I don’t think that Julius Krein realizes just how thoroughly he was bested by Phil Magness in this debate.
Here’s a letter to a long-time correspondent.
Mr. Estes:
Thanks for your email in response to my blog post this morning on tariffs.
You’re skeptical of my claim that commerce among people with different national residences differs in no economically relevant way from commerce among people with different eye colors. You write that you “cannot imagine what the group ‘hazel-eyed people’ might be thought to do to hurt blue and brown-eyed people economically.”
Your point is fair, so let me use a different example – namely, trade among Americans of different ages. As a group, Americans between the ages of 35 and 64 are generally net savers, while younger Americans save much less and retired Americans typically draw more heavily on previously accumulated savings. Yet members of each age group freely trade with members of all other age groups. Indeed, insofar as younger and older Americans spend more than they currently earn, financing the difference with savings accumulated by middle-aged Americans, the former can be said to run “trade deficits” with the latter, who run corresponding “trade surpluses.”
But obviously, these differences in saving and spending patterns are not evidence that one age group economically exploits another. Yet the same logic that prompts Pres. Trump and other protectionists to impose tariffs on imports because America consistently runs international trade deficits should – were this logic economically sound – prompt these protectionists to endorse protective tariffs on goods and services offered for sale by middle-aged Americans to younger and older Americans.
Of course, not even Mr. Trump would favor such tariffs. But he could not consistently defend protective tariffs on trade between Americans and foreigners while rejecting similar tariffs on trade between Americans of different ages.
Sincerely,
Don
Here’s a letter to a new correspondent.
Mr. Burr:
Thanks for your email. You write:
I am not an economist. It seems intuitive that tariffs would raise taxes. Simply stated, tariffs limit competition. Limited competition leads to higher prices. However, the real world is complicated. Is there ever a situation that you could foresee where you could support a tariff?
Yes. Tariffs might sometimes be appropriate for military purposes (although recognize that it’s far too tempting and easy to abuse this ‘national security’ exception to the case for free trade). But apart from a well-justified and crafted national-security tariff, I cannot imagine supporting any other tariffs.
As a source of revenue, tariffs are poor. See this explanation by Brian Albrecht.
As a source of economic ‘protection’ – which, overwhelmingly, is the chief reason tariffs are imposed and tolerated – tariffs are voodoo. While clever sophomores and pedantic professors, along with industry lobbyists, tirelessly tell tales of how, under just the right circumstances, restricting Americans’ access to goods and services from abroad will result in Americans having greater access to goods and services at home, these tales are nearly all internally contradictory, and absolutely all are empirically empty.
You are, of course, correct that the real world is complicated. But as Richard Epstein makes clear, the best rules for dealing with complex realities are typically simple ones. The complexity of the real world no more justifies giving government the power to superintend how we spend our incomes peacefully on goods that happen to be offered for sale by people holding foreign passports than it justifies giving government the power to superintend how we spend our incomes peacefully on goods that happen to be offered for sale by fellow citizens who have hazel eyes or are left-handed – even though it would be child’s play for an economist to construct a theory showing that, under just the right circumstances, we would be generally enriched if government restricted our freedom to trade with hazel-eyed or left-handed fellow citizens.
Indeed, the complexity of the economy is a reason to avoid tariffs. You show me a protectionist, and I’ll show you someone who ignores reality’s complexities. That someone naively believes that government officials can and will easily identify just which industries are ‘the industries of the future’ and just which jobs are best to protect and which are acceptable to destroy. The typical protectionist simple-mindedly sees only the most obvious effects of tariffs – protecting particular existing domestic industries and jobs – while overlooking follow-on effects, including the destruction of other domestic industries and jobs. The protectionist mindset ignores reality’s complexities, while that of the free trader appreciates these complexities and takes them fully into account.
