a foreign policy costs
to this rising protectionism in America.
President Biden
met with his Japanese counterpart
this week in a bid to strengthen
the alliance between America
and one of its longest
and closest allies.
And yet,
his administration
has announced its staunch opposition
to a Japanese company buying U.S.
Steel, a company
that has been floundering for years
and is a shadow of the behemoth
it once was.
Nippon Steel,
the Japanese company,
promises to invest in U.S.
steel on its labor contracts and retain
all its workers into 2026.
In short,
it would
rescue an underperforming
American company.
But for the Biden administration,
it seems the optics are more
important than the substance.
The conventional wisdom of the last
several years
has been that America
hollowed out its manufacturing
by embracing
globalization and efficiency,
which in turn led to the rise
of right wing populism.
That argument doesn't
stand scrutiny
since countries like Germany and France,
which protected workers
and invested massively in retraining,
have also seen right wing populism.
Boom.
Declines in manufacturing
are part of the economic rise
of countries.
Notice that even China,
which has prized its factories
above all else,
has seen manufacturing
decline as a share of its economy
from 32% in 2011 down to 28% in 2022.
People around the world,
especially in America, have gotten
used to the dramatic declines in costs
that globalization
has brought them
over the past three decades.
The cost of clothes,
appliances, telecommunications
and air travel
have all plummeted in that period.
It's been easy to pocket these gains
and complain about the ills of trade.
But inflation
hits everyone,
not just the small percentage
of unemployed and when people are forced
to bear the costs of higher prices,
they tend to lash out at those in power.
What an irony it would
be if policies designed to keep populists
at bay
end up punishing mainstream
politicians instead.