The United States has just come through a period of high inflation. Over the four-year period of Joe Biden’s presidency, every single dollar Americans held in their bank accounts or stuffed under their mattresses lost roughly one-fifth of its value. So it is understandable that when Americans look at the tariff problem, inflation is top of mind.
Specifically, many Americans wonder whether the tariff wall that President Donald Trump erected last year on goods from most countries, including one island populated entirely by penguins, is causing inflation. The answers that researchers are giving to that question are both complicated and kind of horrifying.
MINNESOTA AND THE INSURRECTION ACT
First, yes, tariffs are pushing up the prices of a broad basket of goods that Americans used to consume. This reverse cornucopia effect should be obvious: A tariff works like a sales tax, paid at the point of entry rather than at the point of purchase. Sales taxes clearly make goods more expensive, so tariffs have the same effect on pocketbooks.
For instance, if you buy a car, a doll, or a stick of gum that was manufactured in another country and the government levies a tariff on those goods, then you would reasonably expect to pay more than for previous identical foreign goods. It now costs more to get those goods to you, and nobody is in business to lose money.
Second, and less obviously, tariffs hike prices on many goods that are 100% manufactured in the U.S. Why would that be the case? Because some of the raw materials used to manufacture those goods have to be imported and are thus subject to tariffs. One depressing statistic to track has been the continued decline of domestic manufacturing that the administration promised the tariffs would reverse.
Tariffs can have a third, darker effect that may at first read like good news. The alleged good news is that while tariffs push up some prices, they do not do so across the board. Tariffs thus do not, on their own, cause widespread inflation. But it’s probably best to put a pin in that sigh of relief until you learn the reason why.
“Tariff increases are consistently contractionary,” write Diego R. Känzig and Tamar den Besten, economists for Northwestern, in a working paper of an impressive sweep of historical data issued late last year.
In practice, that means “imports fall sharply, exports decline with a lag, and output and manufacturing activity drop persistently,” the economists write, and the shock “transmits through both supply and demand channels.”
Put more simply, the available economic evidence indicates that tariffs “raise prices and reduce available quantities of goods and services for US businesses and consumers, resulting in lower income, reduced employment, and lower economic output.”
That’s the verdict, according to a report by the Tax Foundation that is, digitally speaking, hot off the presses. Authors Erica York and Alex Durante also found that this tariff burden will fall disproportionately on people with lower incomes.
This year, for instance, two different kinds of tariffs enacted by the Trump administration will reduce American households’ “after-tax incomes by 0.3 percent on average… [and] 0.8 percent on average,” for a total 1.1% drop to most family incomes. And this will come at a time when people’s money doesn’t stretch nearly so far as it used to.
Now granted, it might not end up being so bad. The Supreme Court is set to rule on one kind of President Trump’s tariffs, the ones that would reduce household incomes by 0.8 percent. Court watchers do not necessarily expect the justices to rule in the administration’s favor on that front.
IT’S THE PRICES, STUPID: THE BIG CHALLENGE THAT LIES AHEAD FOR TRUMP AND THE GOP
Yet the Tax Foundation report is not a worst-case scenario either. The Supreme Court could rule in the administration’s favor, allowing all current tariffs to stand and opening the door to new ones. Or the court could issue a narrow negative ruling that is easy to work around. Trade wars with other countries could flare up over any number of issues, most recently Greenland.
So the superficially good economic news is this: No, the administration’s tariffs are not causing widespread inflation. And the bad news is: Far worse things than inflation are possible.
Jeremy Lott (@jeremylottdiary) is the author of several books, most recently The Three Feral Pigs and the Vegan Wolf.
