“Something must be done. This is something. Therefore we must do it.” Those are my favorite three linesfrom Yes, Prime Minister, a British comedy series about politics. Most politicians who face a problem think that “something must be done.” Unfortunately, they tend to reach the same conclusion that the adviser reached in the Yes, Prime Minister episode.
But in the US economy, in which governments at all three levels tax, spend, and regulate as much as they do, there’s another way to confront problems that does not involving taxing, spending, and regulating more. That way is to reduce taxes, spending, and regulation. In short, some things must be undone.
There’s a long list of things that should be undone and that would help ameliorate, rather than exacerbate, some of the problems we face. I’ll settle for five: regulations on home food production, the Jones Act, protectionist trade policies, restrictive immigration policies, and occupational licensing. In each case, I’ll show a particular problem that undoing these policies would ameliorate.
These are the opening three paragraphs of my most recent article for Hoover, “Don’t Just Stand There: Undo Something,” Defining Ideas, May 5, 2022.
One of the best sources for information about the effects of protectionism is the Peterson Institute for International Economics (PIIE). In a study published in March, Gary Clyde Hufbauer, a senior fellow with PIIE, and Megan Hogan and Yilin Wang, both research analysts with PIIE, advocated trade liberalization as a way to reduce inflation and increase real incomes for American households. They estimate that eliminating Trump’s trade war tariffs and ending his 25 percent tariffs on steel would achieve the equivalent of a 2-percentage-point reduction in tariffs. Based on this, they estimate, the consumer price index (CPI) would be 1.3 percentage points lower than otherwise. So, for example, if these measures were undertaken this year, and assuming that importers could adjust quickly, the CPI for 2022 would be 1.3 percentage points lower than otherwise. That would not be a permanent reduction in inflation, but it would mean that the CPI would be permanently 1.3 percentage points lower than it would have been. Hufbauer et al. estimate further that relaxing Buy America rules would lead to a further one-time 0.6-percentage-point reduction in inflation.
What would that mean for the average American household? A lot. The authors note that in 2020 the average American household spent $61,334 on goods and services. A 1.3 percentage point in reduction in the CPI, due to repealing the Trump tariffs, would save that average household $797. And the saving would be 1.3 percent of spending every year. And a 1.9-percentage-point reduction in the CPI, which would occur if the Trump tariffs were repealed and the Buy America rules were relaxed, would save the average family $1,165 annually.
Read the whole thing.