At RealClearMarkets David Hebert makes the case against tariffs, largely a response to Oren Cass’s defense of Trump’s plans. His arguments generally follow the standard neo-classical arguments with a soupçon of ad hominem tossed in:
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.
I’m not arguing against him because I largely agree with him but I wanted to address some specific points that Dr. Hebert makes and explain where I differ from him.
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.
This is a very complicated subject, too complicated for a blog post. First, people who work in the healthcare sector are compensated based on how much care they provide not based on how much health they provide. Now specialization is a necessity as the absolute amount of knowledge increases but it is also aligned with the incentive to provide more care.
From 1900 to 2000 life expectancy (a reasonable enough proxy for health) grew considerably but starting around 2005 that peaked and, indeed, has actually decreased in recent years. Some but not all of that decrease was due to COVID-19. Some was due to bad habit but I believe that some was a result of increased care having a limit in its marginal productivity. At this point while I think there’s a good argument that different care could produce additional benefits I don’t think the argument that more care will is quite as good as it used to be.
I suspect that here Dr. Hebert is succumbing to the flaw he criticizes—failure to consider marginal benefits. Does one more pediatric oncologist actually produce more health?
Equally impressive, in 1900, almost 40% of the American working population was employed in agriculture. Today, that number is less than 2%.
I’m going to use wheat production as a proxy for agricultural production here. As you can see from the graph above a decreasing number of people working in agriculture were able to produce an increasing amount of wheat. Until 1980 that is. What happened?
I don’t know. You tell me. I can think of all sorts of explanations but what happened is hard to argue. Starting around 1980 U. S. wheat production went flat (noisy but flat) and has remained so. My key point: production is how much wheat you are producing. I suspect that globalization played a role.
This post is starting to get long and I have several additional points to make. I’ll be as terse as I can. I understand comparative advantage but there are three problems. I have yet to meet a CEO who understands comparative advantage or one who does not understand absolute advantage. Chinese has an absolute advantage over the United States on a very wide array of manufactured goods. Under the circumstances comparative advantage makes little difference. And the Chinese leadership has sufficient authoritarian control to limit imports and regulate prices to give China comparative advantage as well as absolute advantage.
As I’ve said before I think that China is a special case and we have little recourse but to impose tariffs on China.
Finally, I think that Dr. Hebert is engaging in a certain amount of hand-waving. Consider the Bureau of Labor Statistics’s list of fast-growing occupations. Some don’t pay enough to maintain a middle class lifestyle (home health assistants and veterinary assistants); some are highly subsidized (wind turbine service technicians, solar photovoltaic installers); and some require qualifications that relatively few can satisfy (veterinarians, physicians assistants, data scientists). Every single one of them is tertiary production.
I think we need more primary and secondary production. Does Dr. Hebert believe we can support the American population based on tertiary production alone?
To my eye that the wheat chart shows an increase in exports to China in the 70s as China enacted economic reforms, but this new market was very volatile due to Chinese policies of food-security in wheat, corn, rice and sugar through import quotas, tariffs, and price supports. China imposes a 65% tariff on wheat (and corn) over quota (1% within quota), which must be traded through government-controlled entities. So I would say American farmers could produce more wheat if China didn’t restrict imports in the name of security and keeping Chinese farms in business.
I think that a lot of things top off around 1980. While I like to blame a lot of that on Republicans taking over in the 1980s I actually think a lot fo that is just the rest of the world catching up to us after the wide scale destruction of WW2 and some countries like Japan modernizing. Could we be exporting more wheat if China didnt have quotas? Maybe, but China isn’t the only country in the world. Our leveling off suggests its a world wide phenomenon.
I think that most people would like to see more primary production in the US but the question is how do we get there. Tariffs have a lot of negative secondary effects and wont really target areas where we want growth. It’s a broad policy with the hope that positive results will follow. It likely gives us decreased economic growth and will generally increase prices. If everyone responds and adds tariffs to our goods it’s hard to see how we are better off. All of which ignores the time factor. We would need to rebuild supply chains. For a while, probably many years, we will have higher prices without any resulting increase in primary production.
As an aside I would suggest that functionality is also an important metric when looking at health care.
Steve
As I’ve said every time the subject has come up, I disagree with the idea of broad-based tariffs. I simply don’t think we can continue buying much of the actual stuff we consume from China, putting money in the coffers of the members of the CCP, and hoping for the best.
This is an extremely good and relevant point. My question is to what degree do those who work in healthcare actually devote their attention to the “paracurative” aspects of healthcare that are of concern to patients? IMO many of the functional aspects of healthcare are primarily of interest to practitioners rather than to patients. So, for example, do patients really concern themselves with certification of health status (one of the functional aspects of healthcare)?
Most people want to be able to work and to able to function independently at home. That is important to people. So a lot fo the emphasis on dealing with chronic conditions/illnesses, especially those that dont really have a cure, is making them functional. It’s one of the reasons, for example, that total joint surgery is so popular. For some people it’s just to play golf again but for many it means they can work and are able to do everything they need to do at home rather than pay someone or rely on family. There is a lot of focus on being able to keep people at home and avoiding nursing home type care.
Steve
Center pivot irrigation combined with ethanol production has turned a lot of wheat acreage into corn acreage.
Higher yields and profits.
That would align with the timeline.