The laws of economics can be frustratingly inconvenient, especially in Washington. To many lawmakers, the fundamental principles of economics are neither fundamental nor even principles: They are tools to be bent, warped, and manipulated or outright ignored in order to yield up the answers those lawmakers want.
So it is that Democrats love to argue that raising taxes on things automatically yields more tax revenue for the government. They would have you believe that if you bought ten Big Macs at a cost of $5 each, you would also buy ten if the price were $7.50 after a tax increase. Economics teaches us that people just don’t act like that — it’s called elasticity of demand — even if lawmakers don’t understand.
Another example: By ignoring economic principles, the Congressional Budget Office — supposedly full of people who have at least studied economics — misjudged the number of people who would sign up for Medicaid under ObamaCare by at least 130 percent. It turns out that people really like free stuff.
Sadly, Republicans can be just as unwilling to acknowledge the same basic, fundamental principles as their left-leaning colleagues.
Thus it was this last week, when White House Senior Counsellor for Trade and Manufacturing, Peter Navarro declared that the upcoming basket of Trump Tariffs would raise $6 trillion in revenue in the next ten years, or an average of $600 billion per year.
Some basic math would suggest that, in theory at least, that is possible. Last year, Americans imported around $3.3 trillion worth of stuff from other countries. In order to raise that $600 billion a year, the tariff rate would have to be, on average across everything we import, about 18 percent. President Trump has dangled the prospect of tariffs ranging from 10 percent to 25 percent (or more, when it comes to China), so that 18 percent blended average at least isn’t outrageous, assuming that it covers literally everything, which even the White House hasn’t proposed … yet.
So the math could work, in theory. But economics is more than just math. It also considers human behavior. And one of the basic principles of economics is that of substitution. If the price of something goes up, people will try to find a similar good — a substitute — at a lower price.
It’s part of the same thing that makes the Democrats so wrong about taxes on Big Macs. Some people are going to adjust by going to KFC instead.
Don’t get me wrong: Substitution when it comes to tariffs isn’t a bad thing. Indeed, it is a principle that lies at the heart of the Trump tariff policy. He wants people to substitute American goods for the foreign goods that would be more expensive with tariffs added. He admitted that much this ...
