The Nobel-winning economist Paul Krugman famously claimed once that bad economic ideas simply refuse to die. The ongoing 2024 presidential election campaign validates this point on both sides of the political spectrum. Why do presidential candidates embrace wrong, even zombie economic ideas, despite their obvious failings in the past? The main reason is the candidates’ weakness for simple ideas and attractive political gimmicks that seemingly sell well in the campaign.
As deep concerns around the state of the American economy and high prices continue, about eight-in-ten registered voters say the economy will be crucial to their vote in the coming election. A fresh poll showed nearly two-thirds of respondents said the economy is on the wrong track. This argues for crafting economic programs highly responsive to key voter concerns such as inflation fears, high interest rates, deepening housing shortage and soaring health care costs.
It is far too early to predict the winner of November’s elections but perhaps not too soon to forecast the loser: the American economy. Why? Because some apparently bad economic ideas keep dominating the rival economic agendas. Here are the chief ones.
Harris: halting “price gouging” under Opportunity Economy
Ms. Harris has surprisingly quicky replaced Bidenomics by the more appealing campaign slogan “Opportunity Economy”, a flexible umbrella covering all her proposed economic policies. Bringing down high costs of living for households is a top priority, framed as a centerpiece of her economic agenda. The plan targets high housing costs, medical and student debt and grocery prices “artificially inflated by greedy corporations.”
How does Ms. Harris propose to bring these costs down? As president, she would impose the first-ever federal ban on “price gouging” (“greedflation”) for food, groceries, medicines and some other goods. The Federal Trade Commission and the state attorneys general would have new authorities to impose penalties on opportunistic, rule-breaking companies. Is this a good idea?
Economists of all ideological and political stripes are united that centralized, Soviet-style price controls don’t work and could easily veer into tinkering with the free-market system. There is substantial evidence that groceries are a notoriously low-margin business. Supermarkets also have narrow margins on sales – roughly 2%, compared to 8% on average for other businesses. Federal Reserve researchers found no statistical proof for systematic upward price manipulation in the retail sector.
The Harris plan has been met with instant scepticism, with critics citing President Nixon’s failed price controls from the 1970s. The macroeconomically inexperienced Vice President might have fallen victim to a price-control delusion. Historical evidence, however, reveals that administrative price controls risk reducing incentives to produce more and consumers inevitably end up paying the bill via shortages of supply and reductions in product quality.
Instead of populist gimmicks, Ms. Harris should focus on the real source of inflation: runaway government spending. Currently, America’s budget deficit is running at about 7% of GDP, a level previously seen during wars and severe recessions. The national debt is continuing to climb above the annual GDP at an unsustainale clip. Ms. Harris has not offered yet any serious proposal how to clean up the country’s dire fiscal picture, which under her presidency would get even worse due to her numerous, overly generous state subsidy programs. (Mr. Trump has also failed to address the fiscal landscape, which under his proposed programs would deteriorate even faster.)
Trump 2.0: tariffs, the go-to tool to address economic ailments
Like in Ms. Harris’s case, a fundamentally bad economic idea occupies a central place in the republican candidate’s economic plan: import tariffs. In 2018, President Tump levied high tariffs on products from around the world, focusing on China, to reduce the large trade deficit and revive U.S. manufacturing. President Biden has retained most of the Trump tariffs, while adding some new ones. But despite the high “punitive” tariffs, America’s overall trade gap kept widening and manufacturing employment has deteriorated after the tariff war began.
Now Mr. Trump doubles down on a failed policy with even steeper and broader tariffs: a 10% (or possibly 20%) blanket tariff on every country and product, and a 60% tariff (or more) on imports from China. (Under such “jumbo” tariffs, the U.S.-China trade – the largest bilateral trade flow globally – would likely wither away; perhaps this is Mr. Trump’s ultimate objective.) A highly questionable new objective has been added to the tariff policy: reduction of the federal budget deficit via increased tariff revenue.
