Timothy Birdnow

Reader Mike (a brilliant man, most certainly) and I are having a debate about tariffs and I thought it would be an interesting discussion to post on the main page.

(To read more on my position on tariffs and why I do not fear them read this. The discussion below is less well-notated (because it was just a discussion) but you can easily look this all up.)

Mike asks:

Asking for a friend. Was USMCA one of the horrible trade deals that trump speaks of? How is putting Mexican troops on the border to stop the cartels going to help when the cartels already defeated them? In the deal with Canada all he got was for them to add the cartels to their terrorist list. Everything else was already in the works with their new border czar. And with his tariff BS its time for him to move on. Tariffs dont work. They will drive prices up further, something he wasnt elected to do.

I respond: Mike, you are correct and there is a lot more to do in all avenues here. But well begun is half done and now Trump has made it clear he's going to be the boss.

Mike I don't think the Mexican military got beaten by the Cartels so much as joined them. Mexico is corrupt to the core. But if the Mexicans are trying to handle their side and we use the military to take them out here it's going to be a whole new ballgame. That's why, one way or another, we are having a Mexican war. We may be partners with the Mexican government but it will be our forces doing most of the fighting.

Mike I disagree; Tariffs do work as long as they are targeted and done with some sense. Everyone points to Smoot-Hawley as proof of the terrible nature of tariffs, but that was an outlier -- pretty much a general tariff on everyone and at a time of economic downturn. It was NOT Smoot-Hawley that caused the Depression, I would add; it was Federal Reserve manipulation of the money supply. I've written about that several times before here.

Tariffs were the only funding mechanism the U.S. government had until 1913, I might add, other than issuing bonds (which had to be repayed). The country did fine under them. But it's become axiomatic that tariffs are destructive, by the same people who brought us the New Deal, the Great Society, etc.

There is a difference between things being negotiated and actually happening. I doubt Mexico would have done any of this without the threat of tariffs. They simply cannot afford it and so we suddenly had leverage. Biden would never have done that (and of course he didn't). It's hard to win a fight if you don't have leverage.

We shall see if they drive prices up. They might for a short time, and we are going to have some pains during the realignment. But people forget that Reagan's supply side economics took a couple of years to work, and we had a really nasty recession for the first two years of Reagan's Presidency. But remember Mike if we need stuff so do they, and our economy is far larger and can absorb it far more easily. In time they will submit. The very fact that Mexico is already making big concessions - and Trump suspended the tariffs - shows this to be the case.

As for USMCA, yeah; it wasn't a good deal and Trump needs to reform it - or just get rid of it altogether. Is it any surprise that we saw the explosion of drugs and illegal aliens along our borders after NAFTA? We don't need these kinds of agreements making a North American Union (which is exactly how the European Union was created; first an economic entente then an economic union, then a political union).

But Mike I think the point Trump is making about Canada is that they aren't following the agreement in the first place. It's now one-sided, which is why he's mad at them.

Anyway, those are my thoughts on the matter anyway.

Mike says:

The reason the govt did fine until 1913 wasnt because of tariffs. In 1913 tariffs made up only 10% of its budget. Before that the US govt was selling land to make up the difference and in 1913 it ran out of land to sell.
I know I dont need to remind you that the war of Southern Independence was caused by tariffs. Lincoln and his Repubs passed laws demanding the South pay them and they flipped them the bird. Lincoln had no recourse but threaten to send in Fed troops and it was on.

I reply:

Mike, the U.S. made some money selling land, but not that much; it always sold relatively cheaply and made large free or nearly free land grants - to railroads and later to homesteaders.

Mike, the tariffs were much higher than your estimate between 1869 and 1900 - usually over 50% and topping at 58% of Federal revenue. It was only after the turn of the 20th century that it was reduced (and yes, by selling land and deficit spending) until 1913 when a whole new funding mechanism was put in place. Tariffs and excise taxes and land sales were in fact the primary funding mechanism. The low tariff rates you cite happened mainly at the very end of the cycle, and they as much as anything caused the implementation of the income tax.

