Investment? is that where hedgefunds hold stocks for a pico-second with HFT and then get to pay carried interest tax loophole, just before shipping the money to some Tax haven?
How do you force corrupt wall street to ACTUALLY invest? By my calculation democrats have printed about $30 Trillion since 2008...to make sure wall street get bonuses.
I call for a TAX on all WS trades(stocks or bonds) or moving money offshore. Then you are ENCOURAGED to invest...instead of worthless money spinning!
That's a terrible idea. Even if they hold it for a pico-second, risk is being transferred. Wall Street does invest....There are two places in America where someone can efficiently and reliably raise capital for investment. Wall Street and Silicon Valley.
Neither Wall Street nor Silicon Valley have much interest in building US factories. This situation is reminiscent of the Bank of the United States prior to Jackson: investment capital was available to those proximate to the bank in Philadelphia but not to those in the hinterland. That massive imbalance and underinvestment in flyover country productive assets contributed materially to the rise in populism in the 1820s just as it does in the 2020s.
(Re)Creating capability to “reliably and efficiently raise capital for investment” in productive assets between the Northeast and the West Coast is essential for both broadening American prosperity and calming the American political situation.
In the formula Prof Cochrane cited, Investments explicitly exclude purchases of financial assets such as stocks and bonds, which represent transfers of ownership of existing assets rather than the creation of new productive capacity. Investments include business fixed investment (purchases of new machinery, equipment, and structures like factories and office buildings), residential investment (construction of new homes and apartments), and changes in business inventories (goods produced but not yet sold).
No Jeffrey has it right. As JC said look past the money to the real things going on. Imagine building a plant, it takes a couple of years and during that time the workers doing the building need food, clothing and housing. You convince someone else to provide that by issuing to them a claim against the future earnings of the plant. That claim is exactly the sort of financial asset we’re talking about and its value is enhanced by the ability to sell it on (say because the people who first put up resources may need to recover the value of it before the plant is built).
If you tax that activity you don’t encourage investment you’d crush it.
It's simply accounting and definitions. Trade in financial assets is not included in GDP or National Income definitions (by design and logically), hence it's not part of the formula connecting trade balances, savings, investments and government deficit/surplus. It has nothing to do with intentions, incentive and the like.
How do you classify the activity where e.g. Mitt Romney and Bain Capital buy a factory and close it, but keep the branding while sourcing from abroad? Is that investment?
care to talk about about $2 Trillion a year deficits, the multi-trillions of ZERO interest loans, the $7 Trillion over at the FED(was $10T)?
Reminder Wall Street has a GOVERNMENT funded lower cost of capital, which they USE to DRIVE up housing prices(steal houses) by buying millions of homes!
I want a LEVEL playing field. NO ONE gave me access to a FED window with NEGATIVE interest Rates, How about you? Government BACKSTOPPED banks...didn't back stop me.
The 1980's created quasi government investment bankers without personal risk for bankers... the 2008-2020's allowed banks who MADE criminally BAD BETS...WHOLE! That isn't capitalism...that is crony capitalism! I know 100's of wall street workers...who go to work, collect outrageous packages and have little rain-making talent!
Don't even get me talking about tax-credits designed to erase profits for the Buffett's, Goldman, Googles, Amazon's of the world!
Warren Buffett
"For example, on wind energy, we get a tax credit if we build a lot of wind farms. That's the only reason to build them. They don't make sense without the tax credit."
None of these constitute "printing 30 trillion dollars" and some of it is completely irrelevant. And that's before it degenerates into an unhinged incoherent rant
Guy, your point around short-term trading is well taken. That kind of activity does not help companies lower their cost of capital or contribute meaningfully to the economy. Profits from such trades are already taxed at ordinary income rates, but loopholes (like carried interest) still allow some to dodge fair taxation. Closing those is important.
In contrast, if someone buys a security—either directly in an offering or on the secondary market—and holds it for years, they are helping create long-term price support and capital stability. Preferential long-term capital gains tax rates reward that behavior, and that’s a good thing: it encourages capital formation and productivity in our economy.
One idea to reduce inequality and make markets work for everyone is to allow the U.S. Social Security Trust Fund to invest a portion in equities, as Canada’s pension system does. That way, every American can benefit from long-term stock market growth—not just wealthy individuals or hedge funds. It's tragic that the average Canadian may benefit more from U.S. market performance than many Americans do.
As a David Ricardo Comparative Advantage free-trade disciple, I’m for free trade. But I am reminded that for it to work, both parties (and the more the merrier) need to participate equally otherwise it becomes a beggar-thy-neighbor arrangement where you go deeper into debt and your neighbor is holding the mortgage. And, it turns out, he was only your friend while you were buying the rounds of drinks at the bar but now that you are broke he wants his pound of flesh.
I have been contemplating how much debt as a percentage of GDP the US can have before the banks decide we are bankrupt. I do not have an answer, yet I am concerned that we are far closer to that point than our politicians realize, assuming they are even aware it could happen.
If Trump’s objective is zero-zero tariffs, as Musk advocates, and he is successful, he will be the GOAT (Greatest of All Time free trader). If he fails, he will be a goat (political sacrificial animal).
The analogy was where you are buying the drinks, not the reverse. If you refuse to pay your separate debt what happens next depends on the lender. Some take the financial beating and walk away, others take kneecaps or first born as payment.
In the two country-two product simplified model, Unilateral trade tends to stop rather suddenly unless you, the importer, can pay for it. There are only two countries and your opposite is not buying your product (B) so you have nothing to pay for his product (A). Why would the exporter sell you something when you cannot pay (trade in this case) for it?
Life is much more complex than a two country-two product model but the substance remains the same.
Can you explain why unilateral free trade doesn't work? I am not an economist, I don't even play one very often in comments, and I don't see why raising our taxes in response to other countries taxing themselves does anything but surrender control of our taxes to other countries. I want to reduce US spending, not give them more revenue.
Mr. Cochrane is better to respond to this question as he is an academic in the field, I’m just an old retired CFO of multinational companies. Here is my take: It is not free trade by itself, but Comparative Advantage that makes free trade desirable. A highly simplified example: If we both make products A and B and you are better at A and I am better at B, then trade between us is mutually desirable. If you sell me A but I cannot sell you B, I run out of resources to buy A. Both of us are now worse off. It takes two to begin the free trade tango.
I see one misunderstanding: I do not know what you meant by "free trade". I took it to mean unilateral zero tariffs. You obviously mean something else.
Your example seems too simple and unrealistic. There is no world of just two products.
What has happened such that you can no longer sell me B and have nothing else to sell? More realistically, if you want A so badly, you'll find something else to sell me, some product C.
And what does any of that have to do with free trade? I don't know what your definition is.
Chartertopia: Sorry the explanation did not help you. I suggest you Google "Does unilateral free trade work?". The example I found there explains it might -- or might not work. It's the two-handed economist problem. I still prefer bilateral free trade. I also prefer the simple starting point of only two countries with only two products to isolate the theories involved so you can apply them to more complex scenarios. Our engineering friends on the thread might say you start with understanding a simple electrial circuit and then build towards an understanding of an Nvidia AI super chip.
As to what is "free trade", to me it is the trade between entities (countries and even states here in the US) unencumbered by tariffs, taxes, regulatory burdens, currency limitations or other encumberances. Hard to think of a country that does not have some restrictions on trade. Think of making sure food products are not contaminated, imported animals are free of disease, products are safe [will not maim/kill your baby] and an endless number of other restrictions; and unfortunately some for more base reasons of political protectionism. These are all impediments to free trade but few would surrender, or should surrender, all of them. Many of what countries call "free trade" probably means "freer trade". To me, the idea is the fewer restrictions you can get my with (you need some) the better off humanity is. There is an observation that governments and regulations are like salt: you cannot life without some (~2,000mg/d), but too much (1kg/d) and you are dead.
