Extracted from the Wall Street Journal
POLITICAL ECONOMICS By Joseph C. Sternberg · Apr 11, 2025
The goal of all these tariffs for avowed protectionists is to make Americans less able to purchase things.
President Trump’s sudden reversal this week is unlikely to mark the beginning of the end of his adventures in tariff-land, alas. Two details about this month’s trade fiasco argue for pessimism: Mr. Trump insists on maintaining a 10% base tariff globally despite the “pause” he announced Wednesday. And the administration seems unconcerned about the costs these policies will impose on American households. Both are clues to the true magnitude of Mr. Trump’s trade ambitions.
Trumpism Economic Theory
It’s time to dig into the intellectual version of Trumpism—and yes, there is such a thing. Mr. Trump’s justifications and objectives for his trade policies keep shifting. But it’s becoming clearer that tariffs for him aren’t simply a matter of negotiating leverage, or revenue raising, or protecting a few strategic industries. The policy that’s coming into effect manifests the views of a circle of economists whose understanding of U.S. trading relationships is systematic but unconventional and whose policy prescriptions will come as an unpleasant surprised to many Americans.
The core of Intellectual Trumpism runs as follows:
- The global economy is characterized by large, policy-induced imbalances in both trade and capital flows.
- These imbalances are caused at root by the decisions of some large economies—Germany, Japan and especially China are the usual suspects—to subsidize production by suppressing consumption in their domestic economies.
- Suppressing consumption creates “surplus” output that they foist on the U.S.
This view isn’t wrong, so far as it goes.
Those economies and others historically deployed a range of policy tools to boost exports. In China, the most egregious manifestations are direct subsidies for exporting companies. Less visible to foreign eyes is the financial repression: the deliberate suppression of domestic interest rates and political control of credit to subsidize businesses (which benefit from cheap borrowing) at the expense of consumers (who receive less income from their saving and investment). Such policies can take many forms. In Germany, extensive subsidies shield large companies—meaning exporters—from the worst energy-price consequences of Berlin’s dumb net-zero climate policies. Households pay full freight for electricity.
The net effect of all these policies is a massive transfer of resources in these countries from households to producers, in the expectation that the U.S. will absorb all the products that domestic consumers can’t.
America Imports other Countries Excess Production Because it Must
Trump-adjacent economists say we gobble up those products because we must. This is the core argument of Michael Pettis, a Beijing-based finance professor (who has contributed to these pages) whose work popularizing various earlier trade theories appears to have become influential in Mr. Trump’s circle.
Because other economies underconsume, the argument runs, they accumulate excess savings. They recycle these savings into the U.S., where we transform foreign claims (in the form of equity investments or purchases of American debt) into consumption of the foreign country’s excess production. Hey presto, a trade deficit.
An oddity of this argument is how little agency the U.S. is said to exercise. Once Washington had made the first mistake of opening our economy via tariff reductions and the free flow of capital, it was off to the races.
The truth is much more complex, and politically challenging: While some other economies suppress domestic consumption and subsidize export production, Americans choose to do almost exactly the opposite. Through political choices such as suppressing energy production and distribution, or permitting red tape and the like, or any number of other policy foibles, we make it much harder than it otherwise would be to produce things in the U.S.
You can’t take a step in America without tripping over a consumption subsidy.
To cite a few: Fannie Mae and Freddie Mac stimulate overconsumption of housing. Subsidized student loans stimulate overconsumption of higher education (which, given the poor lifetime earnings prospects of many degrees, should indeed be understood as consumption rather than as an investment in human capital). The earned-income tax credit creates complex distortions that at the margin subsidize consumption while discouraging additional productive work.
Most glaring, though, are our entitlements.
Social Security, Medicare and Medicaid, not to mention a raft of other benefit programs, funnel vast quantities of money into consumption. The trick here is that we’re able to finance these via chronic fiscal deficits funded by foreign investors, meaning at the margin Americans borrow from the rest of the world at ultralow interest rates and funnel the cash into consumption at home.
U.S. trade deficit is a policy choice
In this sense, the U.S. trade deficit is a policy choice—and a popular one, for obvious reasons. This explains better than globalist-corporatist conspiracy fantasies why this state of affairs has persisted for so long. The root-causes solution to the perceived problem of the trade deficit would be to rebalance the American economy away from such heavy consumption subsidies and such steep penalties for production.
Some elements of such an agenda can be popular, as Mr. Trump is discovering with his deregulation and cheaper-energy drives. But the entitlement half is a minefield. Republicans are reluctant even about dialing back Medicaid benefits for able-bodied working-age people. The last time anyone tried to reform Social Security, President George W. Bush backed allowing a portion of payroll tax payments to flow into individual investment accounts. The existing system creates a consumption subsidy by transforming tax payments into transfers to recipients; the reform would have created a form of investment subsidy. That bit of good sense degenerated into a traumatic political fiasco for the GOP.
It’s easier instead to fall back on the notion that the U.S. is a victim of foreigners’ decisions to distort their own economies.
This opens the door to tariffs as a more politically plausible solution. The U.S. can deploy protectionism to thwart foreign attempts to force us to absorb Chinese, German or Japanese overproduction. Maybe we can even create our own excess production, protectionists hope, if tariffs transfer money from households to companies (in the form of higher prices) and companies use that windfall to expand production.
Tariffs are equivalent to entitlement reform: less U.S. consumption
Note that the end result is in one way the same as entitlement reform: less U.S. consumption, only via the demand suppression of higher import prices. But beyond that, the two policies diverge—and not to Intellectual Trumpism’s advantage. Among many other problems, protectionism risks depressing domestic production, a warning emerging from industries across America whose supply chains are imperiled by tariffs. It certainly doesn’t help domestic productivity. Entitlement reform, by contrast, tends to be an enormous supply-side spur to future economic growth that benefits households as inflation-adjusted wages rise.
This explains the recent startling admission from Trump trade adviser Peter Navarro that tariffs could cost the U.S. economy $6 trillion over 10 years, and the more startling fact that he wasn’t apologetic about this. The Trump bet is that trimming American consumption via higher prices is a more politically palatable way to rebalance U.S. trade than paring back entitlements would be. Hundreds of millions of American voter-consumers will decide in coming months whether they agree.
Shared via PressReader.com– Connecting People Through News PressReader – Connecting People Through News
NewspaperDirect Inc. dba PressReader, 200-13111 Vanier Place, Richmond BC V6V 2J1, Canada