The Economy: Policy & Morality

One doesn’t immediately think about morality when discussing economic policy. Perhaps it comes up in rules against price-gouging, laws against fraud, or policies to support the neediest or prevent unfair trade practices. Let me start by explaining one thing I am not going to consider: inflation. Many people put inflation at the top of the economic worries list. They are absolutely correct in their gut feeling that inflation was a major challenge to the average family, and the higher prices that resulted need to be addressed. But inflation is about tomorrow’s prices, not today’s, and the inflation monster has been largely tamed.

Now put your pitchforks and torches down, MAGA friends! It is worth remembering that the terrible inflation we all experienced happened under the Biden administration (although they are only party to blame). It is more important to remember that that same administration told us there was little inflation, or it was temporary, or that we were making too much of it. It is most important to remember that Joe’s policies were going to make it even worse: but for Senator Joe Manchin, the Biden administration wanted to spend more than twice as much on its Green New Deal/Build Back Better/”Inflation Reduction” act. If the administration had its way, we might never have gotten inflation under control.

That in mind, the Federal Reserve has done a spectacular job, it remains on the job, and while prices are not going to decrease, they are back to increasing at a rate that few even notice. So the problem is not inflation now, but affordability. How do we get our economy growing while making life more affordable? And where do the candidates’ policies stack morally in answering this issue?

Vice President Harris intends to build what she calls “an opportunity economy.” While her public discussions and interviews have yielded only a word salad of buzzwords and the endlessly-repeated claim she grew up in a middle class family (with two university professors as parents), she has some details on her campaign website and an associated “policy book.” Among her proposals are these:

• Increasing the child care and earned income tax credits
• Extending the Trump tax cuts for all those making less than $400,000 annually
• new or larger tax credits for low-income home developers/redevelopers
• $25,000+ for renters buying their first-time home
• $40 Billion as a fund for local governments to innovate in home building
• more tax credits for small businesses, debt forgiveness for student loans, and an specified commitment to fund long-term health care for seniors.

The Vice President also has proposed raising the capital gains tax rate to 28%, rescinding the Trump tax cuts for the rich, and various other new taxes or policies that are either unconstitutional (wealth tax) or unworkable (“stopping Wall Street from buying and marking up homes”). There are many more proposals than I cover here, and in general, they are pretty much more of the same: the government has something for you. Let me choose one final one which encapsulates the main thrust of her economic policies: prices.

Noting the continuing problem that the voters really hate inflation and blame the administration for it, she announced her intention to go after price-gouging with a new federal law in order to address the practice. Pundits naturally interpreted this as some form of price control, which is as failed a policy as there is economically. She quickly disavowed this publicly, indicating rather her initiative was to create another law (there are thirty-seven states with such laws already) to combat price-gouging. So this has nothing to do with high prices, per se, but rather those who take advantage of situations (like natural disasters) to unfairly gouge consumers. The problems? She said it would address the already high prices, but it doesn’t. Price-gouging laws all take effect when there is a causative event (think charging an exorbitant fee for bottled water after a hurricane), which is not where we are now. And we have these laws, and few have been used by the States because there isn’t a problem here. The gist? A policy announced to sound good, but it is ultimately unrelated to the problem and unworkable. Ditto for some of her tax proposals, resulting in continuing additions to the deficit and national debt.

Turning to former President Trump, his plans (to the extent they can be called that) seem even more vague. He refers to building the greatest economy ever and helping various groups without further elaboration. There is way more spending and reducing government revenue, resulting in ever-higher deficits and national debt. He does have an economic record to run on, and the economy was a bright spot during his administration, right up until covid. On the stump, the former President has called for extending his previous tax cuts, eliminating unnecessary regulations, reducing the capital gains tax to 15%, eliminating income taxes on social security, overtime pay and tips, and instituting more and more draconian tariffs. Tariffs seem to be Trump’s magic solution to all problems economic. As price-gouging is to Harris, I want to look deeper into Trump and tariffs.

Tariffs were once upon a time the primary way governments acquired funding. Taxes on income were hard to collect before modern convenience made it easy, and they were strongly resisted. Tariffs, taxes paid by the government or company exporting something into your country, seemed like a no-brainer: “they” pay the tax for “us.”Another version of the concept is a “duty” (ever seen duty-free shops at the airport?), which is a tax paid by the company importing an item. Since companies run on profit, they have a tendency to pass along any tariffs, duties, or business taxes to the consumer. But not always (more on that later).

Tariffs fell out of favor because (1) they tinker with free trade, which has been shown to be the best way to run the global economy, and (2) heavy tariffs under the Smoot-Hawley Act helped turn the terrible recession of 1929 into the Great Depression. After that, no sane economist wanted to defend the practice. Tariffs were still around, but seldom used. When then-candidate Trump proposed smacking China with punitive tariffs back in 2016, he was widely ridiculed and economists predicted a disastrous trade war. President Trump went ahead, anyway.

Trump’s China tariffs (which the Biden administration decried but then kept in place, and now are proposing more!) produced US$233 billion dollars of tax revenue as of March 2024. There was no trade war; China responded with weaker, more-symbolic tariffs. But didn’t US consumers actually pay those taxes? There is no evidence to support that. Prices for Chinese goods under tariff rose slightly, but not as much as the tariffs, nor in-line with inflation. China’s producers simply let the tariffs eat into their profit margin, in order to keep market-share in the United States. Selling (even with reduced profit) was more important to China and its producers than buying Chinese products was to American consumers. This is the case where tariffs can really work.