Doctor Hammer: I think you are correct. I overstepped. Being a Ricardo fan of free trade, I got overly enthusiastic and overlooked the potential of zero trade.
The problem with including all those NTBs in the definition of "free trade" is that they cannot be defined objectively or consistently.
A comparison I saw recently was hagis, traditionally made from sheep lungs, and therefore banned in the US as unsafe. Obviously Scots don't think it unsafe.
Each state has its own minimum wage laws; how do you compare foreign minimum wage laws?
NTBs are partisan hacks and make "free trade" as unobtainable as absolute zero.
“Free trade”, like “capitalism”, is not a particularly helpful term.
Voluntary Exchange is the essence of both. It naturally creates benefits for participants, else they would not exchange.
Your discussion beautifully illustrates many things that make Exchange less voluntary. To that discussion, I would add a class of things that are private, rather than public, in origin. Monopoly / Oligopoly chief among them.
It is useful to remember that the postwar liberal order was characterized by relatively free trade among most countries, generally on terms somewhat unfavorable to the US, who supported, or at least did not closely align with, the USSR.
It also included extensive restrictions on trade with the USSR and its close allies.
The PRChina shares an important trait with the USSR: It is building a vast military and training it explicitly to destroy the United States.
Such countries are special cases in trade. They cannot be assessed in the same fashion as other countries who are not investing heavily to destroy you.
In your example, if one country refuses to trade you can’t be worse off than when you started with no trade. Unilateral free trade where the counter party refuses to trade can’t make you worse off than the zero trade case, because it is the zero trade case.
He can't. It does work. :) The bilateral/multilateral negotiations BS is just a way to get domestic exports interested enough to overpower the protectionists, to make them see that tariffs are a tax on exports and reducing import restrictions is export promotion.
even in a world where you can import but not export, paying for those imports in IOUs, that type of trade is better than not being able to trade at all. You can obtain cheaper goods from abroad than they would cost you back home which is a win. The resources you would have used to produce those imported goods domestically can be used for some other more productive activity.
No. "Unilateral free trade". It's right there in the first paragraph.
Or to quote another economist "putting up tariffs is like throwing rocks into your harbor". Should we throw rocks in our harbors just because other countries are dumb enough to throw ones into theirs?
Only Trump can play Trumpism. Once he's out of the picture, it will fall apart from all its internal contradictions. Some will pursue his zero tariffs. Some will pursue his garbage reciprocal tariffs with even weirder formulas. Some will pursue his high tariffs to combat drug smuggling, lax for regulations, and whatever else Trump muttered at some point.
My only half-hearted prediction is that if he doesn't sort this out before summer, the Democrats will take back both chambers in 2026 and impeach him successfully in 2027. The only puzzle is whether JD Vance will grab the chance to be his own man, or try to ride Trump's legacy in 2028.
Seeing as how many people forgo contributing to an employer provided retirement plan if they have to contribute anything at all, even with generous matching by the employer... I kind of doubt it
Would u consider tariffs to be taxes on consumption? If so, wouldn’t optimum level of tariffs be appropriate in our circumstance? Say 5% across the board, which would reduce G-T. Thx. Great and very informative post.
A 5% uniform tariff would be better than the current system, if just for simplicity and effort savings, and also vastly lower than current tariff rates.
I like this idea, but you would have to differentiate between goods that help Americans build other things (ex. steel to build cars) versus throwaway stuff (ex. clothing that is fashionable for three months, then sits in your closet for two years before you drop it off Goodwill). It wouldn't be possible to perfectly differentiate between the two categories but even if we're only 65% correct it could be a net plus for society.
most economists don't make the throwaway vs durable distinctions because they assume they are already built into prices (eg a Brooks Bros shirt costs more than a Shein shirt). so trying to differentiate here with tarriffs would just distort something already corrected for.
but the distinction you seem to be making is between intermediate goods (steel) vs consumer goods (cars). I don't actually know whether the trump tarriffs makes that distinction but its worth noting that China imports mainly ntermediate goods and exports mainly final consumer goods. so I'm not sure the categorisation matters.
if they were a tax on goods that would make sense cf. we tax all imported toothbrushes at 100%. But we are taxing countries, not goods. So imported toothbrushes from china taxed at 145% but those from India taxed at 10%. Americans simply shift where they import from, consumption only changes by the lowest marginal tarriff increase (ok this assumes production can shift seemlessly).
I think one thing Milton Friedman would rethink is free trade with China. I am under the impression he was for free trade because he thought it would encourage them to become a more capitalistic country, or at least a quasi capitalistic country like the EU. The Chinese are not and more of a threat than they were before they entered the WTO.
Anecdotes do not mean causation, but they are interesting. At least they give you clues to investigate something. Tariffs are a poor way to incentivize economically, and even in a 0% tariff environment, legislative protectionism can keep products out. Try buying a bottle of American/Italian/Spanish/German/Austrailian wine in France for example.
I spoke with two CEOs. One ran a multi billion dollar apparel business that manufactured in China and exported worldwide, with a lot of it coming to the US. In 2017, Trump put tariffs on. He moved his production from China to India/Bangladesh. It took 12 months. He did an audit of his company while he was doing this. The move out of China reduced his COGS by 20%. He also found out that many of his own American VPs were getting kickbacks from the Chinese in order to persuade upper mgmt to keep production in China.
The other CEO has a consumer products business made out of steel. He sells to big box US retailers. His competition is similar products that are plastic mold injected. He manufactures in China and the tariffs are going to hurt him. He is looking at moving his manufacturing operation to Vietnam.
When I asked, "If you saved 20% on COGS, why don't all businesses move out?" The answer I received was "Companies can't because of supply chains, or sometimes they truly are lazy."
Any CEO I have ever spoken with that has done business in China says they steal intellectual property. They bribe, and take bribes. Labor was cheap, and the switching costs are something they don't want to currently assume. Tariffs change the economics for them where they have to look at it, but in many cases the opportunity costs might be far too hard to change.
On social media, I have seen opinions that this is a way to crush the Chinese yuan, with the corresponding threat that if the US were to lose, interest rates would go to the moon. Not sure I buy it, but so many conspiracy theories that were trashed in the past have come to truth it's possible to say it's not probable but it is possible. If a lot of factories leave China for Vietnam or India, the Chinese government is going to have to do something to support those unemployed people. I realize they only have "24-month welfare programs", but if there aren't jobs, the government is going to have to step in. I try never to forget, the Chinese are communists and while they run their country in a smarter fashion than the old Soviets, they still are communists.
Additionally, it is clear US policy has not been correct as the post outlines. But, Chinese policy is pretty poor as well. They have not only a demographic problem, but their own debt problem and other problems. What happens to their government if people can't afford to eat?
I think the economics presented in this post are on point and clearly explain things. I think often economists get bogged down in the numbers, and forget the strategy or game theory. They Keynesians are out in full throat on the social media channels that I am on worrying about the cut in government spending, and tariffs.
It is clear that if the entire world went to 0% tariffs and duties, it would be better for every person in the world. But, we still wouldn't have free trade. I don't think we solve that one ever. We are human.
I would have preferred to see Trump take on the inner demons that stop economic progress or competition inside the US. However, that is not politically palatable and it's easier to point fingers and blame someone else.
At the same time, I see a lot of economists with Trump Derangement Syndrome and virtually everything they say is negative no matter what Trump does. They hurt their credibility when they do that. I compliment the Grumpy One that he didn't bring Trump into it, and kept the post objective. With objectivity, we can learn.
I am looking at Miltie’s former residence down the street from me and trying to channel what he would say. I’m getting “You dope! Free trade is not a one-way street, it means bi-directional free trade!” Either that’s Miltie getting crustier in the afterlife, or the copious amounts of cannabis smoke that now envelopes San Francisco.
