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 The tax was rescinded very quickly and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.
Macroeconomics
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).
Methodological
Individualism
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.
Say's
Law
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.
The
Unseen
Frederic Bastiat (1801-1850) pointed out what should be obvious to all;
i.e., that state directing of resources may indeed cause certain
"seen" statistics 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.
Conclusion
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.
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