I had a really great idea for a post all outlined in my head for the last few days, but no time to sit and write it out. And I can say that getting old has at least one disadvantage so far because now, when I finally have some time to write, the idea has vanished. It had something to do with extrapolating on my last post about NGDP, but it is now Poofsville except for my intention to weave the tariff issue into it.

I heard Fox News talking up the Trump tariffs on steel and aluminum yesterday, and according to them it will create 200,001 jobs – or something like that. I certainly am skeptical about their intentions in some respects, but I really don’t believe that in this case they had the intention of misleading and I feel pretty confident in disagreeing with the assertion of net job creation and saying that it won’t create any jobs on net for the simple fact that the Fed is an inflation rate targeting central bank. Depending on the severity of the new tariff policy, it could actually end up costing jobs on net and in industries no one would ever imagine being linked to anything having to do with these materials.

Why? Well, it’s because of the way IT works, the soft cap on NDGP in order to control the P in M*V = P*Y. In this case, the economic pie is more or less zero sum except for the very tiny bit of wiggle room left within the bounds of how far P has to move to get to the target. So if the negative supply shock caused by the new tariffs pushes P above 2% (and it doesn’t actually have to do it, just look like it might for expectations to change) that will cause the Fed to lower the soft NGDP cap so that the tariffs then, in aggregate, end up like trying to make a PB&J sandwich with too much PB&J – it squishes out from between the two pieces of bread and makes a real mess. You just don’t get anything extra without displacing something else. In short, the tariffs are really just one way to cause a lot of what would appear to be cyclical unemployment – all over the place.

Trump is completely in the wrong here. Tariffs do nothing under a simple rate-targeting IT regime except inflict economic hardship on domestic innocents. So, it comes down to the pretty simple choice of either the IT regime needs to go or the tariffs do. I’d prefer that they both go.

If dealing with trade partners becomes a serious problem, the better ways of dealing with it takes some creativity, but you want to make the impacted industries ultra-competitive in whatever possible way. Create positive supply shocks that nobody will ever forget instead of taking the lazy guy’s way by just slapping tariffs on things. Geez!

 

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