I'm not in France, so maybe there are issues I'm not aware of, but looking at French online retail/supermarket offerings it seems like there are plenty of non-French wines available to French consumers.
It's hard to argue with the economic case against tariffs and I will not. With respect, I do find two aspects of the problem vexatious. First, while it is surely true that war is politics by other means, so too economics may be politics by other means. Almost all political goals have costs (and consequences). The question isn't whether political gains can be made without cost but how much are they going to cost and by what mechanism are we going to pay. Tariffs might be an effective cudgel when positive incentives to allies or adversaries haven't worked. And depending on how long the tariffs have to be in place, It might be a fairly cheap solution. Second, in the context of a multi-period game wherein tariffs allow the accumulation of strategic materials or commodities, it's far less obvious tariffs are bad economic policy let alone bad strategic defense policy. The free trade framework virtually never considers that adversaries or neutrals won't trade. Can we really afford to have most essential war materials produced by adversaries or potential adversaries and have pharmaceuticals produced by our most serious long term adversary? I don't think so. Some tariffs and protection would seem to be necessary to preserve our ability to fight and win if it comes down to that.
Tariffs as a cudgel against our allies is a bit like an alcoholic taking a cudgel to his favorite liquor store. The core problem is the alcoholic not the presence of the store.
You want the accounts in balance then CUT THE FEDERAL SPENDING. I saw Bessent say they can’t just do that all at once because it will cause a recession. Of course upending a global trade system all at once with effectively no notice while changing the details hourly via drunken tweet would never do that.
In the end the Senate has set a floor for spending cuts of 4 billion dollars which is effectively no cuts, and we want to bump the defense budget 12%. Basically we are fighting a trade war so spending gets cut never. Theres always a reason the grifty graft train must speed ahead unimpeded.
Having strategic local supply of war fighting inputs is probably wise policy for a nation state, but it’s also the one thing we aren’t addressing here. If that was a concern local sources of rare earths would have been priority 1.
Instead priority 1 is making sure our socks are made in Indiana regardless of the cost. Trump world is clown world just like Biden world was clown world and Obama world was clown world and Bush world was clown world and …..
The focus on tariffs obfuscates, rather than elucidates, the situation for US allies.
What matters is relative competitive position.
For allies who compete with the PRChina to supply the US market, it is to face a 20% US tariff with the PRChina facing 150% than to face no US tariffs with the PRChina facing 20%.
Seems like Trump was able to see, or was persuaded, that things needed to change.
But with his learning disabilities he was the last person you would want to implement change. He acts with all the refinement of the bull in that china shop.
Which is a great shame because he apparently has the power to take the sort of drastic action that is needed, without losing his job - a quality that no previous president had and probably no future president will have either.
A couple of comments. You mention that China should be quite worried about getting paid back, yes they should. But that brings up a point that is often misunderstood, we have all the power in the relationship. They have been sending us goods in return for securities that we completely control the value of! Yes, it has a cost to us to devalue the claims so we won’t do it willy nilly, but we could.
The second is that, as you say, China collects a lot of treasuries and other pretty low risk low return assets, what they really want is safe liquid securities that they don’t have enough institutional capacity to produce at home. You could think of this as an export of the US, essentially renting out our excess institutional capacity.
Thought of this way you could think of this as a form of balanced trade, we import goods and export our institutional capacity.
Lending money that can’t be repaid doesn’t work out well for the lender or the borrower.
Think of China like a credit card company that isn’t doing proper underwriting and has no collateral to repossess.
In the flip side think of the us, with its five or six year average maturity on debt, as someone enjoying a 0% intro apt that could reset at any moment.
Yes but what happens if China refuses to roll the debt? It’s value is destroyed and we have an inflation…disruptive and yes people hate it but in real terms we aren’t made poorer, they are.
In fact anything China can do to us, like dumping the treasuries to spike our interest rates we can easily handle by buying back the debt for dollars, it causes a disruptive and distasteful inflation for us and completely expropriates the real value for them.
The difference between the US and the the non-sovereign borrower on a 0% apt that can reset is our debt only promises dollars, except of it’s a TIPS it doesn’t promise any real value, and we can’t ever be forced to deliver anything real to redeem it. We may well prefer to redeem it for real goods but we can’t be forced to and we do so at our leisure, only if it’s better for us than the alternative.
My uncle in law ran up a bunch of unsecured credit on consumption and defaulted. He did not feel like he had gotten one over in his creditors. He felt like he fucked to his life.
Neither the lender or borrowers come off good in default. Which gets it worse is a contest of losers.
There is also real damage to the world economy. We forget how to make things and the Chinese build a bunch of capacity that doesn’t make things people can pay for with real value.
When the Germans printed marks to pay off their creditors in the 1920s it didn’t work out for them either. Less extreme versions like the 70s or Covid weren’t fun either.
Miran does not think that tariffs will solve the imbalances, for what it’s worth. He thinks they will force other counties to the table to negotiate currency revaluation.
Genuine question. Can’t the US run current account deficits of say 3% per year, and have foreign debt stabilise at about 80% of GDP (assuming 4% nominal GDP growth), and keep I above S for the foreseeable future (with a similar fiscal deficit and government debt to GDP ratio). What stops that from continuing forever?
Yes yes yes they can and its a discredit to Cochrane that he doesn't point this out. The $1.3T nominal deficit is roughly 4% of GDP afaik. Growth is running around 2-3% a year in real terms.
From additional deficit funded spending, as long as the increase in interest payments on the stock of debt is less than the increase in tax revenue (change in GDP x avg tax rate) , you can keep rolling over your existing stock of debt.
Money is not a veil. Money exists in its own right and is valued in its own right.
That's the fundamental mistake of classical economic views. They forget that money is held for insurance and status purposes, and that it is a dynamic concept - created and destroyed on demand.
It's far more useful to see money in the same way as we see reactive power in electrical engineering. There is a power factor with money that changes the operational dynamics in floating exchange rate systems. It's not a one-for-one with stuff. It's more of an inductive relationship.
If government pays interest on a Treasury to the Chinese, and the Chinese leaves that interest in a drawer, that does not magically cause an offsetting factory to arise. But it does increase the 'savings' on the capital account, and therefore the trade deficit by accounting identity.
"The hard reality of debt is you have to pay it back someday."
Nope. Not in a floating exchange rate system. The hard reality is that money *is* debt, and therefore you just swap the debt for a different type of debt with different terms and potentially interest rate. And because it is a floating exchange rate system actors can't get out of that deal in aggregate. Somebody has to hold the debt no matter what.
So there can't be a 'debt crisis' in a floating exchange rate system. It's an accounting impossibility. The base which debt is 'paid back' in is owned, controlled and has the same entity lifespan as the debt itself. It's just another representation of that entity's debt.
"The US will no longer be able to finance $1.3 trillion budget deficits from foreigners, and will have to do it from domestic savings."
The foreign financial savings of dollars are redirected by the tariffs and returned back to circulation, where they cause more domestic transactions. The transactions are taxed at a percentage, and the rest earned as more income. Which is then taxed at a percentage. And so on down the spending chain.
The result would be lower government deficits and higher GDP and that's because a government deficit is *caused* by excess saving of money.
It's far better to visualise the government spending coming first, that bouncing around the economy and taxes raised and returned from that flow, with anything not spent held as savings from which the 'deficit' arises.
The net result of all this will likely be a reduction in foreign saving of dollars and dollar denominated financial assets, and a consequent reduction in the US government deficit. Everything else will continue to exchange at roughly the same rate - because the productivity of the production of different items hasn't changed. There is no reason to presume that a car will exchange for fewer or more tomatoes just because nominal exchange rates have changed as a result of the financial savings desires changing or being changed by the tariff process.
