Official White House Photo by Shealah Craighead – Public Domain
As January bled into February, Lora Kelly notes at The Atlantic, US president Donald Trump “announced 25 percent tariffs on the country’s North American neighbors, caused a panic in the stock market, eked out minor concessions from foreign leaders, and called the whole thing off (for 30 days, at least).”
Cue collective sigh of relief, but the title of the piece — “How the Tariff Whiplash Could Haunt Pricing” — tells an even more disturbing tale.
Yes, tariffs are terrible (btw, they’re not taxes on “the country’s North American neighbors,” but on the American consumers who buy goods from those neighbors), but there are worse things.
One of those worse things is regime uncertainty.
In his 1997 paper published under that title (and subtitled “Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War”), economist Robert Higgs explains:
“[T]he insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns. This uncertainty arose, especially though not exclusively, from the character of federal government actions and the nature of the Roosevelt administration …”
A long-term tariff is certainly economically damaging. It both raises prices on imports and enables domestic producers to raise THEIR prices on the same kinds of goods. It makes everyone (except the politically connected domestic producers who lobbied for it) poorer.
But at least a stable tariff can be planned for. Investors just factor it in to their decisions.
Suppose, however, that tariffs were set on a daily basis by spinning a roulette-type wheel. One day the tariff on, say, imported cars was 0%. The next day, 100%. The day after that, 29%.
Existing auto manufacturers would factor the maximum POSSIBLE tariffs into their prices rather than risk losing money on sudden changes, and few would invest in the risky business of building new plants to build more cars.
Consumers would get screwed on car prices every day; investors wouldn’t risk getting screwed on profitability going forward.
The actual effect of Trump’s tariff shenanigans might not be as stark as the daily roulette wheel hypothetical, but uncertainty will inevitably drive consumer prices up and interest/investment in producing potentially tariffed goods down.
“In this world,” Benjamin Franklin wrote in 1789, “nothing can be said to be certain, except death and taxes.”
Tariff roulette removes even that second element of certainty. And all we get in exchange is reduced general prosperity.
