The Impact of New Tariffs On the US: Let Them Eat Ideology?

Capital markets do not seem to be buying the argument that the administration's new "Liberation Day" tariffs will make the economy stronger and American consumers' wealthier. In fact, most major US financial institutions are now raising their estimate of the likelihood that the US will fall into recession as a result. 

Some argue that this is a clever political tactic designed to force an overdue recession early in his term so that the economy is rebounding when the president announces his constitutionally dubious proposition to run for a third term. But in the interim, economists are united in predicting prices will rise, jobs will be lost and that stagflation, not seen in decades, is likely. JL

Noah Smith reports in Noahpinion:

“Tariff” means “import tax”. The only way tariffs could shift production to America from overseas is by raising the prices of imported goods. Historically speaking, these tariffs are enormous. They are much higher than the Smoot-Hawley tariffs imposed at the start of the Great Depression. Like Maoists during China's (economically ruinous) Great Leap Forward, Trump’s apparatchiks are calling for Americans to forsake material prosperity, suck it up and accept lower standards of living to line up behind their President’s ideological program. To them economic isolation is freedom, and that freedom is worth more than your 401(k).  The basic message is “Let them eat ideology.”

My high school history teacher was a colorful character. I still remember one time when I asked him why some historical actor had done something stupid. He grinned asked me: “Why does a dog lick its balls?” When I couldn’t come up with a good answer, he waggled his eyebrows and said: “Because it can.”

That wasn’t a particularly satisfying answer. But in the 21st century, it often seems like America does stupid things just because it can. Why did we go to war in Iraq? Why did so many of us refuse to take Covid vaccines? Why did we let West Coast cities slip into anarchy? Why did we fail to punish Trump’s attempt to overturn the election of 2020? And so on, and so forth. It seems like we got bored of all the smart, successful things we did in the 20th century, and started exploring all the possible ways we could be stupid instead.

It’s not as if these mistakes aren’t having negative consequences. They are! The Iraq war was a costly debacle, the antivax movement cost many thousands of lives, lax policing probably killed thousands, and so on. We keep touching various hot stoves, jerking our hands away, and saying “Ouch! Well maybe this other hot stove will be good to touch.”

Today America put its hand on yet another hot stove, when Trump announced a series of enormous new tariffs on almost every country in the world. Here’s at least a partial list:

The only two countries on the planet that were exempted from Trump’s tariffs were Russia and North Korea. (Note that I still don’t think Trump is actively working for the Russians, but he’s not doing a heck of a lot to prove me wrong on that count.)

Historically speaking, these tariffs are absolutely enormous. They are much higher than the famous Smoot-Hawley tariffs imposed at the start of the Great Depression:

Source: Evercore ISI via Jason Furman

And in case you think it’s just one Mad King doing this, realize that Congress has the power to revoke Trump’s tariff authority and cancel all of these tariffs any time it wants. The fact that it has not done so means that a critical mass of our elected legislature is on board with Trump’s program.

It’s almost tragicomic to watch Trump’s apparatchiks scramble to defend this act of intentional economic self-harm. For example, Peter Navarro, who is now probably Trump’s key economic advisor, tried to tell us that tariffs are actually tax cuts:

Well, no they’re not. That’s just wrong. “Tariff” means “import tax”. In fact, the only way tariffs could ever actually shift production to America from overseas is by raising the prices of imported goods. I’m not sure whether Navarro means that tariffs will allow us to cut other kinds of taxes (which would only be true if we want to run up the national debt even more than we’ve been doing), or whether he’s just mouthing the words “tax cuts” robotically because that’s what Republican voters have been conditioned to like. But either way, it’s a farce.

Other defenses of tariffs are even less coherent — just blizzards of meaningless buzzwords. And some Trump officials have even resorted to telling Americans to suck it up and accept lower standards of living — Treasury Secretary Bessent has declared that “Access to cheap goods is not the essence of the American dream.” (This would come as news to many Americans.)

Meanwhile, some Trump supporters are clinging to the hope that these tariffs are just a bargaining tactic that Trump will use to force other countries to lower their own trade barriers against American goods. That’s incredibly unlikely, given that A) all the evidence shows Trump just likes tariffs and hates international trade, and B) the tariff rates that Trump claims other countries are charging the U.S. are entirely made up.1

Americans will not be fooled by any of this. Stock markets had already declined in anticipation of Trump’s new round of tariffs, but the import taxes are apparently much bigger and more aggressive than investors had been expecting, so markets are set to fall even more. Trump’s poll numbers are falling, as swing voters recoil from the hot stove.

And yet, like Maoists during the Great Leap Forward, Trump’s apparatchiks are calling for Americans to forsake material prosperity and line up behind their President’s ideological program:

The basic message is “Let them eat ideology.” Trump called these tariffs “Liberation Day” because his ideology says that trade with other countries makes the U.S. dependent on those countries. To Trump, economic isolation is freedom, and that freedom is worth more than your 401(k).

Why is America choosing this moment to embrace an insane, self-destructive economic ideology? One reason is that the many years in which Trump’s subordinates managed to restrain his worst impulses simply tricked much of the country into believing they could take Trump “seriously but not literally”, and that he would never actually smash the economy. Another reason is that America is just emerging from a period of popular unrest, in which crazy ideologies of all stripes got far more buy-in than they should have.

But there’s also a deeper, longer-term reason. Over the past two decades, Americans collectively convinced themselves that their economy — by many measures one of the top performers in the world, and indeed in all of human history — was fundamentally broken and needed major changes. This line of thinking, popular on both the right and the left, did succeed in identifying some problems with the existing American system. But it massively blew those problems out of proportion, and brought way too much ideology into the debate. Now we’re going to experience the consequences.