Legitimate national-security concerns aside, the case for protectionism is rooted in the superstition that commerce that crosses political borders differs categorically from commerce that remains internal to political borders. Reality’s complexities do nothing to render this superstition anything other than the absurdity that it is.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
I have previously written about why Trump’s Section 338 tariffs are harmful and illegal. See my recent Montreal Economic Institute paper on this topic, and earlier pieces here, here, and here. To briefly summarize, the tariffs on Canada are illegal because 1) Section 338 has been superseded by later legislation, 2) even if Section 338 is still operative, Trump’s tariffs do not meet its requirements because the Canadian actions they supposedly respond to do not “discriminate” against US goods, as the law requires, 3) Trump’s tariffs do not “offset” the Canadian actions (as Section 338 also requires), but go far beyond that, 4) the administration’s interpretation of Section 338 runs afoul of the “major questions” doctrine, and 5) if Section 338 is operative and does authorize the Trump actions, it would violate the constitutional nondelegation doctrine (which restricts delegation of legislative power to the executive).
Most damningly, blue-collar workers—tariffs’ notional beneficiaries—have soured. Last year they favored Mr. Trump’s tariffs by a margin of 3 percentage points. They have swung 25 points toward the Democrats. Fifty-eight percent of blue-collar workers oppose Mr. Trump’s tariffs, while only 36% support them. Only 20% of blue-collar workers say tariffs have helped their jobs specifically, compared with 38% who say tariffs have hurt their jobs.
A majority of workers in our survey say tariffs have harmed access to the goods and services Americans need. When asked last August which party had the better approach to trade, workers preferred Republicans by 5 percentage points. Now they favor Democrats by 12.
Michael Strain offers his evidence that Trump has failed to address voters’ concerns about inflation.
“Full ‘reshoring’ of tech product manufacturing would come at a cost.”
Leonidas Zelmanovitz is a fan of Samuel Gregg’s new book, The Civilization of Commerce. A slice:
I read Gregg’s contribution as a continuation of the effort to renew liberalism associated with the Walter Lippmann Colloquium of 1938 and the creation of the Mont Pelerin Society in 1947. That project challenged liberal-minded intellectuals to find arguments that could win back hearts and minds lost through war, the Depression, and the apparent exhaustion of older liberal prescriptions. Hayek’s choice to investigate the foundations of a free society was part of this undertaking. Gregg renews it by linking the market economy to Western civilization’s future, a concern already expressed in the Society’s founding statement of aims.
The contrast with the more practical approach associated with Milton Friedman in the 1960s clarifies Gregg’s choice. Policy prescriptions have their place, but the book returns to Hayek’s broader concern with the philosophical basis of freedom. Hayek and Keynes also shared a sense of what the prewar world had lost. Their disagreement over how to respond makes the question of intellectual foundations especially important: concern for civilization alone does not determine which economic institutions will preserve it.
Understood in this sense, the new liberalism was an intellectual effort to strengthen the defense of liberty. Gregg’s narrative carries that effort forward. His account of liberalism’s relative recovery from the 1980s into the early 2010s can be read against the backdrop of this sustained work. The book also helps explain why a market economy’s achievements do not settle the argument in its favor. Its defenders must continually address competing understandings of human flourishing and the institutional conditions that support it.
Ramesh Ponnuru busts myths – ones spread today chiefly by campaigning Democrats – about data centers. A slice:
It’s a hard-hitting campaign against a nonexistent menace.
The flimsy basis for these attacks is a Republican-backed federal law that contained a grand total of zero dollars in tax breaks for data centers. That 2025 law, embarrassingly titled the “One Big Beautiful Bill,” is a fair target. It recklessly cut taxes without making equal reductions in spending, and it included multiple giveaways with no real justification beyond buying votes. Instead of going after those more obvious flaws, Democrats are distorting one of the law’s best provisions.
Rather than require businesses to write off the cost of investments over many years, the law moves toward “full expensing” — that is, letting companies deduct some expenses as soon as they arise. Under either policy, businesses write off the full dollar amount of an investment. A write-off in later years, however, has lower value: Money today is worth more than money tomorrow, which is why lenders charge interest.
Faster expensing increases a company’s incentive to invest — or, more precisely, reduces an arbitrary penalty on investing. The effect on government is that tax revenues fall in the short run but mostly recover in the long run.
