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Shocker: Tariffs DON'T Cause Inflation |
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Tariffs don't cause inflation after all… But tariffs do increase unemployment… Can you imagine stock market wins 138 times bigger than Nvidia? If you're like most people, probably not. But then again, most people haven't seen this report. But you can see it right now by clicking here.
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Dear Reader, |
The mainstream economics profession has denounced the inflationary effect of tariffs. |
It has informed us that goods sellers simply hand off the tariff's cost to the unfortunate consumer. |
Thus the poor sap must ladle out more money for tariffed goods. Hence, inflation. |
Yet is it true? Are tariffs truly engines of inflation? |
The San Francisco garrison of the Federal Reserve opened the ledger books… and interrogated the historical record. |
From 1870 through to 2022, its number hounds investigated the inflationary effects of substantial tariff changes in three nations — the United States, Great Britain and France. |
What did they discover? They discovered that: |
A prominent prediction is that tariff shocks should act as cost-push shocks, driving up firms' production costs through more expensive imported intermediate goods while raising the prices of foreign final goods. |
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Under this framework, higher tariffs would lead to… higher inflation in the short-run. We find the opposite inflation response… |
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A tariff hike… lowers inflation in the short-run. The inflation response goes against the predictions of standard models, whereby CPI inflation should go up in response to higher tariffs. |
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Whhhhaaaaaat? |
Kind heaven, can it be? A tariff hike lowers inflation? |
Paul Krugman will certainly declare these bedlamites the common enemies of mankind and agents of the Old Boy himself. |
Will they next propose that the sun rises not in the east but in the west… that gravity is a vast fiction… that the United States Capitol does not stable the highest concentration of intellectual wattage ever corralled in a single structure? |
I confess at once that I do not know the answer. |
Yet their detailed researches inform them that tariffs in fact depress inflation. |
On average — on average — they discovered that a four-percentage point elevation of the tariff yields a two-percentage point depression of inflation. |
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Acadamese |
Of course the study is riddled through with the caveats, nuances, provisos, "on the other hands," "howevers" and other tempering filters so common of academic research. |
It is chock-a-block with detail, detail, detail. |
Its graphs confound more than clarify. |
It battens the hapless reader upon the head with scientific formulae such as ∆τi = α + βxi + ei… and di = α + βXi + ei. |
And it staggers his wits with phrasing such as this: |
To estimate the dynamic causal effects of tariffs, we use a yearly VAR with two lags and (at least) 3 variables: tariff changes (∆τt), unemployment (ut), and CPI inflation (πt). As "OLS estimate", we order ∆τt first and report the impulse responses to innovations to ∆τt . 8 As "IV estimate", we enter our narratively identified tariff shock series ε first in the VAR for (ε, ∆τ, u, π), and we report the impulse responses to innovations to ε. |
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Yet once you penetrate the obscuring academic fogs you arrive at the illuminating light — tariffs do not elevate inflation. |
The answer is clear as gin. |
Tariffs in fact, if the study is to be believed, depress inflation. |
The Flip Side of Tariffs |
Yet the San Francisco garrison of the Federal Reserve is not crewed by devotees of the president and his tariffs. |
Can you imagine it? Then you can imagine a circular square or any number of impossibilities.. |
What is more, they do not promote the imposition of tariffs. They are, if I take the tenor of it, against tariffs. |
They conclude that tariffs do not spawn inflation because tariffs elevate the unemployment rate. |
The same four-percentage point tariff increase that depresses inflation by two percentage points… elevates the unemployment rate by one percentage point. |
The elevated unemployment rate chokes off economic activity… which in turn depresses prices: |
We find that a tariff hike raises unemployment (lowers economic activity) and lowers inflation… |
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Regardless of our identification approach, we obtain the same result: a tariff hike lowers CPI inflation and raises unemployment… higher tariffs lead to lower economic activity and lower inflation in the short-run. |
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Possible Explanations |
Why precisely, gentlemen, do higher tariffs lead to lower economic activity and lower inflation in the short-run? |
A possible explanation relies on the effects of uncertainty: a tariff shock creates (or coincides with) an uncertain economic environment, which by itself depresses economic activity by lowering consumers' and investors' confidence and puts downward pressures on inflation. |
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Have you an alternative explanation? |
Another possible channel is a wealth channel, whereby an adverse tariff shock leads to a drop in asset prices, which then depresses aggregate demand and leads to higher unemployment and lower inflation. We find evidence in support of both channels: in response to higher tariffs, stock prices decline and stock market volatility increases. |
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In either instance, these fellows conclude that substantial tariff increases depress the economic level. |
Yet they likewise harpoon the prevailing economic theory that tariffs are inflation-engines. |
Now You Know More Than the "Experts" |
Which is worse —the higher inflation that attends tariffs — or the higher unemployment that attends tariffs? |
The answer ranges beyond my slender abilities… though I do harbor suspicions in one direction. |
I nonetheless leave that determination to you, my poor suffering reader. |
Yet the next occasion you hear some "expert" on television babble — with certitude — that tariffs yield inflation… you may proceed to change the channel. |
You are more expert than him. |
Regards, |
Brian Maher |
for Freedom Financial News |
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Go here for details. Then you decide for yourself. |
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