Oren Cass has written several articles about the need for tariffs to save America. Like all his writings on this subject, he reveals that he has learned enough economics to be a nuisance but not enough to be helpful. In them, he accuses economists of only thinking about the costs of tariffs, such as the increased prices, the net loss of jobs, stagnated economic progress, and the retaliatory tariffs which other nations levy against America, which cost us dearly. At this point, anyone following his work can be left with but one conclusion: he will not let facts stand in the way of his agenda. While his tenacity is admirable, his economic prowess is not.
In these articles, Cass commits three fundamental errors: 1) a misapplication of what economists call “externalities,” 2) falling victim to the water-diamond paradox, and 3) a disregard of secondary effects.
Not Everything is an Externality
According to Cass, tariffs “address [an] externality.”
Externalities are the idea that our private purchases of economic goods may affect others in ways not accounted for at the time of purchase.
Cass uses the classic example of pollution. Whenever we drive our cars, we privately feel some of the cost of this: namely the cost to fill the gas tank, but we do not feel the full effects of the increased CO2 emitted. These are borne by others who are external to my gasoline purchase. This would be a negative externality because our private actions impose costs on others.
Applying this to trade, Cass argues that a negative externality occurs because “a corporation deciding whether to close a factory in Ohio and relocate manufacturing to China, or a consumer deciding whether to stop buying a made-in-America brand in favor of cheaper imports, will probably not consider the broader importance of making things in America” and that “domestic production has value beyond what market prices reflect.”
In Cass’s framework, purchasing foreign-made goods thus imposes economic harm on domestic producers in the form of lost revenues and decreased job opportunities in that particular industry. Thus, we need a corrective tax - a tariff - on purchasing foreign-made goods to correct our private behavior.
It is not that Cass objects to people in other countries producing goods and services. For Cass, “the issue is that foreign producers are selling us too many things. That’s why we need a tariff.” But a tariff, according to many of the latest estimates available, is overwhelmingly paid for by consumers in the form of higher prices, not by foreign producers. This suggests that the activity that Cass wants to diminish is “Americans buying foreign things.” That is what he believes needs correction.
Certainly, it can be said that domestic producers are impacted by foreign competition. But does competition from abroad qualify as a “market failure in need of correction?” Put bluntly, it doesn’t.
To model domestic production as an economic good in and of itself would be absurd. Of course domestic production, writ large, is good for an economy. However, this is not how we define economic goods. An economic good - whether produced in American or abroad - is anything which consumers ultimately purchase for their own ends. To apply the logic of externalities to the production of goods would mean that all production is an externality, which effectively empties the concept of any real meaning. Further, it also opens the door to endless regulation and government direction of every activity.
The Water-Diamond Paradox
Cass’s categorical errors are not, however, confined to his treatment of externalities. He also falls victim to the water-diamond paradox.
The paradox goes like this: how is it the case that water, which is necessary for life, is less expensive virtually everywhere in the world than diamonds? Given the relative importance of water, its low price puzzled generations of economists.
That changed with the marginal revolution of the 1870s. Economists like Carl Menger and William Stanley Jevons illustrated that it is the marginal unit that matters for decisions and therefore for prices, not the absolute availability. People do not think about the value of having water at all or not having water at all. We think about the value of having the additional amount of water than what we currently have when making our decisions and valuations.
The reason why water is so cheap is because it is so readily available that we can use it for extraordinarily low-valued uses. For example, in the U.S. since 1992, we flush 1.6 gallons of clean water each and every time we flush a toilet. Prior to 1992, that figure was between 3.5 and 7 gallons of (formerly) clean water. So why is water so cheap? Because of its high availability, we use it at the margin for extraordinarily low-valued uses. Why are diamonds so expensive? Because at the margin, we use it for extraordinarily high valued uses.
So what does this have to do with Cass’s argument? By asserting that “making things does matter” and seemingly ascribing it highest value, Cass is thinking in absolute rather than marginal terms. For Cass, it all comes down to whether Americans “make things” or not. In this framework, if Americans purchase “foreign things” then there will necessarily be “fewer things” made in America, meaning fewer jobs and whole host of social ills that come with depressed economic conditions.
But this just isn’t the case. American (and indeed, world history) tells a completely different story; one of constant innovation, reinvention, and discovery. The MIT economist, David Autor writes powerfully about this in the latest issue of The Quarterly Journal of Economics. By allowing innovations, even those from abroad, to proliferate in the American economy, new jobs that were previously unimaginable are created. In 1900, for example, there were no pediatric oncologists. Today, there are over 2,000. Equally impressive, in 1900, almost 40% of the American working population was employed in agriculture. Today, that number is less than 2%. Not only is this small army of workers producing so much food that nearly one in three Americans today are considered overweight, but the U.S. is also the single largest exporter of food in the world.