The attacks on these Republicans are false for at least three reasons. First, the so-called tax breaks “for data centers” aren’t for data centers. They apply to a large class of investments. Equipment purchases for data centers don’t receive any greater benefit than equipment purchases for any other investment. Nor does expensing apply to building the structures that house data centers. The provision isn’t a special favor for the industry. It has applied to many billions in data-center equipment purchases because data centers happen to be booming, not because the federal government has put a thumb on the scale for them.
Second, the estimates for the size of the alleged tax break ignore that the policy question mostly concerns when, not whether, taxes are paid. To a large degree, expensing simply moves a tax deduction forward in time rather than enlarging it. Counting the up-front revenue hit but not the later revenue boost overstates the benefit for companies and the cost to governments.
Third, the tax breaks aren’t even tax breaks. Many tax experts support full expensing because, unlike the alternative, it doesn’t penalize investment. The partial expensing policy included in the Republican law is a step toward a tax code that raises revenue while minimizing distortions to the economy. Tax breaks, on the other hand, are departures from that ideal, designed to boost some activities, or the groups that engage in them, over others.
“Farmers need free markets, not free money” – so argues the Washington Post‘s Editorial Board. A slice:
Farmers face real hardships. Diesel prices per gallon have risen about 75 percent and trade disruptions from the Iran war have boosted fertilizer prices. Pointless trade wars and tariffs have reduced foreign markets where American farmers can sell their crops and have raised prices for equipment. Ranchers have also voiced frustration at the chilling effect immigration raids have had on the meatpacking workforce.
Instead of rolling back those disruptive policies, the president is dangling money. “When the Republicans win, we will pass even more funding for our farmers,” Trump said in Kansas. This is akin to the $5,000 checks he’s promising Americans if Republicans hold the House and Senate.
Once government starts compensating industries whenever inputs become unexpectedly expensive, there is no principled stopping point. Why should a farmer’s increased diesel bill be reimbursed when a trucking company’s is not?
One attraction so many “cultural critics of capitalism” feel for [Thomas] Carlyle’s criticism of market exchange may be precisely that he recognized that when market exchange enters hierarchy exits. Consumer sovereignty is thus a dire threat to the notion of a political sovereignty in which orders are given from up the hierarchy to be obeyed by those below. We have command without hierarchy, command without foundation. And, for anyone who thinks that the state or society is simply a person writ large, a state or society without a hierarchy of desires is nonsensical.
DBx: Brilliantly put.
Among the signal achievements of modern economics – including the economics of Adam Smith – is to show that an orderly, peaceful society of individuals with different preferences and plans is possible under a rule of law, with private property rights and market exchange. In such a commercial society, the abstract rules that govern it encourage each individual to act in ways that benefit not only him or her, but countless other denizens of this commercial society.
Such a society is an order but not an organization.
This society is constituted not by all persons being regimented into ranks designed to achieve one society-wide set of particular goals but, instead, by each person following abstract rules (“Thou shalt not steal.” “Fulfill your promises.” Etc.) and thus, within markets, becoming dependent on each other in ways that increase as much as possible the chances for each adult to satisfy as many as possible of his or her peaceful and individually chosen goals.
No kings. No dictators. No pooh-bahs. No nannies. No hierarchies defined by ability to command and duty to obey commands. No “industrial policies” aimed at satisfying the preferences of professors, pundits, preachers, or politicians – or even of some electoral majority.
Tariffs impose a disadvantage on importers, raising a product’s domestic price above what is offered internationally. The added cost to businesses and consumers functions, effectively, as a subsidy for less efficient economic arrangements. Michael argues that foreign companies may not truly be more efficient producers, as they are often subsidized or protected by their own governments. But given the unknowable multitude of factors that go into prices, which Michael notes in his references to Hayek, it is impossible to disentangle the effects of foreign economic policies from real comparative advantages, and therefore impossible to correctly offset distortionary policies with tariffs.