A smart piece. But "taxing consumption" indeed means taxing consumption: a VAT or something like that. And not instead of income tax but in addition to it.
And this is unpopular. The left doesn't want it, except maybe Abundance wonks. And conservatives want it even less.
So, without forcing the US public to accept hard truths, nothing will come of it.
You're probably right about the politics, but there is a way to change Form 1040 to be the key to a progressive consumption tax that isn't VAT. If you start with the accounting identity that all income is either consumed or invested, then Consumption = Income - Investments. So total all income, subtract all investments, and you have total consumption. Add whatever progressivity you wish to have the affluent (measured by their larger consumption) pay progressively more. Sure, there will have to be definitions of what is investment and what is consumption, but that's true in any regime. This may be a politically acceptable way to get to a consumption tax that replaces the income tax because it will use familiar vehicles (Form 1040) and can be progressive.
1) Trump wants to use tariffs to reduce income taxes. So this is clearly swapping a consumption tax for an income tax. Economist are supposed to like things like that, but tariffs are coded as racist and Orange Man Bad.
2) going on a diet or not using your credit cards sucks, but the longer you don’t do it the worse it gets.
Whatever pain you want to avoid now will obviously be worse when we owe even more trillions to China
3) to the extent that other countries are just conduits for china to avoid tariffs (Vietnam, etc) the tariffs will have to be more universal then just China.
4) I find it very strange that a country that can build high speed rail wants to invest in a country that can’t build high speed rail.
There are 1.5b Chinese with an average iq of 105 and a dramatically lower gdp per capita. Are you telling me the best investment they can come up with is USG? USG has two functions, writing checks to old people and the military. Paying for some old geezers nursing home is not an investment in when older Chinese need nursing homes!
I think it’s way more likely that China has a lot of restrictions on its citizens and these are driving a dynamic that is not sustainable.
“There are 1.5b Chinese with an average iq of 105 and a dramatically lower gdp per capita. Are you telling me the best investment they can come up with is USG?”
Renting our institutional capacity, of which they basically have none. See JC’s comments on financial repression of the banking system.
“Institutional capacity” sounds like a really handwavy cop out. It implies our institutions know how to invest that money. When all we are doing is paying people to wipe old peoples butts or sending people checks while we tell them not to go to work because they might catch a cold. Or buy weapons we might use on the Chinese, lol.
If China has worse “institutional capacity” then that they ought to work on changing it rather then lend to us in ever increasing quantities. If they need a punch in the face to figure that out so be it. We did it to the Japanese in the 1980s with the plaza accords. Call tariffs “a tax on accessing our institutional capacity!”
1) Trump also says he wants zero tariffs. Can't have both. Imports in 2024 were $6 trillion, income tax revenue was $2.4 trillion, so you'd need a 40% tariff to replace the income tax, which would drive down imports, which would require a higher rate, ad infinitum.
2) If you are suggesting spending is the problem, you'll have to show me where Trump thinks so too. All he's done so far is talk about more spending. DOGE spending cuts are too trivial to matter; they are only important for showing corruption and trivial waste.
3) I hope I am not reading this as you expecting Chinese tariffs alone to replace the income tax. The rate would have to be even higher.
4) HIgh speed rail requires high population density. The US has few places where that makes economic sense, and the Chinese ones are heavily subsidized jobs programs, not economical transportation.
Individual income taxes 1.14t (maybe you are throwing payroll taxes in your number?).
A very large % of that is paid by the highest income brackets. Tariffs of 10-20% would raise hundreds billion dollars annually. That is probably enough to eliminate income taxes for a very large swath of Americans. On income below $75k, $100k, $150k. I don’t know where the cutoff would fall but it would mean a huge tax break to a lot of middle income families. If you’re like me and you don’t like buying a bunch of cheap Chinese crap this would be a huge positive.
Literally nobody in government wants to restrain spending. I don’t find Trump unique in any way here. Was Harris running on cutting Medicare (lol)?
Florida managed to build high speed rail. Californias problem isn’t density. They all live in the coast. It’s democrats.
"Per the White House's projections, income taxes are slated to contribute $2.6 trillion. Another $2.2 trillion should come from payroll taxes. This includes $1.3 trillion for Social Security, $399 billion for Medicare, and $56 billion for unemployment insurance."
When you google “how much money does the government collect in income taxes” the top result shows income taxes of $1.14T. But that’s inconsistent with all the other sources and it looks like there is a footnote in the first source saying it’s YTD 2025 (you gotta dig a little to find it).
That's interesting. I'm going to have to watch out for that. Probably just luck it hasn't tripped me up yet.
I don't like having only the rich pay income tax, just because it takes the pain out of paying for government. It hides the true cost. Same with withholding. I'd rather everyone had to cut a check at the end of the year, make sure everyone knew how expensive it is.
It's also like the VAT hiding taxes, since the shelf price includes tax. I'd rather have the tax added at the cash register just so people are aware of how big the tax is. Also, the EU is even worse, because every country has its own rate, so if a website shows one price for all countries, the store pays more tax and makes less profit in the spendiest countries.
Tariffs are paid by whoever has the least power in the commercial relationship. In some cases, that will be the consumer. In others, it will be the producer. In most cases, the burden will be shared between consumer and producer — and among higher prices, lower profit margins, and reduced consumption of / demand for the tariffed item.
I agree with almost everything, but I think there is an inconsistance. You say:
"Reform taxes to tax consumption, not saving and investment. Stop funneling borrowed money to consumption. Cure the nightmarish cost, regulatory, and permitting bloat making investment so difficult, especially public investment."
Isn't exactly what the Trump administration is trying to do?
I understand tariffs are not a tax on all consumption, but it is to over 20%. And there is no way to pass a tax increase in congress, not even democrats who campaigned against Trump tax cuts did it. Insted of having having a consumption tax + lower income tax, the administration is doing tariffs + lower income tax. It seems they saw what you are saying, and tried to adapt to something that is politically feaseable.
Hopefully congress don't mess it up by passing a reconciliation bill that undo the savings the administration is doing.
To your first question yes. And the tragedy of the tariffs is that they will lead to economic chaos, which will undo all the great things the Trump administration was trying to do: cancel energy suicide, cancel AI suicide, deregulate, cut spending, showers that work, and so forth. When everything at Walmart doubles in price and Trump's base loses their jobs, it all goes poof.
There's this 2000 JEL paper by Dani Rodrik where he argues - in a more general version of the usual international economics trilema - that the US (or any country) cannot have at the same time democracy, nation-state sovereignty and full integration in international trade. It seems the US, which is a democracy, wants to exert sovereignty in its affairs by giving up full integration in world trade.
Investment? is that where hedgefunds hold stocks for a pico-second with HFT and then get to pay carried interest tax loophole, just before shipping the money to some Tax haven?
How do you force corrupt wall street to ACTUALLY invest? By my calculation democrats have printed about $30 Trillion since 2008...to make sure wall street get bonuses.
I call for a TAX on all WS trades(stocks or bonds) or moving money offshore. Then you are ENCOURAGED to invest...instead of worthless money spinning!
That's a terrible idea. Even if they hold it for a pico-second, risk is being transferred. Wall Street does invest....There are two places in America where someone can efficiently and reliably raise capital for investment. Wall Street and Silicon Valley.
Neither Wall Street nor Silicon Valley have much interest in building US factories. This situation is reminiscent of the Bank of the United States prior to Jackson: investment capital was available to those proximate to the bank in Philadelphia but not to those in the hinterland. That massive imbalance and underinvestment in flyover country productive assets contributed materially to the rise in populism in the 1820s just as it does in the 2020s.
(Re)Creating capability to “reliably and efficiently raise capital for investment” in productive assets between the Northeast and the West Coast is essential for both broadening American prosperity and calming the American political situation.
