Conflicted

I agree with everything that Phil Gramm and Donald J. Boudreaux say in their latest Wall Street Journal op-ed about tariffs. Here’s a sample:

It’s true that America had high tariffs throughout the 19th century and experienced substantial economic growth. But tariffs were the nation’s primary revenue source until the ratification of the 16th Amendment—which authorized income taxes—in 1913. Alexander Hamilton, who supported industrial subsidies that Congress rejected, was skeptical of high tariffs since no tax revenue is collected on goods that tariffs keep out of the country and tariffs funded about 90% of the government.

and

Proponents of more government spending used the politically expedient argument that tariffs helped infant industries by protecting them from foreign competition. But in 1831 the nation’s longest serving secretary of the Treasury, Albert Gallatin, rejected the conclusion that high tariffs promoted economic growth. He wrote that “the American people, amidst all the fluctuations and vicissitudes incident to human affairs, had never ceased to make the most rapid progress in agriculture, arts, and commerce. To ascribe that unexampled and uninterrupted prosperity, which even legislative errors cannot arrest, to a tariff is one of the most strange delusions by which intelligent men have ever suffered themselves to be deceived.”

In 1875 the great British economist Alfred Marshall visited the U.S. to see whether protective tariffs fueled economic growth. Before his visit, Marshall thought the infant industry argument for tariffs might have merit. What he observed in the U.S. changed his mind. In 1903, reflecting on his trip, Marshall wrote: “I found that, however simple the plan on which a protective policy started, it was drawn on irresistibly to become intricate; and to lend its chief aid to those industries which were already strong enough to do without it.”

I agree that tariffs are lousy tools. I have two related questions for them though. First, let’s consider a simplified model of the U. S. economy. In this model we produce no actual physical products. No iron. No steel. No automobiles. No airplanes. No lumber. No minerals of any kind. No soy beans. No wheat. No physical products at all—just services.

We continue to need things to survive. How will we pay for the goods we need? Continue to inflate the currency? Won’t China refuse to take it eventually? Not to mention everyone else. Sell Land to China? That’s what we’re doing now. Here’s a pretty balanced primer on Chinese ownership of prime U. S. farmland. It’s also true of mines and timberland.

Here’s my second question. President Biden has said that if China attacks Taiwan, we will defend Taiwan. Every major U. S. weapons system requires components made in China. How would we fight a protracted conflict with China?

I think the answers to both of those questions is that we can’t and that it is an economic and security necessity that we make a lot more of the stuff we need and that we shouldn’t be using components made in China in our weapons systems at all. How do Mssrs. Gramm and Boudreaux propose that we accomplish that?

For thirty years I have been saying that it would be a lot less fun and a lot more expensive to reindustrialize than it would be not to deindustrialize in the first place.