The conventional wisdom is that higher tariffs mean higher prices. While this is certainly true as to a particular product that is subject to a tariff–coffee, for example, in the current instance–inflation is a monetary phenomenon. Higher prices of a specific product are not inflationary; demand for that product will fall, and that demand will go to substitutes (e.g., in the coffee instance, tea or Diet Coke) or to random, unrelated goods and services. Whether tariffs imposed across a broad range of products will cause a general increase in prices, which consumers will experience as inflation, I leave to those better versed in the dismal science than I am.
Researchers at the Federal Reserve Bank of San Francisco have released a new report that challenges the conventional wisdom on tariffs. Examining over 100 years of history, the authors conclude that higher tariffs have correlated with lower prices but higher unemployment, the opposite of what most economists expect:
In this paper we exploit 150 years of tariff policy in the US and abroad to estimate the short-run effects of tariff shocks on macro aggregates. A careful review of the major changes in US tariff policy since 1870 shows no systematic relation between the state of the cycle and the direction of the tariff changes, as partisan differences on the effects and desirability of tariffs led to opposite policy responses to similar economic conditions. Exploiting this quasi-random nature of tariff variations, we find that a tariff hike raises unemployment (lowers economic activity) and lowers inflation. Using only tariff changes driven by long-run considerations—a traditional narrative identification—gives similar results. We also obtain similar results if we restrict the sample to the modern post World War II period or if we use independent variation from other countries (France and the UK). These findings point towards tariff shocks acting through an aggregate demand channel.
Are they right? I don’t know. Experience, of course, always trumps theory. In any event, someone get this paper to Jerome Powell, quick!