In the formula Prof Cochrane cited, Investments explicitly exclude purchases of financial assets such as stocks and bonds, which represent transfers of ownership of existing assets rather than the creation of new productive capacity. Investments include business fixed investment (purchases of new machinery, equipment, and structures like factories and office buildings), residential investment (construction of new homes and apartments), and changes in business inventories (goods produced but not yet sold).
No Jeffrey has it right. As JC said look past the money to the real things going on. Imagine building a plant, it takes a couple of years and during that time the workers doing the building need food, clothing and housing. You convince someone else to provide that by issuing to them a claim against the future earnings of the plant. That claim is exactly the sort of financial asset we’re talking about and its value is enhanced by the ability to sell it on (say because the people who first put up resources may need to recover the value of it before the plant is built).
If you tax that activity you don’t encourage investment you’d crush it.
It's simply accounting and definitions. Trade in financial assets is not included in GDP or National Income definitions (by design and logically), hence it's not part of the formula connecting trade balances, savings, investments and government deficit/surplus. It has nothing to do with intentions, incentive and the like.
And, don't forget, all of those things abroad, too. Dams and road and factories to let emerging economies emerge faster.
How do you classify the activity where e.g. Mitt Romney and Bain Capital buy a factory and close it, but keep the branding while sourcing from abroad? Is that investment?
Thats not the "investment" that is discussed in the article
Democrats - or anyone else for that matter - did not print 30 trillion dollars or anything even close to that since 2008
care to talk about about $2 Trillion a year deficits, the multi-trillions of ZERO interest loans, the $7 Trillion over at the FED(was $10T)?
Reminder Wall Street has a GOVERNMENT funded lower cost of capital, which they USE to DRIVE up housing prices(steal houses) by buying millions of homes!
I want a LEVEL playing field. NO ONE gave me access to a FED window with NEGATIVE interest Rates, How about you? Government BACKSTOPPED banks...didn't back stop me.
The 1980's created quasi government investment bankers without personal risk for bankers... the 2008-2020's allowed banks who MADE criminally BAD BETS...WHOLE! That isn't capitalism...that is crony capitalism! I know 100's of wall street workers...who go to work, collect outrageous packages and have little rain-making talent!
Don't even get me talking about tax-credits designed to erase profits for the Buffett's, Goldman, Googles, Amazon's of the world!
Warren Buffett
"For example, on wind energy, we get a tax credit if we build a lot of wind farms. That's the only reason to build them. They don't make sense without the tax credit."
None of these constitute "printing 30 trillion dollars" and some of it is completely irrelevant. And that's before it degenerates into an unhinged incoherent rant
really the FED creating $10 Trillion for Bankers...isn't printing?
The FED giving investment banks ZERO or negative percent interest isn't printing?
The US government printing $2 Trillion a year to CREATE inflation isn't printing?
Maybe you need to explain what you think is PRINTING?
Also why were wall street INVESTMENT BANKS rescued for horrific criminally BAD bets in 2000, 2008, 1987, etc?
What is wrong you don't believe in capitalism?
The Fed did not “create 10 trillion $ for banks” and if did it wouldn't be “printing”
Guy, your point around short-term trading is well taken. That kind of activity does not help companies lower their cost of capital or contribute meaningfully to the economy. Profits from such trades are already taxed at ordinary income rates, but loopholes (like carried interest) still allow some to dodge fair taxation. Closing those is important.
In contrast, if someone buys a security—either directly in an offering or on the secondary market—and holds it for years, they are helping create long-term price support and capital stability. Preferential long-term capital gains tax rates reward that behavior, and that’s a good thing: it encourages capital formation and productivity in our economy.
One idea to reduce inequality and make markets work for everyone is to allow the U.S. Social Security Trust Fund to invest a portion in equities, as Canada’s pension system does. That way, every American can benefit from long-term stock market growth—not just wealthy individuals or hedge funds. It's tragic that the average Canadian may benefit more from U.S. market performance than many Americans do.
Excellent report. Thank you!
As a David Ricardo Comparative Advantage free-trade disciple, I’m for free trade. But I am reminded that for it to work, both parties (and the more the merrier) need to participate equally otherwise it becomes a beggar-thy-neighbor arrangement where you go deeper into debt and your neighbor is holding the mortgage. And, it turns out, he was only your friend while you were buying the rounds of drinks at the bar but now that you are broke he wants his pound of flesh.
I have been contemplating how much debt as a percentage of GDP the US can have before the banks decide we are bankrupt. I do not have an answer, yet I am concerned that we are far closer to that point than our politicians realize, assuming they are even aware it could happen.
If Trump’s objective is zero-zero tariffs, as Musk advocates, and he is successful, he will be the GOAT (Greatest of All Time free trader). If he fails, he will be a goat (political sacrificial animal).
The analogy was where you are buying the drinks, not the reverse. If you refuse to pay your separate debt what happens next depends on the lender. Some take the financial beating and walk away, others take kneecaps or first born as payment.
In the two country-two product simplified model, Unilateral trade tends to stop rather suddenly unless you, the importer, can pay for it. There are only two countries and your opposite is not buying your product (B) so you have nothing to pay for his product (A). Why would the exporter sell you something when you cannot pay (trade in this case) for it?
Life is much more complex than a two country-two product model but the substance remains the same.
Can you explain why unilateral free trade doesn't work? I am not an economist, I don't even play one very often in comments, and I don't see why raising our taxes in response to other countries taxing themselves does anything but surrender control of our taxes to other countries. I want to reduce US spending, not give them more revenue.
Mr. Cochrane is better to respond to this question as he is an academic in the field, I’m just an old retired CFO of multinational companies. Here is my take: It is not free trade by itself, but Comparative Advantage that makes free trade desirable. A highly simplified example: If we both make products A and B and you are better at A and I am better at B, then trade between us is mutually desirable. If you sell me A but I cannot sell you B, I run out of resources to buy A. Both of us are now worse off. It takes two to begin the free trade tango.
I see one misunderstanding: I do not know what you meant by "free trade". I took it to mean unilateral zero tariffs. You obviously mean something else.
Your example seems too simple and unrealistic. There is no world of just two products.
What has happened such that you can no longer sell me B and have nothing else to sell? More realistically, if you want A so badly, you'll find something else to sell me, some product C.
And what does any of that have to do with free trade? I don't know what your definition is.
Chartertopia: Sorry the explanation did not help you. I suggest you Google "Does unilateral free trade work?". The example I found there explains it might -- or might not work. It's the two-handed economist problem. I still prefer bilateral free trade. I also prefer the simple starting point of only two countries with only two products to isolate the theories involved so you can apply them to more complex scenarios. Our engineering friends on the thread might say you start with understanding a simple electrial circuit and then build towards an understanding of an Nvidia AI super chip.
As to what is "free trade", to me it is the trade between entities (countries and even states here in the US) unencumbered by tariffs, taxes, regulatory burdens, currency limitations or other encumberances. Hard to think of a country that does not have some restrictions on trade. Think of making sure food products are not contaminated, imported animals are free of disease, products are safe [will not maim/kill your baby] and an endless number of other restrictions; and unfortunately some for more base reasons of political protectionism. These are all impediments to free trade but few would surrender, or should surrender, all of them. Many of what countries call "free trade" probably means "freer trade". To me, the idea is the fewer restrictions you can get my with (you need some) the better off humanity is. There is an observation that governments and regulations are like salt: you cannot life without some (~2,000mg/d), but too much (1kg/d) and you are dead.
Doctor Hammer: I think you are correct. I overstepped. Being a Ricardo fan of free trade, I got overly enthusiastic and overlooked the potential of zero trade.
The problem with including all those NTBs in the definition of "free trade" is that they cannot be defined objectively or consistently.
A comparison I saw recently was hagis, traditionally made from sheep lungs, and therefore banned in the US as unsafe. Obviously Scots don't think it unsafe.
