Do tariffs increase prices? – Econlib

The argument that tariffs increase the prices of imported goods is exactly the same as the argument that gasoline taxes increase gasoline prices.

You might argue that it's theoretically possible that a particular tariff won't raise prices. That's true. It's also theoretically possible that an increase in the gasoline tax won't raise gasoline prices. In either case, the seller could absorb 100% of the tax. The likelihood of this happening in the real world is vanishingly small, especially with tariffs that apply to all countries.

Matt Yglesias recently retweeted a tweet by Scott Lincicome and added a comment:

Here, I think Yglesias greatly exaggerates the level of disagreement. This may sound odd, since he uses the phrase “very little disagreement” and cites a study that shows only 5% disagreement. However, I think he massively exaggerates the level of disagreement, which in my opinion is actually much less than 1%.

The poll question asked about the impact of tariffs on “general economic welfare.” Some economists (not many) favor tariffs because they believe they might increase welfare. But that's almost certainly not because they believe tariffs will prevent price increases. For example, suppose an economist believes that the loss of blue-collar jobs from imports is a bigger problem than higher prices. That's not a nonsensical claim, although I think it's false, partly for reasons I laid out in my article. previous post(I don't think this would save jobs.)

The few economists who support protectionism do so precisely because they believe that a tariff would increase prices. If prices were not increased, if domestic industry was not protected from cheaper imports, then this would not help to protect jobs in industries competing with imports.

You may think I'm making a mountain out of a molehill and putting too much emphasis on the difference between a 5% minority and a minority of say 0.5%. But I fear that people may assume that a statement is almost certainly true if 95% of economists think it is true. If 50 out of 1000 economists hold a heterodox opinion on a particular issue, it is certainly not that unlikely that they could be right – the probability is certainly much higher than 5%. Imagine a case where 95% of economists thought it was 75% likely that X was true, and 5% of economists thought it was only 25% likely that X was true. If you did a survey, you might find that 95% of economists say they believe X to be true, but in reality it would only be 75% likely that X was true. even if these 95% were completely correct.

I'm among a tiny percentage of economists who believe the Fed caused the 2008 recession through tight monetary policy. But even if a poll shows that 99% of economists believe I'm wrong, that doesn't mean there's a 99% chance I'm wrong. In fact, I doubt many of the economists who disagree with me would take a bet that would give them a measly $102 on a $100 bet on whether alternative monetary policy could have prevented the big drop in NGDP in 2008, especially given that we weren't even at the zero lower bound! (Yes, that would be hard to test, but imagine if there was a test.)

Economists’ opinion polls tell us with certainty, something It is helpful to know what experts believe. But one should not overestimate the importance of a strong majority of economists taking one side of an issue. It is not meaningless, but it is not definitive either.

PS. It's also possible that a poll question asking whether tariffs raise prices would yield the same heterodox 5%. In that case, it could be that there are a small number of economists who are just very eccentric. But I still believe the number would be well under 5%, especially if the two questions were asked back to back, reminding the economists being polled that they are two different questions.

PPS. Less than an hour after I finished this post, I read The Economist and came across the following story about the Russian economy:

Russian GDP will rise by over 3% in real terms this year, continuing its strongest growth spurt since the early 2010s. In May and June, economic activity “increased significantly,” according to the central bank. Other “real-time” activity indicators, including one published by Goldman Sachs, suggest that the economy is strengthening (see Chart 1). Unemployment is nearing historic lows. Inflation is too high – in July prices rose 9.1% year-on-year, above the central bank's 4% target – but with cash incomes growing 14% year-on-year, Russians' purchasing power is rising fast. Unlike people in almost every other country, Russians are happy about the economy.

I estimate that in 2022, well over 95% of economists (including myself) were wrong about the impact of the Ukraine war and the resulting sanctions on the Russian economy. In most cases, 95% of economists are right. But in a disturbing number of cases, that is not the case.