The last time inflation stood consistently at numbers this high, Keynesian economics looked just as befuddled as it does now. It was in that era (1975-80) that new ideas based on supply-side reforms came to the fore. We are in desperate need of a repeat performance. The COVID shock impacted both aggregate demand and aggregate supply; no one can seriously argue that America hasn’t done enough to cushion the demand shock. The supply shock is another matter altogether.
There are all sorts of policies one can enact to address supply-side hang-ups in the economy. Eli Dourado, a senior research fellow at Utah State University, lists more than a few in City Journal [1]. However, many of his ideas will take time, thus not relieving the inflationary burden as quickly as Americans would want or deserve.
There is, however, one set of reforms that would require nothing but the use of President Biden’s pen: reversing the tariff increases imposed by his predecessor.
The Peterson Institute for International Economics [1] has just released an analysis of the damage done from Trump’s tariffs. Here are their findings (emphasis added).
With inflation running at 40-year high rates, President Joseph R. Biden Jr. is wringing his hands and the Federal Reserve is signaling more interest rate hikes in 2022 and 2023. But policymakers are overlooking one set of actions that could make a meaningful contribution to taming inflation: trade liberalization. The data cited in this Policy Brief indicate that a feasible package of liberalization could deliver a one-time reduction in consumer price index (CPI) inflation of around 1.3 percentage points. That reduction would amount to $797 per US household, about half the size of pandemic relief in 2021. As a bonus, the embrace of trade liberalization would curb inflationary expectations taking hold in American firms now protected by trade barriers from foreign competition.
With inflation at 8.5 percent over the last 12 months (BLS [2]), the package cited above would cut inflation by 15 percent, roughly. According to the PIIE, that package would consist of three things.
- Eliminate Trump’s trade war tariffs
- Dismantle Trump’s 25 percent Section 232 “national security” steel tariffs
- Waive penalty duties on Canadian lumber
None of these items require Congressional action, nor would they suffer any other policy implementation lag. They can be done via simple executive order. Moreover, they would be reversing prior executive overreach, thus making the federal government less powerful rather than more powerful.
President Biden has decades of political experience getting in the way of this truth. For nearly all his career, Democrats were the party less trusting of free trade than Republicans. That isn’t true anymore. Even if it were, one of the main reasons for Biden’s election was to advance the concept of Country Before Party. In this case, it would be the Country of today before the Party of yesterday.
Tariff hikes and trade wars are bad ideas no matter who initiates them. Biden should reverse the ones Trump implemented.