Each state has its own minimum wage laws; how do you compare foreign minimum wage laws?
NTBs are partisan hacks and make "free trade" as unobtainable as absolute zero.
“Free trade”, like “capitalism”, is not a particularly helpful term.
Voluntary Exchange is the essence of both. It naturally creates benefits for participants, else they would not exchange.
Your discussion beautifully illustrates many things that make Exchange less voluntary. To that discussion, I would add a class of things that are private, rather than public, in origin. Monopoly / Oligopoly chief among them.
It is useful to remember that the postwar liberal order was characterized by relatively free trade among most countries, generally on terms somewhat unfavorable to the US, who supported, or at least did not closely align with, the USSR.
It also included extensive restrictions on trade with the USSR and its close allies.
The PRChina shares an important trait with the USSR: It is building a vast military and training it explicitly to destroy the United States.
Such countries are special cases in trade. They cannot be assessed in the same fashion as other countries who are not investing heavily to destroy you.
In your example, if one country refuses to trade you can’t be worse off than when you started with no trade. Unilateral free trade where the counter party refuses to trade can’t make you worse off than the zero trade case, because it is the zero trade case.
no - unilateral trade, you import and the other party exports, is still a win for the importer; corp fin is not economics
He can't. It does work. :) The bilateral/multilateral negotiations BS is just a way to get domestic exports interested enough to overpower the protectionists, to make them see that tariffs are a tax on exports and reducing import restrictions is export promotion.
even in a world where you can import but not export, paying for those imports in IOUs, that type of trade is better than not being able to trade at all. You can obtain cheaper goods from abroad than they would cost you back home which is a win. The resources you would have used to produce those imported goods domestically can be used for some other more productive activity.
No. "Unilateral free trade". It's right there in the first paragraph.
Or to quote another economist "putting up tariffs is like throwing rocks into your harbor". Should we throw rocks in our harbors just because other countries are dumb enough to throw ones into theirs?
IFF he allows normal politics to work. If not he become the Founder of Trumpism as Pero was on Peronism.
Only Trump can play Trumpism. Once he's out of the picture, it will fall apart from all its internal contradictions. Some will pursue his zero tariffs. Some will pursue his garbage reciprocal tariffs with even weirder formulas. Some will pursue his high tariffs to combat drug smuggling, lax for regulations, and whatever else Trump muttered at some point.
My only half-hearted prediction is that if he doesn't sort this out before summer, the Democrats will take back both chambers in 2026 and impeach him successfully in 2027. The only puzzle is whether JD Vance will grab the chance to be his own man, or try to ride Trump's legacy in 2028.
Make interest on treasuries tax free for us citizens and you will see how quickly people will become savers
Seeing as how many people forgo contributing to an employer provided retirement plan if they have to contribute anything at all, even with generous matching by the employer... I kind of doubt it
Ah, but he's right. We would find out. The only disagreement is *what* we'd find out :-)
Would u consider tariffs to be taxes on consumption? If so, wouldn’t optimum level of tariffs be appropriate in our circumstance? Say 5% across the board, which would reduce G-T. Thx. Great and very informative post.
A 5% uniform tariff would be better than the current system, if just for simplicity and effort savings, and also vastly lower than current tariff rates.
I like this idea, but you would have to differentiate between goods that help Americans build other things (ex. steel to build cars) versus throwaway stuff (ex. clothing that is fashionable for three months, then sits in your closet for two years before you drop it off Goodwill). It wouldn't be possible to perfectly differentiate between the two categories but even if we're only 65% correct it could be a net plus for society.
most economists don't make the throwaway vs durable distinctions because they assume they are already built into prices (eg a Brooks Bros shirt costs more than a Shein shirt). so trying to differentiate here with tarriffs would just distort something already corrected for.
but the distinction you seem to be making is between intermediate goods (steel) vs consumer goods (cars). I don't actually know whether the trump tarriffs makes that distinction but its worth noting that China imports mainly ntermediate goods and exports mainly final consumer goods. so I'm not sure the categorisation matters.
if they were a tax on goods that would make sense cf. we tax all imported toothbrushes at 100%. But we are taxing countries, not goods. So imported toothbrushes from china taxed at 145% but those from India taxed at 10%. Americans simply shift where they import from, consumption only changes by the lowest marginal tarriff increase (ok this assumes production can shift seemlessly).
I think one thing Milton Friedman would rethink is free trade with China. I am under the impression he was for free trade because he thought it would encourage them to become a more capitalistic country, or at least a quasi capitalistic country like the EU. The Chinese are not and more of a threat than they were before they entered the WTO.
Anecdotes do not mean causation, but they are interesting. At least they give you clues to investigate something. Tariffs are a poor way to incentivize economically, and even in a 0% tariff environment, legislative protectionism can keep products out. Try buying a bottle of American/Italian/Spanish/German/Austrailian wine in France for example.
I spoke with two CEOs. One ran a multi billion dollar apparel business that manufactured in China and exported worldwide, with a lot of it coming to the US. In 2017, Trump put tariffs on. He moved his production from China to India/Bangladesh. It took 12 months. He did an audit of his company while he was doing this. The move out of China reduced his COGS by 20%. He also found out that many of his own American VPs were getting kickbacks from the Chinese in order to persuade upper mgmt to keep production in China.
The other CEO has a consumer products business made out of steel. He sells to big box US retailers. His competition is similar products that are plastic mold injected. He manufactures in China and the tariffs are going to hurt him. He is looking at moving his manufacturing operation to Vietnam.
When I asked, "If you saved 20% on COGS, why don't all businesses move out?" The answer I received was "Companies can't because of supply chains, or sometimes they truly are lazy."
Any CEO I have ever spoken with that has done business in China says they steal intellectual property. They bribe, and take bribes. Labor was cheap, and the switching costs are something they don't want to currently assume. Tariffs change the economics for them where they have to look at it, but in many cases the opportunity costs might be far too hard to change.
On social media, I have seen opinions that this is a way to crush the Chinese yuan, with the corresponding threat that if the US were to lose, interest rates would go to the moon. Not sure I buy it, but so many conspiracy theories that were trashed in the past have come to truth it's possible to say it's not probable but it is possible. If a lot of factories leave China for Vietnam or India, the Chinese government is going to have to do something to support those unemployed people. I realize they only have "24-month welfare programs", but if there aren't jobs, the government is going to have to step in. I try never to forget, the Chinese are communists and while they run their country in a smarter fashion than the old Soviets, they still are communists.
Additionally, it is clear US policy has not been correct as the post outlines. But, Chinese policy is pretty poor as well. They have not only a demographic problem, but their own debt problem and other problems. What happens to their government if people can't afford to eat?
I think the economics presented in this post are on point and clearly explain things. I think often economists get bogged down in the numbers, and forget the strategy or game theory. They Keynesians are out in full throat on the social media channels that I am on worrying about the cut in government spending, and tariffs.
It is clear that if the entire world went to 0% tariffs and duties, it would be better for every person in the world. But, we still wouldn't have free trade. I don't think we solve that one ever. We are human.
I would have preferred to see Trump take on the inner demons that stop economic progress or competition inside the US. However, that is not politically palatable and it's easier to point fingers and blame someone else.
At the same time, I see a lot of economists with Trump Derangement Syndrome and virtually everything they say is negative no matter what Trump does. They hurt their credibility when they do that. I compliment the Grumpy One that he didn't bring Trump into it, and kept the post objective. With objectivity, we can learn.
Jeffrey,
I am looking at Miltie’s former residence down the street from me and trying to channel what he would say. I’m getting “You dope! Free trade is not a one-way street, it means bi-directional free trade!” Either that’s Miltie getting crustier in the afterlife, or the copious amounts of cannabis smoke that now envelopes San Francisco.
