Tariffs Are Awful, Government Is Central Plans. Neither Is Inflation

The Fed is tasked with fighting inflation that neither it nor Congress understands. See the accepted view among politicians, economists and pundits that if the Fed centrally plans low, but not-too-low unemployment, the price level will be kept in check. The notion of a “Goldilocks” economy would be the silliest notion in economics if the profession and those who follow it weren’t stalked by countless other incredibly dense ideas.

Which is why it’s hard not to laugh when pundits use “economists hate tariffs” as a reason to not implement them. To be clear, tariffs are mindless. At the same time, to hide behind “economists” as a reason for disliking anything is to frequently misunderstand your argument and to kill your argument before you’ve begun.

Fed Chairman Jerome Powell says Trump’s tariffs will cause inflation, which means economists think tariffs will cause inflation, which means pundits think tariffs will cause inflation. They’re all wrong.

Economics is about tradeoffs. If you purchase the more expensive car after the mindless implementation of tariffs, you logically have fewer dollars to purchase travel, food and clothing. A rising price by its very name implies a falling price elsewhere.

Please think about this as stopped-clock economists correctly point out that a mindless tariff is a tax. Since it’s a tax, by the previous definition you have fewer dollars after implementation. When economists say tariffs will cause inflation they’re saying people can endure mindless tariffs without losing a dollar of purchasing power.

Moving to government spending, it can’t and doesn’t cause inflation. To believe it does implies not just market stupidity, but ferocious amounts of it. See mindless tariffs again. They’re a tax, meaning they’re a revenue concept. Would it that Congress would wake up to the latter, but that’s a digression.

The main, simple thing is that Congress can only spend insofar as we have less to spend. To say high or rising government spending causes prices to rise implies that government gets its spending power from Pluto. No, it comes from us. Which means government spending doesn’t result in “excess demand” as conservatives like Phil Gramm contend. Instead, the spending by government takes place amid commensurately reduced spending by the private actors who created the wealth.

To which some will say government spending causes inflation because it frequently correlates with borrowing and devalued debt. Wrong. For brevity’s sake just the obvious will be stated here: the power of compound interest is the most powerful force in all of markets and economics. To then believe, as the deficit delusional do, that government debt is purchased by investors so that those same investors can purposely be fleeced by devaluation begs for a new, so-far not created word sufficient to describe the level of self-hate and market stupidity for the government debt/inflation argument to have any validity. No doubt government borrowing is a negative, but it’s rooted in the market-signaling truth that the borrowing governments have too much taxable access to private production now, and worse, access to even more in the future.

Economies are individuals, and individuals work to get. Tariffs raise the cost of getting while slowing the division of labor that powers even more production and more getting. Government spending is the central planning of precious resources. Both are awful on their own such that there’s no need to make things up about both.

Inflation is a policy choice of currency devaluation by governments that saps the wealth of earners, along with the investment behind the creation of all wealth. Let’s get our definitions right in the perhaps vain hope of getting policy right.