(Regardless, the opportunity cost of preventing lower international prices for Americans is the same no matter the cause. Imagine if China did not subsidize manufacturing whatsoever, but was still able to make phones and footwear at a lower cost thanks to its staggering economies of scale. It would undercut U.S. manufacturers all the same, allowing us to shift labor and capital to more valuable uses. Protectionism draws those resources back into lower-value industries.)
By stifling access to foreign markets, tariffs reduce the competitive pressure that Michael says is essential to developing cheaper production methods. I agree that tariffs do not “abolish competition,” as domestic producers still must deal with one another. But just as dissolving the National League would not abolish competition in baseball, it would surely diminish it!
Markets do not become more competitive with less competition. Once insulated from global price pressures — which factor in all the efficiency discoveries that happen abroad — domestic companies have far less incentive to innovate or invest in cost-saving measures themselves. Consequently, their prices remain higher than what businesses and consumers would otherwise be free to pay.
This is not mere theory. Many industries in the United States today meet Michael’s qualifications for stable, predictable trade protection that long predates the current Trump administration: shipping and shipbuilding, steel and aluminum, sugar and lumber, food and apparel, light trucks and solar panels. In none of these industries have production costs fallen below what they are abroad. Hence, in none of these industries have domestic prices fallen below international levels. Americans pay significantly more in all cases, decades and even centuries into these protectionist experiments. Steadily coddled, our “infant industries” never grew up to fare for themselves.
The one example Michael cites of protectionism ultimately reducing prices is South Korea’s burgeoning manufacturing sector in the 1960s and 70s. Certain firms were undoubtedly boosted by industrial policy, but not through tariffs. That period of development was marked by export promotion after South Korea turned awayfrom its previous strategy of import substitution, which had failed to spark industrialization. The country succeeded by thrusting its manufacturers into global competition, not by shielding them from it. It was that competitive pressure that yielded greater productivity, innovation, and efficiency — the same competitive pressure that tariffs suppress.
Here’s the abstract of a new paper by Benjamin Jaros and Joshua Rauh:
This paper examines the revenue and migration impact of the 2026 California Billionaire Tax Act, a one-time 5 percent tax on the worldwide net worth of individuals exceeding $1 billion. Using data from the Forbes Billionaire List, news reports detailing the residential real estate holdings of California billionaires, and public announcements of billionaire departures from the state, we estimate the behavioral response and associated revenue loss to this new tax using several different methodologies. Even before accounting for reductions in other tax bases such as the income tax, we estimate that the Act will collect approximately $30 billion (range $28 to 36 billion), less than a third of the $100 billion projected by Galle et al. (2025). This range accounts for the publicly confirmed taxpayer migration that has already eliminated nearly 30 percent of the Act’s wealth tax base, applies a litigation-survival discount to the remaining base, and is validated by the wealth tax base elasticity literature. We estimate that California’s billionaires contribute $3.3–5.8 billion annually in state income taxes. The present value of permanently lost income tax collections from departures more than offsets the one-time wealth tax revenue, yielding a net present value of negative $38.9 billion. Across 100,000 simulated revenue and discount rate combinations, 85 percent of plausible outcomes produce a negative net present value of state revenues.
Isabella Weber of the University of Massachusetts at Amherst saw earlier than many economists how politically toxic unexpected inflation could be. Her new book, “Anti-Fascist Economics,” even argues that this political combustion helped Trump specifically and boosted “the extreme right around the world.”
The fact that Trump himself is now underwater on the cost of living suggests it is incumbents presiding over inflation who face the backlash. But let’s grant Weber’s premise. If high inflation breeds authoritarianism, understanding what causes it becomes a democratic imperative. This is where her book is unconvincing.
She starts with a half-truth. Pandemic shutdowns snarled supply chains, Russia’s invasion of Ukraine drove up food and energy costs, and the Iran conflict delivered another oil price spike recently. Negative supply shocks in these “systemically significant sectors,” she writes, raise prices of basics, hitting the poor hard and making production more difficult, thereby raising aggregate inflation.
