Some thoughts on tariffs

What is Trump even trying to accomplish with the tariffs? You hear two purposes articulated by his administration and followers. First, that the tariffs are an aggressive, brash opening position in a negotiation that is intended to bring down other countries' tariffs and trade barriers. Second, that the tariffs are in place - "permanently" - to bring manufacturing back to America and to generate revenue.

Those two purposes are contradictory! The first would be a push for freer trade, in line with Ricardian comparative advantage. The second is the inverse of the first. It would reflect a belief that we are losing when Vietnam makes stuffed animals for us less expensively than we can make them ourselves. But anyway, the purpose, logically has to be one or the other, it cannot be both. 

I suppose it could also be the case that Trump is trying to achieve contradictory purposes without realizing it - that would be even worse. But it seems like the best hypothesis is that he has a longstanding dislike of trade per se and wants to have these large tariffs in place "permanently." 

The theory of Cornucopianism helps us to understand the transition away from manufacturing that the United States has made.

Herman Kahn writes about this in The Next 200 Years. As a country or civilization gets wealthier, the focus of economic activity shifts from primary (extractive) to secondary (construction and manufacturing) to tertiary (services) and then to quaternary (post-industrial) activities. 

And as you get richer, the theory of comparative advantage predicts that you would hire people who are not as rich to do physical tasks for you. Such as sewing fabric together. (Labor in Vietnam is even cheaper than in China.) 

You can buy an OCBD shirt made in the U.S. but it is expensive ($255) because people have higher and better uses for their time than making shirts. It's a flex, a status symbol, for your button-down to be made here instead of buying an shirt that's "globally sourced" for only $40.

For a country that has been supposedly "deindustrialized," the United States still produces a huge amount of manufactured goods. We do not make stuffed animals, we make jet engines. Essentially all of the commercial aircraft in the air right now throughout the world - probably 10,000 or more - are using American jet engines or British ones. China still cannot make them. 

Russia is truly deindustrialized. It produces virtually no complex goods for export and, unlike the U.S. does not export any impressive services either. Nobody is buying GPUs or analog semiconductors from Russia. (Imagine creating this chaos with tariffs to punish Vietnam for making us cheap shoes when we have a semiconductor ecosystem like this.)

The sad thing about the tariffs is that even if Trump set about them with the best of intentions and even if they could work in theory, they are not going to work in practice. Molson Hart has a great thread about why Trump's plan is not going to work from the level of an entrepreneur and factory owner. 

But Trump's plan is also not going to work politically.

Instead of attempting to legislate a durable trade policy, Trump tried to dictate, as one man, a clumsy and absurd system to govern the foreign trade of a $28 trillion economy. The problem is that the more arbitrarily and capriciously he acts, the less likely the tariffs are to be "permanent," and so the less likely that anyone would want to make a major investment in manufacturing a product in America that is currently manufactured overseas. 

Trump has blown 2026 (and likely 2028) for the GOP by causing a market crash and recession. The obvious conclusion by anyone with the capital to actually build a factory will be that these tariffs will not be in place long enough for the investment to be paid back.

In fact, Trump might be (and should be) put on a leash much sooner than 2026 or 2028. Senators Grassley and Cantwell introduced a bill (S 1272) that would cause any tariff imposed by the President to sunset after sixty days unless approved by Congress - it already has seven Republicans cosponsoring. So either Congress will get rid of the tariffs now or when Democrats win in 2026 or when a Democrat is elected in 2028. 

It looks like I was wrong to be optimistic about Trump in November. Notice that nothing on that list of things to be optimistic about pertained to tariffs or trade. It was a blind spot in not appreciating that Trump simply cannot grasp the concept of comparative advantage. Romney was correct all along - Trump does not have temperament of a stable, thoughtful leader.

Reasons to Celebrate

• The Trump administration will be in charge of the United States Quarter Millennial celebrations in 2026. Herman Kahn (previously) was excited about America's bicentennial, and he wrote his best book in 1976 with his predictions for the next two centuries. Kahn thought these occasions were a big deal, an opportunity to set a tone and mood for the country, which he obviously thought should be Determinate Optimism to use Thiel's term. Sadly, he could not get dopey Gerald Ford interested in the bicentennial. Kahn would be excited about a presidential administration where the SpaceX founder has a front row seat.
• Trump can continue to advance a classical aesthetic in new federal buildings, planes, ships and so forth. Having the correct views on hierarchy and beauty is true conservatism, and a sign that Trump is a genuine article where Romney, McCain, and Bush were not. During his first term, Trump issued an Executive Order on Promoting Beautiful Federal Civic Architecture.
• Hopefully, Trump will replace as many of the monuments that were torn down during the 2020 cultural revolution as possible, and revert back the names of any places that were changed for woke reasons. We really need to change "Denali" back to Mount McKinley to honor a president who believed in the gold standard and protective tariffs and who was assassinated by a communist. It would be good to go on the offensive and build new statues and monuments. There should be a James K. Polk monument.
• For a half century, welfare has taken priority over space exploration. Now with Musk we can have an ambitious national goal of getting to Mars. This will be part of a broader switch to solution-oriented future optimism as described in The Conservative Futurist. Perhaps we can stop starving our society of energy and get the usage per capita curve moving up again.
• We may have seen the high water mark for the progressive mania over DEI, transgender, and race. Democrats got hurt in the suburbs, which means they took the woke stuff too far even for the prosperous suburbanites who are squeamish about Trump. In 2028, we could see more normal Democrat candidates. If they are smart, they will go back to talking about the Two Income Trap and open borders as a Koch brothers proposal. Note that Fetterman was the only Democrat smart enough to go on Rogan.
  
