Trump The Redistributor

Friday, March 2, 2018

Corporations and many households rightfully celebrated when the Trump administration led the way in cutting their taxes. Now, the administration is in effect clawing at least a little of that tax cut back in the name of increasing the profitability of two ailing American industries. Trump announced he would begin imposing tariffs of 25 percent and 10 percent on imported steel and aluminum, respectively. These policies help a very small group of people at a cost to everyone else, and do even greater damage in the long run.

A Windfall for Steel and Aluminum

The United States imported about 30 percent of its steel last year, and about 52 percent of its aluminum. President Trump’s action would raise the prices other American firms must pay to these overseas competitors, increasing domestic demand for American steel and aluminum. All else equal, this would result in U.S. steel and aluminum manufacturers increasing the quantity they produce and being able to charge higher prices domestically. This policy would constitute a major windfall for owners and shareholders of U.S. steel and aluminum manufacturers. Furthermore, the plan could “create jobs,” ones we would hear about from Mr. Trump for a long time. However, primary-metals manufacturing (to which both steel and aluminum belong) employed only about 375,000 people last year, relative to over 12 million total in manufacturing and almost 150 million economy-wide.

A Tax on Everyone Else

Everyone to the right of Fidel Castro knows tariffs destroy rather than create wealth, so who’s funding this windfall? In addition to foreign steel and aluminum suppliers, most American businesses and consumers bear the cost — in the form of higher prices. Many manufacturers use steel or aluminum as inputs. Their costs will increase, some of which will manifest in reduced profits (possibly leading to fewer jobs) and some as price increases for consumers. It is very difficult to predict exactly how much prices will increase or how much the hardest hit will be hurt, but with 25 percent and 10 percent tariffs, the answers are both likely to be “significantly.” So the president is redistributing wealth from most businesses and households to a small group struggling in today’s economy. “Barack the Redistributor” as, John McCain called him, has some unexpected company.

The Tip of the Iceberg

These immediate costs may pale in comparison to the long-run cost of government picking industrial winners and losers and deciding which firms will and won’t prosper. The market is uniquely equipped to allocate investment over time because those making the decisions are also the people with the most detailed information. Even small interventions can add up over time, as investment begins to flow to industries where the United States simply isn’t the most efficient producer. What industries will suffer from underinvestment? What innovations won’t occur? It’s impossible to predict exactly where the costs will be borne, but the fact there will be significant costs from this policy is one agreed upon by an unusually high proportion of economists. The next time Republicans decry the “redistributionism” of their opponents on the campaign trail, it would be wise to remember policies like this.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.