More on Trump's terrible tariffs

Here is a must-read article on the folly of Trump's tariff policy: Trump’s Tariffs Are as Bad as BidenomicsTrump’s Tariffs Are as Bad as Bidenomics, from the April 15, 2025 edition of the WSJ.

Key excerpts:

The logic of the Trump protectionist policy is that a nation can become richer by producing at home products that it could buy more cheaply abroad. Not only does this defy reason, but the administration has presented no evidence showing how the U.S. or any other nation has benefited economically from broadbased protectionist policies.

The president’s trade policies focus exclusively on manufacturing, never mentioning America’s massive surplus in the services sector, where wages are now on average higher than in manufacturing.

In 2018, Mr. Trump imposed tariffs on washing machines, raising the cost consumers paid for these appliances by more than $1.5 billion annually while bringing in only $82 million in customs revenue. Even after netting out the tax revenue, the average annual cost to American consumers of each job created by these tariffs was north of $815,000, roughly 19 times the average annual salary earned in 2018 by production-line workers employed in manufacturing appliances.

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Blogging will be light for the rest of the month since I am spending some time Italy.

Trump's Tariffic Mistake

I'm a fan of nearly everything Trump has done this year, with the exception of his Terrible Tariffs. As I and many others have explained, Trump's threat to raise tariffs is a terrible idea because they're meant to fix something that isn't broken (Trump's claims to the contrary notwithstanding).

Our trade deficit with China, for example, means that we buy more goods and services from China than they buy from us. The difference, termed the trade "deficit," is evidence, in Trump's mind, that China is "ripping us off." But by the laws of commerce, he who sells more goods and services than he buys must do something with the net amount of money he receives. In the case of China-U.S. trade, the dollars China earns from its commerce with the US must inevitably find their way back to us in the form of investment, security or bond purchases, or simply bank deposits. Simply put: you can't spend dollars in China.

China is not ripping us off because it already spends everything it earns from our trade deficit. In economic jargon, the deficit in goods and services we have with China is completely offset by a surplus in our capital account.

Where Trump has a legitimate beef with China and other countries is their use of tariffs to make US goods and services expensive and thus reduce their demand for our stuff. They would be better off—and so would all of us—if no one used tariffs. Free global trade is nirvana for everyone. Everyone wins when tariffs are zero.

Trump understood this back in 2018 when he said during a discussion with G7 leaders that all countries should eliminate tariffs and subsidies, because that would be "true free trade." Has he forgotten what he once believed in and fully understood?

You might think so after living through the global financial turmoil of the past week or so. It was a nightmare scenario. Trump was a madman determined to wreak havoc among global economies and global trade. I was so anguished I could only think that the prospects were so awful that Trump would be forced to back off. This couldn't go on. And suddenly, yesterday, it didn't. Trump gave everyone except China a 90 day reprieve and markets rejoiced. Today, however, second thoughts were creeping back in.

I agree with what Bill Ackman said yesterday. By waiting until panic set in before announcing a reprieve, Trump forced the world to see first-hand what the results of a global tariff war would lead to. And he also put tremendous pressure on China, the biggest bad actor of global trade, to change its ways. It was a master-stroke of persuasion. Until yesterday I had begun to fear that Trump was making a huge mistake. Now my fears have been assuaged. We're not out of the tariff woods yet, but the prospects for a favorable resolution have improved dramatically. Maybe those tariffs Trump threatened weren't so bad after all, if they help the world understand how bad they can be. 

Now let me comment briefly on today's CPI release, which was a pleasant surprise. The chart below says it all:

Chart #1

Chart #1 compares the year over year change in the CPI index with the same change in the CPI index ex-shelter. The ex-shelter version of the CPI has increased by 2.3% or less for the past 23 months (since May 2023), and it has averaged a mere 1.7% per year for almost two years. In the past year, ex-shelter inflation was only 1.5%. Only shelter costs have kept the broader CPI from long ago meeting the Fed's objective, and their impact is continuing to fade away. 

To repeat what I said months ago, tariffs don't cause inflation. Only monetary policy causes inflation. So far the Fed has been doing a pretty good job of neutralizing the monetary excesses of 2020 and 2021.

Chart #2

As Chart #2 shows, the M2 measure of the money supply is within shouting distance of the long-term trend growth that prevailed from 1995 through 2019. Excess money has all but disappeared, and Chart #1 goes a long way to proving it.

Inflation update

Markets are in correction territory, and the economy is flirting with a recession. There's a lot of concern about the impact of Trump's beloved tariffs, and the judicial system, with the help of a weakened Democrat Party, is trying its darnedest to stymie Trump's efforts to put the federal Leviathan on Ozempic. 

In any event, I detect no reason to worry about inflation. I do worry because emerging economic weakness stems from several sources: the fallout from DOGE cutbacks, the fallout from tariff wars, and the ongoing weakness in the housing market coupled with unsustainably high prices and mortgage rates. Another factor may be due to the uncertainty surrounding whether Trump's 2017 tax cuts will be extended prior to year end, when they are scheduled to revert to much higher levels. Worry about growth, not inflation.

Chart #1

Chart #1 compares the year over year change in the CPI index with the same change in the CPI index ex-shelter. It's important to note that the ex-shelter version of the CPI has increased by 2.3% or less for the past 22 months (since May 2023). Only shelter costs have kept the broader CPI from long ago meeting the Fed's objective. And their impact is almost certainly fading away. 

Chart #2

Chart #2 focuses narrowly on the rate of inflation in shelter costs. The one- and three-month annualized  rates of increase in shelter costs have been declining since mid-2023, and the decline looks set to continue. As it continues, and without any help from the Fed, the gap between the CPI and the CPI ex-shelter (Chart #1) will also decline, and eventually approach zero. We just need to be patient. The decline in shelter cost inflation has taken quite a few months longer than I expected, but nevertheless it is occurring. 

Chart #3

Today we learned that the Producer Price Index for Final Demand was unchanged in February, but is still up 3.2% over the past 12 months. Is this a problem? I've always paid more attention to the broader Producer Price Index for Finished Goods, and it has been quite well behaved, as Chart #3 demonstrates. Both the total and core versions are up only about 2% over the past year. More impressive, however, is that the PPI Finished Goods index has only increased by 1.3% since June 2022. That's an annualized rate of increase of only 0.04% over the span of 32 months. PPI inflation is on life support.

If we can make it to year end while avoiding a massive tax increase and runaway tariff wars, the long-term effects of Trump's (stupid) tariff wars and DOGE's cost- and regulation-cutting efforts should be very positive.