• Make America Healthy Again (MAHA) is now part of the the conversation. This can be an aesthetic triumph for the country as well as an example of solution-oriented future optimism. Universal ozempic? This would be the first time that the President cares about physical fitness since JFK.
• The "mainstream" media is over. Trump finally realized that he could get his message out much better via podcasts than with establishment journalists. The interviews that Joe Rogan did with Trump, Vance, and Musk likely helped win young men. As president, he can erode the legacy media by starving them of interviews. Remember when a federal judge ordered the White House to restore the press credential of CNN reporter Jim Acosta? Discontinue the obsolete press conference format where the press secretary talks to the establishment media and talk with independent journalists and podcasters on an invitation-only basis.
  
• It is going to be tough to explain why Kamala did so much worse than Biden in their strongholds like Philadelphia, Milwaukee, Atlanta. Already, liberals are seeking explanations for why she got ~15 million fewer votes than Biden, as though the GOP made them disappear somehow. (Strangely, the Trump vote totals were also lower than 2020 despite much higher enthusiasm.) Laura Ingraham was talking on Fox last night about how there is no justification for Florida having an instant count and the Democrat cities holding back their results for days. Better election security would lock in a more conservative future, like Florida after DeSantis cleaned it up. (Also look how much better Virginia is this time.) If the margin of fraud is ~5 points, even New Jersey and New Mexico would now be competitive states if fraud were cleaned up.
  
• Musk did a Spaces on election eve talking about his efforts in Pennsylvania. He said that after getting involved in this election he discovered that Republicans have not been trying very hard to win. Wiping out election fraud is one bit of low hanging fruit. Another is forming coalitions based on popular platform positions. Reasonable stance on abortion (Trump's "more weeks") and anti-crime is a winning formula. Shouldn't parents be able to take their kids to a playground without seeing junkies and their used needles?
  
• Another four years of Trump judicial appointments. As Nate Silver says, a Supreme Court seat is an order of magnitude more important than most political matters. Trump's first term picks have been great even though the district judges do not get a lot of attention. This will give Clarence Thomas a chance to retire if he desires.
  
• We will not have to see much more of Obama, Kamala, Walz, Cheney, Bush, or Romney again. Trump has remade the GOP and kicked the controlled opposition grifters out.
• The GOP has a great bench for 2028 with Vance, Youngkin, and DeSantis. For the first time we will be spoiled for choice. Strangely, no democrat was smart enough to disavow open borders and wokeness. (Fetterman should have done this when he was on the Rogan podcast. He should have said, "we are going to lose this week because Pennsylvanians care more about jobs than pronouns.")
  
• The threat of anarcho-tyranny and communism is greatly diminished. There is a big tent of people opposed to this stuff. No one wants to deduct an unrealized gains tax from their net worth spreadsheet. The California proposition on rent control (#33) failed 62/38. I would imagine Trump rounds up the Venezuelan militants up right away.
• Demography is not necessarily destiny. Trump did better with Hispanics than Jeb Bush dreamed of doing.
  
• This was another triumph for Twitter autists. (Musk is our king.) He looked for the lever to pull to have the most impact (getting 100k Amish to the polls in Pennsylvania) and made a huge difference. Also, the threat of scrutiny (with no censorship on Twitter) prevented Democrats from doing a big steal.
• Remember that Trump will govern to the S&P 500 index. This is a victory for capital (regional bank stocks were up 13% today) but that should temper expectations for populist change.

Good response from our friend Chris DeMuth Jr.:

Sabin Howard should get the next monument task along with an architect along similar classical lines.  And the FBI and other brutalist buildings should be unceremoniously demoed.  Neomi Rao is my next SCOTUS pick; with this POTUS and Senate majority, we can get great judges.  I’m elated about Musk’s role.  This is a defeat for a static deterministic future molded by legacy media.  It is an end of a demographic progressive ascension.  Hispanic voters are not only opting out of a leftwing coalition, they might opt out of a permanently separate racial distinction.  I don’t know what the future holds but I love that.  I hope it is human centered, dynamic, technologically audacious, multiplanetary, and surprising.  Glad to be here for it.  