Despite this apparent success, economists continue to howl. There are any number of statistical analysis showing the tariffs were a hidden tax on US consumers and cost the US economy a reduction in Gross Domestic Product. On the latter claim, US economic growth has been robust, and there is no way to prove at this point it would have been even stronger without tariffs. On the former point, the “hidden tax on US consumers” hypothesis always includes the caveat, “before accounting for behavioral effects.” What does that mean? When the price of Chinese products increases, fewer Americans buy from them: they change their behavior and buy from a different national producer. So the American consumers does not pay the tariff, rather, they avoid it.

As you can see, tariffs can be an effective policy in certain circumstances: there is a robust, competitive market, substitution is possible, and the tariffs are not so comprehensive. If you want to buy parmesan cheese and only the one from Parma, Italy, will suffice, you will end up paying the tariff, as the producer will pass it along to you. But if local “parmesan” will do, it will force the producer to eat it (the tariff, not the cheese). If you tariff everything, other countries will do the same, and the benefits may disappear.

There is another potential benefit/drawback with tariffs. They can encourage the growth of domestic industry (and thus jobs), since those products have a price advantage absent the tariff. This is a little tricky, though, since if there is no such industry, and you need the product now, you can’t wait. Or the industry might be one with enormously high start-up costs (think semiconductor production), or one where the country under tariff has a huge quality advantage (would you want to buy a “good-enough” domestic defibrillator?).

Sorry for the long macro-economics lesson! I wanted to explain that when you hear the experts talking about Trump’s tariffs, there is more than a whiff of “how dare you be right!” about it. But tariffs are a blunt tool, and can cause the problems I cited (pass-through taxes, trade wars, shoddy domestic production). For her part, Vice President Harris calls it “Trump’s sales tax” which may be smart politics, if inaccurate economics. Sales taxes are paid by the consumer, and are unavoidable. Try asking the check-out person at the store. Tariffs can be avoided. It’s also a bit funny she uses “sales tax” as a bogeyman. Many States employ sales taxes, and nearly every other large industrialized economy has some form of national sale tax. Many use an even more draconian Value-Added Tax, or VAT. You are no doubt familiar with it if you travel, as there are sometimes ways to get VAT rebated when making significant purchases as a tourist.

VAT is a sales tax on steroids, as it applies at every level of the value chain. Whenever a substance or product has value-added, the transaction is taxed. Mine dirt to find silicon (value-added over plain dirt) and sell it: taxed. Take that silicon and refine/purify it (value-added) and market it: taxed again. Cut that silicon and place in on transistors: yup, more tax. Put the transistors in a computer: taxed. And put that computer in a car: more tax. States and countries like sales taxes (they produce a lot of revenue), but they really love VAT.

What are Trump’s tariffs like? No one knows! He talks about massive tariffs, sometimes universal, but has no hard plans for them. Suffice it to say the tariffs will produce revenue, mostly not from Americans, but could also cause other issues.

Before I depart from former President Trump, a word about Project 2025. This is the 922 page document put out by the Heritage Foundation (a noted conservative think-tank) with policy proposals on just about everything, including the economy. Social media is filled with spurious posts about things that aren’t even in the document, but then again, there are many claims that are. Why haven’t I mentioned it thus far? Here’s a simple observation and a piece of inside-the-beltway insight. The observation is that if you think former President Trump has read the 922 page document, let alone endorses it, you need a reality check. But wait, aren’t many Trump supporters at Heritage? Didn’t JD Vance write the forward on a book by the same lead author? Won’t Heritage people be “in” a Trump administration. Yes to all, and just as irrelevant.

If you look up the advocacy group Democratic Socialists of America (DSA), you’ll see many Obama/Biden administration members, who will come back for a Harris administration. The DSA has a policy agenda on their website, and I could pick out some dandy ideas there to scare you. They haven’t (to my knowledge) yet endorsed the Harris-Walz ticket, but neither has Harris nor Walz declaimed their support. The DSA do claim to have influenced the Democratic Party to select Walz over Pennsylvania Governor Shapiro, a claim not denied by the ticket. DC types will tell you there are think tanks and agendas galore, and people who really believe in them, but as Mike Tyson legendarily said, “everybody has a plan until they get punched in the face.”

Neither candidate has introduced the kind of benefit cuts, savings, revenue increases or spending decreases to do anything about the federal deficit and ever-growing debt. Both seem content to leave the looming Social Security and Medicare collapses for the next administration to handle, meanwhile claiming the other side is out to “push granny off the proverbial cliff”

Neither candidate has plans or policies directly addressing the core economic challenges. Both pander to favored groups (student debt, big corporations, seniors, etc.) and tinker at the margins. As with the policies about Immigration and Abortion, there is little moral difference between them. Not to say a voter might like one set or the other, but it would be on expected results, not some inherenty more moral standard.

I’ll complete this series with a final look at January 6th, and a wrap-up to explain why I took all this time to compare the morality of the two campaigns.