If Mr. Trump will have a chance to implement his super-aggressive tariff plan, the outcome will be the same dismal one as in his first term, but the costs for America would be disproportionately higher. Why? Because the former president fails to understand a simple economic principle: as long as the U.S. invests more than it saves (or consumes more than it produces), the trade deficit is a macroeconomic necessity.
Another Trumpian misconception is that foreign suppliers (who “rip off America” through the trade deficit) will pay the tariffs. Not so. Ultimately, American consumers pay the costs of import tariffs. (The Trump/Biden China tariffs cost each U.S. household $620 a year, according to the Federal Reserve.) It is estimated that Mr. Trump’s proposed 60% tariff on China and 10% on imports from everywhere else would raise U.S. consumer prices by 1.4% to 1.7%. Effectively these tariffs would be equivalent to a vastly inefficient, inflationary sales tax in disguise. They would fail to spur a rebirth of the manufacturing sector because a sure-fire tariff retaliation (as occurred in Mr. Trump’s first term) would substantially reduce America’s manufactures exports.
Trade economists like myself should leave no stone unturned to explain to the American public that the Mr. Trump’s mega-tariffs are self-defeating as they raise the cost of living for everybody without creating new high-paying jobs for American workers and fixing the unsustainable fiscal deficit.
Mr. Trump’s proposed tariffs would be a huge negative shock to world trade, likely triggering a global trade war, with far more losers than winners. Instead of acting as a chief disrupter in world commerce, the new president should reestablish the United States as the global champion of rules-based free and fair trade and a credible leader spearheading the fight against growing protectionism worldwide.
*Istvan Dobozi is a former lead economist at the World Bank. He resides in Sarasota, Florida.
Disclaimer
Member’s blog posts reflect the views of the author(s), drawing on prior research or personal experience. Freedom of expression is an essential part of the 1818 Society’s culture. The 1818 Society® is a nonpartisan, independent organization and does not take institutional positions. Members are welcome to add their comments in the box below.
KEYWORDS Donald Trump, import tariffs, Kamala Harris, price controls, US elections
I hope price controls is not the vehicle Ms. Harris would intend to use for dealing with “gouging”. Firstly, gouging needs an operational definition, and from that, an understanding of what measures would incite firms to not “gouge”. We can intuitively think “gouging” is happening, but there is then a long stretch to operational and rational policy and measures for controlling it. History is not encouraging in this area. Maybe if there were less concentration in the economy, there would be more effective competition and competitive forces would do the job they are supposed to do. This means looking to reform of competition policy and enforcement arrangements as the most sensible attack on “gouging”.
Another aspect of the Harris plan – the social program spending – she intends to finance that by raising taxes on very high income sources. I hope she has people around her who could truthfully advise on how much she can hope to raise in this manner, and how much of the incremental spending it will cover.
Turning to the Trump policies, good discussion in this post. Much discussion previously published around tariffs have lacked nuance informed by theory of the incidence of tariffs. Incidence depends on demand and supply elasticities in importing and exporting countries. These of course are notoriously difficult to compute. Suffice to say there are conceivable conditions in which the consumers in the imposing country will pay, other conditions in which producers in target countries will absorb, and yet still other conditions in which the burden would be shared. One thing for sure though, as Mr. Dobozi argues, unless they are being imposed to counter improper trading practices, they are a dead-weight loss with respect to international gains from trade. Mr. Dobozi’s call for re-establishing rules-based free and fair trade is laudable. The first test of it may come with the impending review of the CUSMA trade agreement, in which all three participating countries have much to gain or lose depending on who forms the next US Administration and how it is approached.
To win votes, politicians repeat what most people want to hear. Even if they both know the proposals are fallacies.
This is a very interesting analysis. There is a big disconnect between the policies that economists favor and those that politicians think will get them elected. We need a better educated public?
Thanks very much Istvan.
You need to join one of the USA’s News Networks to explain Tariffs. I shudder every time one of the political candidates offer up tariffs as a solution to every problem that America has, and the supposedly informed News Anchor/commentator/reporter, says absolutely nothing.