DJT

Good Point on Trump & Markets

A comment over at MR:

I am perplexed by the strength of the markets. I think Trump is a buffoon – but a very amusing buffoon with the right sort of political enemies. I would have thought that the markets would be more upset. After all, they bought and paid for Hillary. Surely they expected value for money?

It suggests that the Clintons weren’t selling influence. They were selling protection. People had to pay them or they would regret it later when Hillary was in power. So everyone is relieved that they are gone. For now.

Review of Secrets of the Temple: How the Federal Reserve Runs the Country by William Greider

The one good thing about Secrets of the Temple is the documentation of the Fed's strong influence over the business cycle, and therefore over presidential elections.

Being elected president at or near the top of the business cycle is bad news. When the cost of money eventually spikes and the economy suffers, people blame the incumbent president. This may be why Carter only had one term in office. (Very rare given the powerful incumbent advantage in elections.)

Conversely, Obama was elected at the perfect point in the business cycle: the bottom. He couldn't have had it any easier. The slow recovery actually served him extremely well - where would he have been without the ability to borrow a trillion dollars a year at low interest rates?

Now Trump enters office with very high asset prices - a "big fat bubble". Average hourly earnings are the hottest of the cycle (2.8% growth in December), which gives cover for tightening. It's a safe bet that there's not a single Trump supporter on the Federal Reserve Board of Governors. Raising rates (at the right moment) and causing a recession has a strong chance of defeating an incumbent president after one term.

Think about it, the Fed has three purposes. Bailing out the elite at the bottom of economic cycles, which is a put option that allows them to use more leverage. Choking off the economy when labor is starting to receive a share of economic growth (like now). And third, bouncing populist presidents from office. See this week's WSJ:

"The Federal Reserve is quietly tightening U.S. monetary policy—by means other than interest rates. Decisions made by the Fed years ago mean that the maturity of its $4 trillion-plus bond portfolio declines every day, a process that Fed Chairwoman Janet Yellen said in January has the same impact on benchmark bond yields as two short-term rate increases over the course of 2017. In a footnote to her most-recent speech, Ms. Yellen said that the maturity of the Fed’s portfolio is falling. The average duration of the Fed’s portfolio, excluding mortgage-backed securities, fell to just over six years last week from nearly 7.5 years at the end of 2013"

Unfortunately, this book isn't based on a solid theory of economics (like Austrian), and although it depicts the Fed as a "secretive temple," it does so in a typical journalistic power-adulatory way. The overall message is that the Fed does have enormous power, but it's exercised by and for technocrats and any conspiracy theories are wrong. But watch and see how hard it they are going to make things for Trump.

2/5

Peter Thiel Speaks at The National Press Club

High Plateau Drifter on "The Narrative" and Trump

The unrelenting media narrative is that the economy is growing and everything is great. Of course, for those without real college educations the job opportunities are scarce and real wages are falling. Thus the subtext, and vehicle for social control in our atomized and socially disconnected society, is that if you aren't doing well the failure is you as a lone individual. The failure is yours and not a failure of the system. The propaganda message to every economic loser is that there is no opportunity to organize for changing the system because there is no broad base of support.

Trump is destroying this institutional narrative that allows social control of the economy's many losers. Getting Trump to abandon his "the economy sucks" narrative is far more important to the system than whether or not he wins the election. The last thing the current economic establishment wants, given that its primary business is the export of jobs and dollar denominated bonds in exchange for cheap goods, is to have the many economic losers understand that they are a majority with common interests. Whether or not Trump wins the election, his campaign theme will do irreparable damage to social control by the elites as the economy continues its down hill slide.

Great Review of Trump's The Art of the Deal

Great review:

I started the book with the question: what exactly do real estate developers do? They don’t design buildings; they hire an architect for that part. They don’t construct the buildings; they hire a construction company for that part. They don’t manage the buildings; they hire a management company for that part. They’re not even the capitalist who funds the whole thing; they get a loan from a bank for that. So what do they do? Why don’t you or I take out a $100 million loan from a bank, hire a company to build a $100 million skyscraper, and then rent it out for somewhat more than $100 million and become rich?

As best I can tell, the developer’s job is coordination. This often means blatant lies. The usual process goes like this: the bank would be happy to lend you the money as long as you have guaranteed renters. The renters would be happy to sign up as long as you show them a design. The architect would be happy to design the building as long as you tell them what the government’s allowing. The government would be happy to give you your permit as long as you have a construction company lined up. And the construction company would be happy to sign on with you as long as you have the money from the bank in your pocket. Or some kind of complicated multi-step catch-22 like that. The solution – or at least Trump’s solution – is to tell everybody that all the other players have agreed and the deal is completely done except for their signature. The trick is to lie to the right people in the right order, so that by the time somebody checks to see whether they’ve been conned, you actually do have the signatures you told them that you had. The whole thing sounds very stressful.