The Main Event is Our Future

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DSC_8233.jpg by bobosh_t is licensed under CC BY-NC 2.0

With the daily dose of atrocities, it’s hard to get beyond us versus them.   “My people are not like that.”   Get rid of the bad guys and everything will be just fine.  Except that it’s not so easy.

It’s a lot easier to produce factions than policies, and this is a moment that cries out for serious answers.  We’re so numbed by roadblock issues—inequality, declining opportunity, rise of authoritarianism, unstoppable climate change—that we get depressed about the future too.  But the issues are there to be solved.

This isn’t an appeal to bipartisanship, because there is no reason to think that’s the point.  The crisis is not of compromise but of ideas.  So instead this is an appeal to resist chest-beating and work on the issues.  The problems will still be there, impeachment or no impeachment.

If we want to fight climate change, we should stop talking about morality and come up with specific plans.  That’s not trivial, and bad plans can make matters worse—certainly in missed opportunity.  Green New Deal isn’t a plan yet, and spending money on that scale means we better be clear enough about what we’re doing to avoid corruption even among the good guys.   Similarly if we want to improve education we need a plan with funding and a way to get more people involved.   Fundamental problems such as inequality or lack of opportunity are even harder—we need both individual prosperity and national growth.  Detail matters.  The country needs specific proposals and a serious dialog to move forward.  In this Elizabeth Warren’s many proposals are important whether you agree with her answers or not—they are specific enough so that we can start having confidence that this is a job we can get done.

One thing that is certainly true is that we can’t continue denying reality or the interconnectedness of the world we live in.

Any new President will have plenty to fix in sheer damage control.  The country has been weakened in many ways.  But we also have to think about this as a new beginning with bright prospects.  (A recent NYTimes piece was good on prospects though rather breezy on answers.)  It is not a given that 19th century level inequality is a fact of life or that we can’t be expected do much of anything for the common good.  Since there’s no shortage of either money or opportunity, what we’re faced with is the difficulty of getting to where we ought to be.

After World War II, the US led the world into becoming a much more equitable and prosperous place.  That challenge is again on the table.

The Tariff Tax

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As many economists have noted, tariffs are not a sneaky way to get free money from foreigners.  They are a tax paid by all of us in higher prices, and that’s exactly what has happened with the Trump tariffs to date.

Since a tariff is a tax, it’s worth thinking about what kind of a tax it is.  We’ll be specific.

For this note we’ll restrict ourselves to the two biggest ones:  the new Chinese tariff of 25% on $250 B of annual inputs and the new Mexican tariffs, scheduled (as Trump says) to reach 25% on all Mexican imports ($346 B annually) by October.  This costs a total of .25 x ($250 B + $346 B) = $149 B annually.

At first glance this doesn’t seem too bad, since aggregate annual income in the US is $13T, and $149 B /$13 T is about 1%.  But that’s the wrong comparison.  The primary impact here is on prices, which means we’re talking about consumptionnot income.  This is like a sales tax.   Consumption is much more evenly distributed than income, so lower incomes pay more.

It is a truism that the rich spend less of their income, because they don’t have to.  But in fact we can be specific.  Even if we throw out the highest 5% of incomes, the income distribution in this country is more than 3 times more inequitable than the consumption distribution.  What’s more, the US Bureau of Labor Statistics publishes a breakdown of consumption spending by decile segments of US income.  That is, for each 10% segment of the population—ordered by income—they give a percentage of total consumption spending.  These ten slowly-increasing percent values give a quantitative picture of what it means to say the rich spend less of their income:

4.1, 4.5, 6.1, 7.0, 7.8, 9.0, 10.5, 12.1, 15.1, 23.7

Going back to the $149 B of tariffs, this tells us how those tariff costs are allocated to the different segments of the population:  4.1 % to the lowest tenth of income, 4.5 % to the next tenth, and so forth.  Further, since the total number of households in the country is 141 million, we can even say something about how much households in each segment will actually have to pay.  For the lowest segment this is

$149 B x (0.04) / 14.1 M = $433

The calculation is the same for each segment, using the percent values just listed.  In addition the Labor Statistics figures also include the average income level associated with each population segment.  That lets us directly compare Trump’s much-touted tax cuts with tariff costs.  Putting it all together we get the following chart

Population segment Percent of consumption Average income Tariff cost Tax cut
1 4.1 $6,000 $433 0
2 4.5 $16,000 $475 $50
3 6.1 $25,000 $644 $180
4 7.0 $35,000 $738 $360
5 7.8 $45,000 $824 $570
6 9.0 $60,000 $951 $870
7 10.5 $75,000 $1110 $1310 (combined in source)
8 12.1 $100,000 $1268
9 15.1 $130,000 $1596 Not in source
10 23.7 $250,000 $2504 Not in source

What we see is that the Chinese and Mexican tariffs alone overwhelm the Trump tax cuts for 60% of the US population (and come close for another 20%).

Conclusion:  Tariffs are a serious and regressive tax.  Since they are also an expensive and uncertain way to create jobs (at $800-900K each), this is no silver bullet.  And that’s before we even think about retaliation.