Tariffs, Trump and Econ 101


Trump reportedly graduated from the Wharton School of Business with a Bachelor of Science degree in economics.1

Commencement Program from University of Pennsylvania, Wharton School of Business, he has a Bachelor of Science in Economics

Commencement Program from University of Pennsylvania, Wharton School of Business, he has a Bachelor of Science in Economics

It’s hard to believe. On Sunday, Trump tweeted,

So how can a guy with a degree in economics spout this kind of nonsense? There are so many misstatements, lies and half-truths in these two tweets that it would take pages to correct them. WC will touch on just a few.

Federal debt increase from President Obama’s policies while he was in office: it’s complicated, but about $983 billion between 2009 and 2017. Since the Republicans had control of Congress during six of Obama’s eight years in office, those increases have to be shared with the Republicans. That’s not “much” of $21 trillion.2  In fact, it’s a little more than 6% of the $15.3 trillion in public, interest-accruing debt.3 By contrast, Trump’s tax changes alone will add about $1.6 trillion to the national debt – more if you take into account additional interest charges – according to the Congressional Budget Office.

As for paying down the national debt? Well, interest alone is $310 billion a year. The total tariffs President Trump has imposed so far are about $85 billion, although most are announced and not yet imposed. He has threatened still more as “negotiating leverage.” Trump’s tariffs at this point, when collected, will pay a little more than 25% of the interest on the national debt. They won’t reduce the national debt itself by a dime, let alone by “large amounts.”

Tariffs are a tax; a tax on goods and services from another country. As such, they add to the cost of those goods and services. Increased prices mean reduced demand. The law of supply and demand is pretty relentless. And any increased cost on those goods and services is either eaten by the manufacturer, meaning lower profits, or paid by the consumer, in the form of higher prices. So at least part of the taxes represented by Trump’s tariffs will be paid by citizens like you and WC. For example, Coca-Cola has announced price increase on its beverages, as a result of Trump’s tariffs on aluminum.

Tariffs typically have a recessionary effect; they slow down an economy as the cost of goods and services rise. They don’t “create jobs.” Tariffs – specifically the Smoot-Hawley Tariff Act – contributed greatly to the Great Depression. Congress’s efforts to protect American jobs absolutely backfired. This is stuff most people learn when they get a degree in economics. But apparently Trump wasn’t paying attention then.

A recession, if Trump’s tariffs trigger a recession, would mean less income available to tax. Less corporate income to tax, even at the new, lower rates. That means much lower tax revenues as the slashes to corporate rates cut in and the taxable revenue shrinks at the same time. Less tax revenues means even bigger deficits.

Let’s recap:

  1. Tariffs aren’t working “big time.”
  2. Tariffs don’t mean “great wealth;” classically, they mean a recession. Or depression.
  3. The national debt isn’t $21 trillion.
  4. The eight years of the Obama Administration created slightly more than half of the federal debt that Trump will create in his first year.
  5. Trump’s tariffs won’t pay the interest, let alone the principal, of the national debt.
  6. Tariffs shift taxes. They don’t reduce taxes.

All that from an econ major. With that kind of accuracy, WC shudders to think what the “better trade deals” will be like.

 

 


  1. Note Trump has an undergraduate degree, not an MBA. He did not graduate at the “top of his class” or cum laude. 
  2. Ironically, Obama’s largest contribution to the deficit was his extension of the Bush tax cuts. $858 billion. The American Recovery and Reinvestment Act added $757 billion, but did, eventually, get us out of the Bush’s Great Recession. 
  3. It’s not clear how Trump arrived at the claimed $21 trillion in debt. Public debt is about $15.3 trillion, although destined to go up a lot after Trump’s tax cuts for the rich. Even if you include loans from the Social Security Trust Fund of about $2.8 trillion you can’t push the total to $21 trillion. Another “alternative fact,” apparently. 
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