The difficulty begins when Weber turns this partial mechanism into a general theory. These transitory cost shocks, she argues, gave firms the “perfect opportunity” to raise prices beyond their now-higher costs. Executives’ boasts about “pricing power” prove it — in Weber’s telling, profit-seeking sellers exploited the very real shocks to raise inflation yet higher.
Most economists doubt this theory. If firms could profitably raise prices at will, why await a cost shock? Why would competitors and entrants not undercut firms raising prices above the fundamentals? And where did customers find the money to pay all these higher prices? If gas stations gouge consumers while household spending power is fixed, families have less money left to spend at restaurants or furniture stores. One price — gas — rises, but it is offset by demand and price pressure falling elsewhere. Broad inflation can persist without collapsing sales only when aggregate spending rises, too.
That theory alludes to a simpler explanation for inflation. Between February 2020 and March 2022, the money supply grew by $6.2 trillion. Washington ran huge budget deficits while the Federal Reserve held rates near zero and bought trillions in assets. By mid-2022, all this stimulus meant nominal gross domestic product — total dollar spending — was growing at 10 percent a year, instead of its pre-pandemic trend of 4 percent per year. This excess demand, not greed, was the underlying cause of price increases.
Explaining high prices and profits doesn’t require tacit collusion by firms. Overseas shocks shifted demand toward American substitutes, raising their prices; the broader spending boom allowed other prices to rise across industries, given that more money was chasing goods and services. Because retail prices adjust faster than costs fixed by contract, such as wages or existing inventory, profit margins widened temporarily in many sectors.
Yet Weber credits all the stimulus for the rapid recovery while largely absolving it of the ensuing inflation. The same dollars, apparently, could stimulate production but not prices — a convenient distinction for which the book supplies no explanation.
This diagnosis affects Weber’s analysis of the options the United States had in dealing with inflation. In her telling, economists on “Team Wait-and-See” correctly anticipated that supply chains would heal without monetary tightening but were too indifferent to near-term suffering. “Team Austerity” would raise interest rates, causing unemployment to bring inflation down. Her alternative — price caps, commodity reserves, antitrust and public provision — would “target the specific prices that drive inflation,” until supply recovered. One camp is callous, another cruel and hers, conveniently, humane and “anti-fascist.”
Alex Tabarrok busts the myth – a myth embraced by, among others, Paul Krugman – that data centers are crowding out other, better investments. Here’s his conclusion:
Bottom line is that I think a more plausible story is that two things are happening at once: tariffs, uncertainty, and other forces including the fading of Biden-era CHIPS and IRA subsidies have weakened investment outside AI-tech. The AI boom in contrast has supported overall investment. In other words, rather than datacenters and AI investment “crowding out” other investment, my interpretation is that AI investment is a bright spot in what would otherwise be a more negative economy.
Daniel Hannan decries the intense risk-aversion today of so many of his fellow Brits.
GMU Econ alum Stephen C. Miller ponders AI and higher education.
… is from GMU Econ alum Nathanael Snow’s July 2026 EconLog post titled “America the Market” [references removed; bracketed remark original to Snow]:
Impartial institutions facilitate exchange. The broader open market and society are held together through exchange that coordinates our activities. [Adam] Smith points to market interactions as the prime example of how impersonal relations are often self-governed: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner.” We have to imagine what the other person wants and seek their sympathy. Instead of affection, we learn sympathy with others, starting as young people. “When [a child] is old enough to go to school, or to mix with its equals, it soon finds that they have no such indulgent partiality.” We internalize the morality of actions that earn us the approbation of our peers and develop a way of imaginatively judging our own actions that Smith considers similar to an impartial spectator. Good governance limits itself to maintaining justice among people impersonally relating to one another.
Here’s another letter to my long-time protectionist ‘friend.’
Mr. McKinney:
Calling my latest reply to Michael Brendan Dougherty “an example of knee jerk globalism,” you advise me to think more “creatively.” Specifically, you believe that Mr. Dougherty correctly invokes Hayek to support the protectionist argument that tariffs, if kept in place long enough, would, in your words, “give our firms enough breathing room, resources and motivation to grow their efficiencies.”