Prior to 1913 the government had no legal right to compel people to pay taxes directly. There were no intrusive tax forms, no IRS agents breathing down your neck, no audits. And we did fine.

I'm not saying I like a high tariff either and you are correct that the War Between the States was in no small part over tariffs, but one can argue that they were not just tover tariffs but over taxation in general. The South wanted lower tariffs and had the North imposing them on them since there were more Northern states - and a higher population.

But the civil War had many other causes and those included huge cultural differences and the metastic growth of the Federal government and of course the slavery issue (which could have been solved far bettter through negotiation. Britain, for instance, paid compensation to slaveholders and did it in stages with an educational system in place for the slaves unlike the way we did it by just ramming it down the throats of the Southerners and making no provisions and in fact treating Southerners who tried to defend themselves from criminal former slaves as traitors.) The ruling class in the South didn't like the tariffs but I rather doubt the average person gave a hoot about them.

But getting back to the subject at hand; the income tax originally was quite mild, and imposed a one percent tax on incomes above $3,000 , with a top tax rate of six percent on those earning more than $500,000 per year. It was no more adequate to fund the government than was the tariffs at this point,and the country was doing fine. But of course that rate rose considerably.

And since the U.S. was booming in the '20's it was making out fine. In 1925 the tariff was 14.5%, in '28 it was 14%. I would add it was Calvin Coolidge, who is known as the man who said "the business of America is business" and was a fiscal hawk actually raised the tariff and did so quite enthusiastically. He shephered through the The Fordney-McCumber Tariff Act, which authorized raising the tariff to as high as 50%. This was only one year after the end of the horrible depression of '21. This started the roaring twenties (not the taxation but it didn't hinder the boom is my point.)

These tariffs actually were low; in 1910 they were at , 34.6%, for instance.

In the end it was not the tariffs that hurt the economy but the the Federal Reserve, which had maintained a weak-dollar policy and mild inflation through the '20's and then sharply reduced the money supply. And once the Depression began it conttinued until the Fed had cut the supply by 30%, at a time that they needed liquidity. Tariffs had little to do with it, although they certainly didn't help.

Frankly Mike I oppose ALL taxes, but we cannot be rid of them alas. And so we need to make them minimal and make them less intrusive on the public. And we may as well utilize them to compel foreign countries to treat us fairly.

These tariffs won't cause major inflation, nor will they cause an economic downturn, unless the Federal Reserve implements an austerity program to "fix" things which they just might do to screw Trump. We might have some products go up, but that will be termporary. There are plenty of fish in the sea and most of what we buy from abroad can be found elsewhwere. Trump is not making tariffs that are across the board - the are targeted.

Oh Mike,some of America's highest economic growth occurred during periods with high tariffs.

Between 1871-1913 the U.S. economy grew annually at 4.3%, despite being some of the highests levels of tariffs we have ever imposed. Throughout this period tariff rates were generally abover 38%, although they were dropping during the teens.

This graph illustrates how low the tariff rates are at present:

https://www.howeandrusling.com/wp-content/uploads/2025/01/Screenshot-2025-02-03-at-9.54.01%E2%80%AFAM-1024x518.png

Sorry - it cut off, but you can see the trend line and it hasn't changed.

So what has happened at this time? We've heard that giant sucking sound as foreign competitors have turned us into a service economy from a manufacturing one. That needn't have happened. It happened because we let anyone who wanted a share of our market come and take it. The end result is people with decent jobs wound up driving Ubers or watiting tables. The rust belt is rusty because we have "outsourced" all our labor. That would have been avoided with reasonable restrictions and tariffs.

NOT going hog wild, mind you, but some targeted restrictions would have been greatly beneficial.

And Mike here is a PDF file report from the government about the matter; half of all revenue brought in by the United States was through tariffs according to the report. (The other half was excise taxes mainly; land sales were not all that important.)

Do not fear the tariff; it's not the bogeyman we've all been taught to believe it to be.

Posted by: Timothy Birdnow at 08:00 AM | No Comments | Add Comment
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