Do tariffs protect American jobs? Could unions have saved U.S. manufacturing? Do interest rate changes affect the economy, or just Wall Street?
All three questions are important, all three involve fundamental economics, and, for different reasons, all three got attention this past week.
The first question came up because of President Donald Trump’s imposition of punitive tariffs on imports of steel and aluminum because of what he said was their negative impact on national security. Just this past week, the White House clarified the tariffs by broadening the exemptions for U.S. allies, focusing the import taxes on other producers, especially China.
Whether from a national security or an economics perspective, China is a special case. It is trying to expand its influence in the western Pacific and has not been shy in leading this effort with its naval and air forces. It is also literally expanding its territorial reach by building islands in the sea and building air bases on them.
It is also a special case because of its flouting of international agreements on copyrights and patents. Some of this effort has been pursued by its intelligence services — which raises national security issues — but there is also a shoulder-shrugging open taking of U.S. intellectual property.
The most productive way to view the tariffs on China is that they are a negotiating tactic rather than a protective or cost-equalizing economic policy device. Because of the NAFTA exemptions for Canada and Mexico, it would be relatively easy for China to evade the tariffs by expanding its investment and presence in Mexico.
At the moment, though, because of its economic slowdown, China would probably prefer to negotiate the tariff issue in order to maximize its domestic jobs effect of steel production and export. Because the excess capacity of steel is a global problem, there are enough competitors to eat China’s lunch if it doesn’t do something promptly to preserve its U.S. market.
Taken as a whole, the tariff route serves neither the Chinese or our own long term interests, and is, for that reason, unlikely to serve as the causa bellum to launch a trade war.
U.S. steel manufacturing is in a sorry state and the tariff impositions are not likely to be much help to the industry beyond keeping things from getting worse, at least for a while.
The idea that strong unions could help the industry is an intriguing one, but it appears to be built on a slender thread of correlation. Looking back, the time when wages in the steel industry were healthy enough to allow middle class homes and lifestyles was also a time of the steel industry’s most robust health and growth.
While the time-series correlation is very high, though, it was also a period of low investment in new production facilities that embodied the latest technology. The reasons for that are complex, as we might expect, but the factors include both the high wages and, even more importantly, the lack of significant competition. Foreign steel imports at the time were generally of unacceptably lower quality than our domestic products. And, initially, the exceptions were more expensive than our stuff.
The unions probably had a greater effect on workplace safety than on the kind of price competitiveness that could stay in the ring with the new challengers.
The question about the effect of interest rates on the economy is perhaps the most interesting of all — and the most difficult for policy makers to answer. Economists these days tend to be as politically polarized as everybody else, but they would agree, I think, that when you interfere with a free market, you will get different, usually less efficient, results. Usually these inefficiencies, evidenced by higher costs and prices, are paired with non-market effects that have social rather than monetary value. Whether these social values outweigh the market values is a question that polarizes people at an intensity not usually found anywhere but a Yankees-Red Sox ball game.
When interest rates affect Wall Street, it makes headlines, as they did when U.S. Treasury bond interest rates rose — briefly, as it turned out — to 3 percent and the stock market tanked. But that is only part of the interest rate picture.
Interest rates are so deeply embedded in a modern economy that it is almost a form of money in its own right. It isn’t an accident, for example, that in the “money market,” money is not traded, but interest rates are.
Interest rates affect not only costs, and therefore current output consumption, but also investment, which affects future growth, output and consumption.
All three of the questions about interest rates, unions and tariffs are in the news. They show us how our economy works, and the answers shape and reshape our lives.
James McCusker is a Bothell economist, educator and consultant.
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