The truth about President McKinley and his tariffs - trade costs fell, not rose
Trade economics does get wrapped up in a lot of complications - often deliberately so - but it is still possible to approach the subject using basic logic. Something that isn’t, necessarily, happening:
For there really is a moral case for tariffs. In a protectionist state, goes the argument, there is less need for welfare because jobs are plentiful; less incidence of social unrest because wages are high.
Prices might go up – though they barely did in Trump’s first term – but that’s the whole point. While income taxes penalise effort, tariffs, by hitting consumption, encourage frugality and saving.
That’s something that doesn’t work just using that basic logic. If prices are high then wages are low. Your real wages are what you can purchase with what you get paid - if you can buy less then you have lower wages. If the amount you can buy is low then your wages are low. Further, high prices relative to wages do not increase savings. If this were true then the poor would have higher savings rates than those richer than them - for the poor face higher prices relative to wages than those richer than them. Reader: the poor do not have higher savings rates than those richer than them.
Further:
Yet philosophically it makes sense, and the inability of journalists to see the President’s point of view betrays how far free trade has become a religion – a faith, like any other, that’s prone to myth and hypocrisy.
The myth is that free trade built America and is an axiom of conservative thought. In reality, throughout the 19th century, taxes on imported goods provided over half the government’s revenues, and Republican presidents saw them as essential to expand industry and protect US workers from cheap products and labour. To quote President William McKinley, Trump’s mountainous hero: “Free trade results in our giving our money… our manufactures and our markets to other nations... It will bring widespread discontent. It will revolutionize our values.”
Here it’s a factual problem. Observers are quite right to point out that McKinley’s America did pretty well while groaning under tariff burdens that doubled and more following the Civil War and on. However, tariffs are only part of trade costs.
The total costs of trade are, obviously, all the costs that going into being able to trade. We tend to forget now, in a world where a 36 tonne container of whatever can get whereever for $3,500 or so, how important those other costs used to be. As Mssrs Findlay and O’Rourke point out in Power and Plenty*, total trade costs over those decades of high tariffs actually fell. The ocean-going steamship reduced transport costs by more than tariffs increased other trade costs. Yes, the calculations have been done. The United States became more open to trade over those decades of rising tariffs. Which is one of the reasons why trade increased over that period.
One more factual point. Yes, tariffs were a (and booze taxes, we think at least, the other) major source of Federal revenue. But it’s also true that Federal government was of a size that could be fed merely with tariffs and booze taxes. 3 and 4% of GDP, that sort of level. Enough to pay for the (small) standing army and the President and Congress itself and really not much more than that. The free market, minimal governance, argument is not undermined by a country booming in such circumstances.
It’s entirely true that how the United States governs and taxes itself isn’t up to us here. But it is possible to see there a bargain that we’d readily accept. In fact, reduce the Feds to 3% of GDP again and we’d happily sign off on near any form of taxation to pay for that minimalism. On the grounds that the benefits of non-Feds would be so great that the damages of even non-optimal taxation at such levels would be tiny costs to have to bear in comparison.
Not that that’s a deal actually on offer, more’s the pity. Perhaps it should be…..
Tim Worstall
*Any interested in the subject really should read this. Fairly weighty but for those wishing to be armed with the details worth it.