Skewed Incentives

Nobel Prize-winning economist Paul Krugman declares, “The Trump Tariffs Just Got Even Worse.”

I wanted to put up a quick response to yesterday’s sudden move to exempt electronics. What you need to know is that it does not represent a move toward sanity. On the contrary, the Trump tariffs just got even worse.

Why? Three reasons.

1. For electronics, at least, we’re now putting much higher tariffs on intermediate goods used in manufacturing than on final goods. This actually discourages manufacturing in the United States. Joey Politano puts it well:

2. Uncertainty created by ever-changing tariff plans is arguably a bigger problem than the tariffs themselves. So look at the timeline so far. First we had the sudden imposition of average tariffs bigger than Smoot-Hawley. Then, a week later, Trump ditched that plan and replaced it with a plan that imposed average tariffs roughly the same size, but with the tariffs on individual countries either much higher or much lower than in the first plan. Then tariffs were taken off some but not all products just three days later. At this rate we’ll soon see tariffs changing every day, then maybe every three hours.
3. The stench of corruption around these policies keeps getting stronger. There’s a lot of circumstantial evidence for massive insider trading around last week’s tariff announcement; the big beneficiaries from the latest move are companies that made big donations to Trump. Investing in plant and equipment looks like a bad idea given the uncertainty, but investing in bribes for the ruling family clearly yields excellent returns.

So just like that we’re turning into a nation where policies are ill-considered and constantly changing, and business success depends not on what you know but on who you know and whether you pay them off.

That sounds bad, but I’m sure the Trump team knows what they’re doing.