With respect, your claim defies credibility. When you encounter bad service from a restaurant, from an auto-repair shop, from a dry cleaner, or from some other merchant, do you continue to patronize that merchant? Are you unhappy that you have alternatives to this merchant? Do you think to yourself, ‘If only this merchant had fewer competitors, his service would improve’? Do you volunteer to pay higher prices to this merchant in exchange for his bad service in the belief that doing so will give him “breathing room, resources, and motivation” to improve his service? Or do you take your business elsewhere?
Tariffs reduce the competitive pressure on firms, which is to say that tariffs weaken firms’ incentives to please their customers. In short, tariffs create monopoly power.
The title of the Hayek article that Mr. Dougherty bizarrely cites in support of tariffs is “Competition as a Discovery Procedure,” not – as Mr. Dougherty and you seem to think – “Monopoly as a Discovery Procedure.”
Sincerely,
Don
Zachary Karabell warns of the dangers of AI fear-mongering. A slice:
The point isn’t that AI is without its existential risks. It is that the future here is, as futures are, unknown, and the decisions made today will shape what happens next. If false certainty of impending doom determines those actions, the ability of this new technology to help solve core human challenges — such as disease, climate change, population decline and the nature of work — will be constrained.
There is a past lesson in how nuclear power was managed in most countries. Because nuclear weapons threaten human existence and nuclear power plant accidents can be catastrophic, the nuclear regulatory framework was constructed primarily to mitigate harm. That may have helped prevent nuclear war, but it also constrained the deployment of and innovation in nuclear energy, which is both cleaner and cheaper than oil and gas. Cultural fear created a deep animus that never dissipated.
John Puri ponders the Declaration of Independence. A slice:
In John Locke’s Second Treatise of Government, from which Thomas Jefferson took obvious inspiration, a natural law of justice exists before any government is instituted. In a precursor to the Declaration’s retelling, men exist in a state of nature with equal rights to life, liberty (or self-direction), and property acquired through exertion. Each person may exercise these rights freely, but only within the bounds of others’ rights. When one man violates the rights of another — by harming him, enslaving him, or stealing from him — he enters an unjust state of war, and his victim has the right to uphold the natural law by punishing his aggression.
But as we contemplate academia’s degradation of the electorate, we must not forget the rest of the far-reaching damage it does. Education departments that instill poisonous ideologies in schoolteachers have depressed children’s test scores in reading and math to historic lows. Journalism, law and medical schools put woke indoctrination ahead of competent professional training.
The FAA should be the regulator of air safety, just as the Federal Railroad Administration is the regulator of rail safety and the Federal Highway Administration and National Highway Traffic Safety Administration regulate road safety. The FAA should not own or operate the systems it regulates. Imagine if the FHA, which sets standards for traffic lights, also operated all of them nationwide, and that replacing any of the lights required asking Congress for money. Nobody would think that was an arrangement for safer streets.
So long as air traffic control remains within the FAA, the agency will be unaccountable and subject to the whims of politicians. Spinning off ATC, as 98 countries have done successfully for decades, would be good for taxpayers and, most importantly, for passenger safety.
Ramesh Ponnuru offers the following from the Department of Things Not to Worry About:
The Atlantic has an article by Jean Chatzky arguing that senior citizens are too cautious about spending money, which is bad both for themselves and for the economy. The concern about the negative effect of oversaving on an economy goes back to Keynes — but even Keynes was concerned about it only in the context of a zero-interest-rate economy. He was wrong, but we’re obviously not in that situation today.
… is from page 198 of Samuel Gregg’s hot-off-the-press book, The Civilization of Commerce [original emphasis]:
Part of the stadial theory of development advanced by Scottish Enlighteners involved stressing that key institutions of commercial society had developed largely without conscious planning by governments. But the Scots were equally insistent that it is through our free choices to defer to the wisdom contained in particular institutions that we become free and can participate as citizens in commercial civilization.
