Thread by @michaelxpettis

1/11
A new paper by the NBER on the McKinley tariffs of the late 1890s claims that the US economy did not benefit from the tariffs, mainly because they "may have reduced labor productivity in manufacturing."

bloomberg.com/opinion/articl…

2/11
Tyler Cowen (along with a number of other economists and journalists) argues that this paper is evidence that if the US were to impose tariffs today (or other trade intervention policies, presumably), they too would hurt the economy.

3/11
But this argument makes the same mistake as claims about the similar lessons of the Smoot Hawley tariffs of 1930. It treat tariffs a little hysterically, either as inherently and always bad for the economy, or as inherently and always good for the economy.

4/11
But tariffs are neither. They are simply one of a huge range of industrial and trade policies that work (much like currency devaluation) by shifting income from households (as net importers) to producers (as net exporters).

5/11
To put it another way, tariffs work in large part by forcing up the domestic savings share of GDP. For that reason their impacts on the economy must depend in large part on whether investment in the economy is constrained by scarce savings or by weak demand.

6/11
In economies running persistent trade surpluses, saving exceeds investment by definition, with the very purpose of trade surpluses being to resolve weak domestic demand. In that case policies that further weaken domestic demand and boost savings are not likely to help.

7/11
On the contrary, they need the opposite policies. That is why most economists, for example, call on China to implement policies that increase the consumption share of GDP (i.e. reduce the savings share). China should, in other words, reduce tariffs and strengthen the RMB.

8/11
But the impact of tariffs on deficit economies will be radically different. In that case by pushing up the savings share, these economies can either enjoy more investment and growth, or the same amount of investment and growth driven by less debt.

9/11
The US had been running large surpluses for over 20 years in 1900 and for over 60 years in 1930. It is not at all surprising that increasing tariffs was unlikely to benefit the economy. Surplus countries should implement the opposite transfers.

stlouisfed.org/on-the-economy…

10/11
Today, however, the US has been running massive deficits for roughly five decades. It should surprise no one that policies that benefit the economy under one set of imbalances are unlikely to do the same under a set of diametrically opposed imbalances.

11/11
That's why instead of pounding the table about whether tariffs are inherently good or inherently bad, we should instead discuss what the conditions are under which tariffs (and other trade and industrial policies) will or won't benefit the economy.