The point of this research is two-fold: First, domestic production of the goods and services imported by other countries is not completely eliminated; some U.S. firms continue to exist, even in industries where the U.S. heavily relies on imported goods. The steel and aluminum producing sectors in the U.S., for example, continue to exist even with the rise of imported steel from Canada, Mexico, Brazil, South Korea, and Japan. Why is this?
Because importing goods into the U.S. affects marginal production, not absolute production.
The second point of this research is that by acquiring goods and services at lower costs elsewhere, American workers are freed to pursue new, innovative specializations that were previously unimaginable. In 1900, the idea of a doctor specializing in pediatric oncology or that less than 2% of American workers would be needed to feed a nation of 350 million people would have been considered absurd. Today, these absurdities are not only reality but few people, if any, even notice that this is the case.
The same can be said about the U.S. manufacturing sector: on a per-capita basis, the U.S. manufacturing ability is absolutely incredible. But as other countries develop and grow, they become relatively better at particular things. This means that we as a nation can reduce our capacity in the production of some things and increase our capacity in other things, and yet still enjoy access to more of both than we did previously. This is the hallmark of the concept of comparative advantage.
My own hometown of Grand Rapids, Michigan stands as evidence of exactly this. In its earlier days, we were known far and wide as “Furniture City,” providing wooden furniture to most of the United States and employing tens of thousands of workers assembling furniture for households and businesses far and wide. Today, only a small handful of furniture companies remain, with the focus on providing office furniture and passenger seating solutions. As a result of the furniture industry’s decline thanks to foreign imports, workers found new opportunities. Today, Grand Rapids is known for thriving sectors in medicine, medical device manufacturing, and IT services, higher education, and craft beverages. We even have a new moniker: “Beer City, USA,” thanks to the proliferation of craft breweries throughout the greater Grand Rapids community.
Seen and Unseen
The third problem with Cass’s argument is that it embodies the problem of “folk economics” to which good economists have relentlessly drawn attention. The economics journalist, Henry Hazlitt, explains it this way:
The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.
When we apply this insight to Cass’s treatment of tariff policy, he plainly falls into the category of Hazlitt’s bad economist. One can say that around 1,000 jobs were saved in the steel and aluminum producing industries by President Trump’s tariffs. This would be the direct effect of the tariff, which proponents frequently cite. The same cannot be said about jobs in the steel and aluminum using sectors, who were indirectly affected by the tariffs placed by President Trump. This is confirmed in a 2019 Federal Reserve study, noting that “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment,” as well as a 2020 report by economists Kadee Russ and Lydia Cox.
Another indirect effect of tariffs was underscored by Trump’s own Council of Economic Advisors. In their 2019 report, they wrote, “Canada, China, the EU, Mexico, Russia, and Turkey imposed retaliatory tariffs.” These tariffs caused US exports to fall because foreign consumers found U.S. products more expensive and thus switched to purchasing their own, domestic wares or importing then from other nations.
The result was a decrease in overall economic well-being in America of 0.12 percent of GDP. While this was a small percentage of America’s total GDP of $27.36 trillion, it amounted to U.S. citizens being worse off by $32.8 billion, or about $100 worse per year on average for each and every citizen. Making each American worse off by $100 per year in exchange for an overall reduction in available jobs and higher prices is a raw deal.
Tariff Advocacy Reflects Bad Economics
These flaws, and others, in Cass’s argument for tariffs reflect basic errors in economic reasoning. Indeed, if Cass and other protectionists really want to increase manufacturing jobs, tariffs should be avoided at all costs. We need to reduce barriers to trade, not erect new ones, if we are to secure America’s position as an economic superpower going forward.
By asserting that tariffs are a productive means of achieving American prosperity, what Cass is really arguing is that the idea of comparative advantage is not only false but represents a con-job of sorts by economists. The reality, of course, is that the opposite is true: comparative advantage is real and nations prosper when the follow their comparative advantage, even if these change over time thanks to the rise of new technology, new trading partners, and new opportunities.
In a way, Cass represents a New Right version of Harold Daggett, the current president of the International Longshoremen’s Association. Daggett is famously trying to “ban automation of gates, cranes, and container-moving trucks in ports” across the entire Eastern seaboard in an effort to protect union jobs. Dagget’s goal is to maintain current jobs and to protect current employees from the scourge of new innovations. This would clearly cripple the American economy going forward as it would raise the cost of importing and exporting goods from and to the United States relative to other countries more amenable to automation and other forms of innovation.
Similarly, Cass is trying to reduce competition faced by U.S. firms and protect existing jobs. Implicitly, he wants a stagnated economy, where innovation and creativity are stifled in favor of protecting the status quo. Not only is this bad economic policy, it’s completely antithetical to the American values of hard work, determination, and ingenuity.
If anyone is guilty of perpetuating a con-job against the American people, it is Cass and his pro-tariff compatriots, not economists.
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