"Unilateral"
The very first paragraph of John's post has the word "unilateral" in it
I'm not in France, so maybe there are issues I'm not aware of, but looking at French online retail/supermarket offerings it seems like there are plenty of non-French wines available to French consumers.
It's hard to argue with the economic case against tariffs and I will not. With respect, I do find two aspects of the problem vexatious. First, while it is surely true that war is politics by other means, so too economics may be politics by other means. Almost all political goals have costs (and consequences). The question isn't whether political gains can be made without cost but how much are they going to cost and by what mechanism are we going to pay. Tariffs might be an effective cudgel when positive incentives to allies or adversaries haven't worked. And depending on how long the tariffs have to be in place, It might be a fairly cheap solution. Second, in the context of a multi-period game wherein tariffs allow the accumulation of strategic materials or commodities, it's far less obvious tariffs are bad economic policy let alone bad strategic defense policy. The free trade framework virtually never considers that adversaries or neutrals won't trade. Can we really afford to have most essential war materials produced by adversaries or potential adversaries and have pharmaceuticals produced by our most serious long term adversary? I don't think so. Some tariffs and protection would seem to be necessary to preserve our ability to fight and win if it comes down to that.
Tariffs as a cudgel against our allies is a bit like an alcoholic taking a cudgel to his favorite liquor store. The core problem is the alcoholic not the presence of the store.
You want the accounts in balance then CUT THE FEDERAL SPENDING. I saw Bessent say they can’t just do that all at once because it will cause a recession. Of course upending a global trade system all at once with effectively no notice while changing the details hourly via drunken tweet would never do that.
In the end the Senate has set a floor for spending cuts of 4 billion dollars which is effectively no cuts, and we want to bump the defense budget 12%. Basically we are fighting a trade war so spending gets cut never. Theres always a reason the grifty graft train must speed ahead unimpeded.
Having strategic local supply of war fighting inputs is probably wise policy for a nation state, but it’s also the one thing we aren’t addressing here. If that was a concern local sources of rare earths would have been priority 1.
Instead priority 1 is making sure our socks are made in Indiana regardless of the cost. Trump world is clown world just like Biden world was clown world and Obama world was clown world and Bush world was clown world and …..
The focus on tariffs obfuscates, rather than elucidates, the situation for US allies.
What matters is relative competitive position.
For allies who compete with the PRChina to supply the US market, it is to face a 20% US tariff with the PRChina facing 150% than to face no US tariffs with the PRChina facing 20%.
Seems like Trump was able to see, or was persuaded, that things needed to change.
But with his learning disabilities he was the last person you would want to implement change. He acts with all the refinement of the bull in that china shop.
Which is a great shame because he apparently has the power to take the sort of drastic action that is needed, without losing his job - a quality that no previous president had and probably no future president will have either.
It is difficult to imagine this ending well.
Feels like I just took an Econ class. Thank you!🙏🏻
A couple of comments. You mention that China should be quite worried about getting paid back, yes they should. But that brings up a point that is often misunderstood, we have all the power in the relationship. They have been sending us goods in return for securities that we completely control the value of! Yes, it has a cost to us to devalue the claims so we won’t do it willy nilly, but we could.
The second is that, as you say, China collects a lot of treasuries and other pretty low risk low return assets, what they really want is safe liquid securities that they don’t have enough institutional capacity to produce at home. You could think of this as an export of the US, essentially renting out our excess institutional capacity.
Thought of this way you could think of this as a form of balanced trade, we import goods and export our institutional capacity.
Lending money that can’t be repaid doesn’t work out well for the lender or the borrower.
Think of China like a credit card company that isn’t doing proper underwriting and has no collateral to repossess.
In the flip side think of the us, with its five or six year average maturity on debt, as someone enjoying a 0% intro apt that could reset at any moment.
Yes but what happens if China refuses to roll the debt? It’s value is destroyed and we have an inflation…disruptive and yes people hate it but in real terms we aren’t made poorer, they are.
In fact anything China can do to us, like dumping the treasuries to spike our interest rates we can easily handle by buying back the debt for dollars, it causes a disruptive and distasteful inflation for us and completely expropriates the real value for them.
The difference between the US and the the non-sovereign borrower on a 0% apt that can reset is our debt only promises dollars, except of it’s a TIPS it doesn’t promise any real value, and we can’t ever be forced to deliver anything real to redeem it. We may well prefer to redeem it for real goods but we can’t be forced to and we do so at our leisure, only if it’s better for us than the alternative.
My uncle in law ran up a bunch of unsecured credit on consumption and defaulted. He did not feel like he had gotten one over in his creditors. He felt like he fucked to his life.
Neither the lender or borrowers come off good in default. Which gets it worse is a contest of losers.
There is also real damage to the world economy. We forget how to make things and the Chinese build a bunch of capacity that doesn’t make things people can pay for with real value.
Yes but, presumably, your uncle-in-law owed dollars and couldn’t create them. Not applicable to the US in aggregate.
When the Germans printed marks to pay off their creditors in the 1920s it didn’t work out for them either. Less extreme versions like the 70s or Covid weren’t fun either.
Miran does not think that tariffs will solve the imbalances, for what it’s worth. He thinks they will force other counties to the table to negotiate currency revaluation.
Genuine question. Can’t the US run current account deficits of say 3% per year, and have foreign debt stabilise at about 80% of GDP (assuming 4% nominal GDP growth), and keep I above S for the foreseeable future (with a similar fiscal deficit and government debt to GDP ratio). What stops that from continuing forever?
Yes yes yes they can and its a discredit to Cochrane that he doesn't point this out. The $1.3T nominal deficit is roughly 4% of GDP afaik. Growth is running around 2-3% a year in real terms.
From additional deficit funded spending, as long as the increase in interest payments on the stock of debt is less than the increase in tax revenue (change in GDP x avg tax rate) , you can keep rolling over your existing stock of debt.
This is the mainstream view in macroeconomics.
Thank you for the answer - much appreciated.
Money is not a veil. Money exists in its own right and is valued in its own right.
That's the fundamental mistake of classical economic views. They forget that money is held for insurance and status purposes, and that it is a dynamic concept - created and destroyed on demand.
It's far more useful to see money in the same way as we see reactive power in electrical engineering. There is a power factor with money that changes the operational dynamics in floating exchange rate systems. It's not a one-for-one with stuff. It's more of an inductive relationship.
If government pays interest on a Treasury to the Chinese, and the Chinese leaves that interest in a drawer, that does not magically cause an offsetting factory to arise. But it does increase the 'savings' on the capital account, and therefore the trade deficit by accounting identity.
"The hard reality of debt is you have to pay it back someday."
Nope. Not in a floating exchange rate system. The hard reality is that money *is* debt, and therefore you just swap the debt for a different type of debt with different terms and potentially interest rate. And because it is a floating exchange rate system actors can't get out of that deal in aggregate. Somebody has to hold the debt no matter what.
So there can't be a 'debt crisis' in a floating exchange rate system. It's an accounting impossibility. The base which debt is 'paid back' in is owned, controlled and has the same entity lifespan as the debt itself. It's just another representation of that entity's debt.
"The US will no longer be able to finance $1.3 trillion budget deficits from foreigners, and will have to do it from domestic savings."
The foreign financial savings of dollars are redirected by the tariffs and returned back to circulation, where they cause more domestic transactions. The transactions are taxed at a percentage, and the rest earned as more income. Which is then taxed at a percentage. And so on down the spending chain.
The result would be lower government deficits and higher GDP and that's because a government deficit is *caused* by excess saving of money.
It's far better to visualise the government spending coming first, that bouncing around the economy and taxes raised and returned from that flow, with anything not spent held as savings from which the 'deficit' arises.
