Sterling Terrell

recovering economist

Trump Tariff Nonsense

Trump Tariff Nonsense

On economics, Donald Trump has no idea what he is talking about.

“But he is a billionaire! A smart businessman!” you say?

Well, he has been bankrupt a number of times.

And would be better off if he had simply invested all his money in the S&P 500.

But yes – he is a billionaire. I will give him that.

My issue, however, deals with his view on trade.

He is either bloviating nonsense or simply dangerous.

He has proposed a 25% tariff on imports from China.

Most recently, he has proposed a 45% tariff on imports from China.

The reasons for the proposed tariff includes unfair trade and currency manipulation on the part of China.

In regard to currency manipulation, I am not sure what Trump thinks that the U.S. Federal Reserve does exactly.

A country manipulates its currency, to the “benefit” of themselves?!

Of course, they are. And we do the same thing.

However, if Trump wants to be against ALL currency manipulation and endorse a gold standard – or the like – I can respect that. But my guess is that he wants no such thing.

Second, the issue implies that China is devaluing its currency to unfairly make goods cheaper, relative to the US dollar and other currencies.

This makes Chinese goods cheaper for others to buy.

But – it also makes all other goods more expensive for the Chinese to buy.

Artificially, our standard of living goes up (through cheaper goods) – while China decreases the standard of living of its own citizens (through more expensive goods).

A 45% proposed tariff on all Chinese imports is, however, the most insidious.

You realize that it would make everything imported from China 45% more expensive, right?

Do you have any idea by how much that would decrease the standard of living for the average American absent similarly priced alternatives?

I hope everyone remembers the Smoot-Hawley Tariff Act and how instrumental it was in the Great Depression.

My guess, however, is that thankfully, Trump is just bloviating before the big deal.

If elected, it allows him to go into negotiations with China threatening to end trade relations, so he can come out and say: “Hey, China has agreed to import more U.S. goods.”

Let’s hope so anyway.

We should be leading the way on freedom, free-trade, and economic sanity – not posturing against it.

Economics: On Production

Economics: On Production

I wrote a post some time ago titled:  30 Basic Points on Economics.

Point #6 was:

“Cost has nothing to do with price, other than to say: If it costs more to make something than it can be sold for, it does not get made.”

This concept – that price has little to do with cost – is hard for many to get their head around.

A great example, of this, is a conversation I had when I worked at a summer camp years ago.

I occasionally helped out in the camp store, and one afternoon the store manager and I were busy putting price tags on t-shirts.

The manager casually said: “We paid $10 for each one of these shirts. Should we charge $15, or $20 for them?”

I replied: “Who cares what they cost. What do you think we can we sell them for?”

The manager replied:

“We are charging cost-plus. We sell these shirts for 20% over cost.  And this stack here, we always charge 50% over cost.”

I took a few steps back and pointed to the bargain bin of dishevel discount shirts:

“How much over cost do we charge for these?” I asked.

“See? Price has nothing to do with cost. All that matters is what we can sell them for. These bargain shirts have been here for years. They are marked down to $5 each. And we can’t even sell them at that price! The same goes for this stack we just bought. If we sell out of them charging $40 each, wouldn’t we order more and start charging $50 each.”

What the store manager didn’t get is that the price paid, or charged is what someone is willing to pay for it.

What if you ran an oil company?

Nothing huge.

Maybe you have an LLC in your name and own 1 oil well.

The cost of getting the oil out of the ground and ready to be sold is $40 per barrel.

Guess what? You are going to sell that oil for the market price – your cost has nothing to do with it.

The second part of what I said originally was:  “If it costs more to make something than it can be sold for, it does not get made.”

The example of your 1 oil well-owning company still applies.

If the price of oil is $30 per barrel for an extended period of time, guess what?

You are going to quit running your oil well.  You turn it off!

Which is another way of saying the same thing:

“If, in the long-run, it costs more to produce oil than oil can be sold for, know oil reserves will not be harvested.”

And you know what?

The same is true for t-shirts:
If in the long-run, it costs more to buy camp t-shirts than camp t-shirts can be sold for, people will eventually stop ordering camp t-shirts.

Sterling Terrell