Liberation or isolation

There is a long-standing debate of whether economics is science or art. In other words, can economics be understood as a science leading to principles that will be important for predicting differing outcomes? Or is it an art that is best mastered and managed by those with vast experience with a command of economic history? The fact that our Federal Reserve, which governs our nation's monetary system, consists of a panel of seven members suggests that we hedge our bets by relying on a group of experts to guide our economy. Science plays a role, but we need the art.

On March 3rd, the Wall Street Journal, owned by FOX news Rupert Murdock, called Trump's tariffs "the dumbest trade war in history". The stock market initially believed Trump was going to use tariffs to bully and negotiate with other countries. But as tariffs kick in, Trump claims they are reciprocal and that "a recession might be worth the pain and cost." Wall Street has accordingly responded with its opinion on pain. Besides the tariffs, the administration is also obsessed with trade imbalances with other countries. Of course, the whole messaging issue has been confused as Trump kept lying that "other countries pay the tariffs" until he had to stop as voters realized that tariffs will drive up inflation since we pay those costs. Doubling down, Peter Navarro, senior counselor for trade and manufacturing, claims that tariffs will raise more than $6 trillion over the next ten years. There are roughly 132 million households in the US and that tariff tax will add $4500/yr to each family's expenses if Navarro is right. Trump is making the bet that by raising the price for foreign goods/materials, consumers will either find American sources and buy them or manufacturers will build factories here, employ Americans, and we'll buy made in America. The trillion-dollar question is whether this works in our modern world. Taiwan Semi-Conductor Corp manufactures many of our tech companies' chips, such as Nvidia, Qualcomm, Apple, etc. They are building a manufacturing plant in Arizona, but the chips built here will cost more because of our higher labor costs. Given China's threatened invasion of Taiwan, the chip plant here makes sense, but this is a narrow case. Coffee beans are finicky about their climate and can only grow in a few places in the US, but those berries must be hand-picked since they ripen at differing rates on the bush. Given the limited locations and higher labor costs, we might all be suffering caffeine withdrawal. If some companies do build manufacturing plants back in the US, it will take years. The follow-on question is whether those American jobs will be filled by Americans or automation. Reportedly, twenty million manufacturing jobs around the world may be replaced by robots in the next five years.

As best as anyone can figure, when Trump asserts that countries are treating us "very unfairly," he is talking about our trade imbalance with other countries — when a country imports more than it exports. Trump believes the tariffs that China puts on American goods, keeps the Chinese from buying our products. So, he is retaliating with tariffs on Chinese goods. Trump is obsessed with the trade of goods, but he brushes off the services part of trade (banking, consulting, transport, construction, etc.) where we run a surplus with many countries. Many economists don't see a larger trade deficit as a problem since this can be the result of a strong economy where consumers have more money to spend and import more. Additionally, the higher interest rates and stability of a strong economy help reinforce the dollar's role as the global reserve currency attracting foreign investment. Economists worry that too much focus on trade deficits could revive protectionism and lead to a global trade war that would make everyone worse off given our cross-border supply chains. This begs the opening question — is economics an art or science. I'll punt on the answer, but what I do believe is that our global economy is complex and interconnected. Tariffs can be a useful tool when managed judiciously by experts, but if used vindictively as a sledgehammer by a king with a retribution vendetta, I doubt the outcome will turn out well.