The net result of all this will likely be a reduction in foreign saving of dollars and dollar denominated financial assets, and a consequent reduction in the US government deficit. Everything else will continue to exchange at roughly the same rate - because the productivity of the production of different items hasn't changed. There is no reason to presume that a car will exchange for fewer or more tomatoes just because nominal exchange rates have changed as a result of the financial savings desires changing or being changed by the tariff process.
A smart piece. But "taxing consumption" indeed means taxing consumption: a VAT or something like that. And not instead of income tax but in addition to it.
And this is unpopular. The left doesn't want it, except maybe Abundance wonks. And conservatives want it even less.
So, without forcing the US public to accept hard truths, nothing will come of it.
You're probably right about the politics, but there is a way to change Form 1040 to be the key to a progressive consumption tax that isn't VAT. If you start with the accounting identity that all income is either consumed or invested, then Consumption = Income - Investments. So total all income, subtract all investments, and you have total consumption. Add whatever progressivity you wish to have the affluent (measured by their larger consumption) pay progressively more. Sure, there will have to be definitions of what is investment and what is consumption, but that's true in any regime. This may be a politically acceptable way to get to a consumption tax that replaces the income tax because it will use familiar vehicles (Form 1040) and can be progressive.
1) Trump wants to use tariffs to reduce income taxes. So this is clearly swapping a consumption tax for an income tax. Economist are supposed to like things like that, but tariffs are coded as racist and Orange Man Bad.
2) going on a diet or not using your credit cards sucks, but the longer you don’t do it the worse it gets.
Whatever pain you want to avoid now will obviously be worse when we owe even more trillions to China
3) to the extent that other countries are just conduits for china to avoid tariffs (Vietnam, etc) the tariffs will have to be more universal then just China.
4) I find it very strange that a country that can build high speed rail wants to invest in a country that can’t build high speed rail.
There are 1.5b Chinese with an average iq of 105 and a dramatically lower gdp per capita. Are you telling me the best investment they can come up with is USG? USG has two functions, writing checks to old people and the military. Paying for some old geezers nursing home is not an investment in when older Chinese need nursing homes!
I think it’s way more likely that China has a lot of restrictions on its citizens and these are driving a dynamic that is not sustainable.
“There are 1.5b Chinese with an average iq of 105 and a dramatically lower gdp per capita. Are you telling me the best investment they can come up with is USG?”
Renting our institutional capacity, of which they basically have none. See JC’s comments on financial repression of the banking system.
“Institutional capacity” sounds like a really handwavy cop out. It implies our institutions know how to invest that money. When all we are doing is paying people to wipe old peoples butts or sending people checks while we tell them not to go to work because they might catch a cold. Or buy weapons we might use on the Chinese, lol.
If China has worse “institutional capacity” then that they ought to work on changing it rather then lend to us in ever increasing quantities. If they need a punch in the face to figure that out so be it. We did it to the Japanese in the 1980s with the plaza accords. Call tariffs “a tax on accessing our institutional capacity!”
its not a cop out, there's literally a very famous economic paper on the topic -see the Lucas Paradox.
1) Trump also says he wants zero tariffs. Can't have both. Imports in 2024 were $6 trillion, income tax revenue was $2.4 trillion, so you'd need a 40% tariff to replace the income tax, which would drive down imports, which would require a higher rate, ad infinitum.
2) If you are suggesting spending is the problem, you'll have to show me where Trump thinks so too. All he's done so far is talk about more spending. DOGE spending cuts are too trivial to matter; they are only important for showing corruption and trivial waste.
3) I hope I am not reading this as you expecting Chinese tariffs alone to replace the income tax. The rate would have to be even higher.
4) HIgh speed rail requires high population density. The US has few places where that makes economic sense, and the Chinese ones are heavily subsidized jobs programs, not economical transportation.
Individual income taxes 1.14t (maybe you are throwing payroll taxes in your number?).
A very large % of that is paid by the highest income brackets. Tariffs of 10-20% would raise hundreds billion dollars annually. That is probably enough to eliminate income taxes for a very large swath of Americans. On income below $75k, $100k, $150k. I don’t know where the cutoff would fall but it would mean a huge tax break to a lot of middle income families. If you’re like me and you don’t like buying a bunch of cheap Chinese crap this would be a huge positive.
Literally nobody in government wants to restrain spending. I don’t find Trump unique in any way here. Was Harris running on cutting Medicare (lol)?
Florida managed to build high speed rail. Californias problem isn’t density. They all live in the coast. It’s democrats.
Per this page --
https://www.thebalancemoney.com/current-u-s-federal-government-tax-revenue-3305762
"Per the White House's projections, income taxes are slated to contribute $2.6 trillion. Another $2.2 trillion should come from payroll taxes. This includes $1.3 trillion for Social Security, $399 billion for Medicare, and $56 billion for unemployment insurance."
Your right.
When you google “how much money does the government collect in income taxes” the top result shows income taxes of $1.14T. But that’s inconsistent with all the other sources and it looks like there is a footnote in the first source saying it’s YTD 2025 (you gotta dig a little to find it).
https://www.visualcapitalist.com/how-much-does-each-u-s-wealth-bracket-pay-in-income-taxes/
Here’s fy 2022 by bracket. Let’s just say 10% tariffs would raise about $300b a year in 2022 money.
The first $300b would eliminate income taxes on the bottom 75% of taxpayers. Another $300b on the bottom 90%.
Personally, I think that would be a good trade.
That's interesting. I'm going to have to watch out for that. Probably just luck it hasn't tripped me up yet.
I don't like having only the rich pay income tax, just because it takes the pain out of paying for government. It hides the true cost. Same with withholding. I'd rather everyone had to cut a check at the end of the year, make sure everyone knew how expensive it is.
It's also like the VAT hiding taxes, since the shelf price includes tax. I'd rather have the tax added at the cash register just so people are aware of how big the tax is. Also, the EU is even worse, because every country has its own rate, so if a website shows one price for all countries, the store pays more tax and makes less profit in the spendiest countries.
I’m moving to Florida which has no income taxes. I don’t see people there clamoring to add one because they can’t see the cost of government.
The purpose of politics is to take your wins when you can get them.
But aren't tariffs paid by the importers and/or the consumers ? Don't they boil down to consumption taxes? Sorts of VAT taxes ?
Tariffs are paid by whoever has the least power in the commercial relationship. In some cases, that will be the consumer. In others, it will be the producer. In most cases, the burden will be shared between consumer and producer — and among higher prices, lower profit margins, and reduced consumption of / demand for the tariffed item.
I agree with almost everything, but I think there is an inconsistance. You say:
"Reform taxes to tax consumption, not saving and investment. Stop funneling borrowed money to consumption. Cure the nightmarish cost, regulatory, and permitting bloat making investment so difficult, especially public investment."
Isn't exactly what the Trump administration is trying to do?
I understand tariffs are not a tax on all consumption, but it is to over 20%. And there is no way to pass a tax increase in congress, not even democrats who campaigned against Trump tax cuts did it. Insted of having having a consumption tax + lower income tax, the administration is doing tariffs + lower income tax. It seems they saw what you are saying, and tried to adapt to something that is politically feaseable.
Hopefully congress don't mess it up by passing a reconciliation bill that undo the savings the administration is doing.
To your first question yes. And the tragedy of the tariffs is that they will lead to economic chaos, which will undo all the great things the Trump administration was trying to do: cancel energy suicide, cancel AI suicide, deregulate, cut spending, showers that work, and so forth. When everything at Walmart doubles in price and Trump's base loses their jobs, it all goes poof.
There's this 2000 JEL paper by Dani Rodrik where he argues - in a more general version of the usual international economics trilema - that the US (or any country) cannot have at the same time democracy, nation-state sovereignty and full integration in international trade. It seems the US, which is a democracy, wants to exert sovereignty in its affairs by giving up full integration in world trade.