Alternative facts, real costs

I took my first economics course in the first semester of my freshman year in college. It was macroeconomics — an eye-opener. I felt like it gave me the tools to understand how the world works. That was then. These days, I think those same tools are essential for anyone interested in thinking critically about the representations of our government officials. I come to this topic today following the publication of a report by the Federal Reserve Bank of New York that addressed the question of who bears the cost of Trump’s tariffs. That release was followed by a dismissal of its findings by National Economic Council Director Kevin Hassett.

The study concluded that the lion’s share of tariff costs are borne by U.S. consumers — something on the order of between 86 to 94 percent, depending on the time period analyzed — with the remainder being absorbed by the foreign exporters. Mechanically, what’s going on is that foreign suppliers have shown some willingness and capability to mitigate the price impact of the tariffs through price reductions. To my mind, that result is hardly surprising. It’s merely a confirmation of what economic theory would predict.

Certainly, when faced with the prospect of losing market share, suppliers will be incentivized to try to keep their customers, and some price concessions would be expected. The magnitude of those concessions would vary case by case, however, depending on the operating margins that they had in place prior to the implementation of the tariffs. Those enterprises enjoying “excess profits” might reasonably be expected to make larger price concessions, but those operating more closely to the bone, would likely not be able to be as accommodating. To the extent that U.S. importers were dealing in competitive markets, the expectation that foreign suppliers would be able to absorb substantial portions of the tariffs doesn’t pass the smell test. The results of the study by the New York Fed seem reasonable and understandable, if not intuitive.

Nonetheless, the Director of the National Economic Council, Kevin Hassett, publicly criticized the Fed’s report, saying, “The paper is … the worst paper I’ve ever seen in the history of the Federal Reserve System,” and that the analysis, “wouldn’t be accepted in a first semester econ class.” He accuses the Fed of generating a partisan result, going so far as to encourage the authors to be disciplined. His criticism, however, sidesteps the substance of the analysis.

The Fed’s paper asked a singular question: Quantitatively, how much of a change in import prices arises as a function of a change in tariffs? Using regression analysis, the study concluded that each dollar of tariffs results in import prices rising by something on the order of $0.90. Almost any such analysis can be scrutinized with respect to how the model is specified, how the data set is assembled, or other statistical considerations; but Hassett had nothing to say about any of that. Instead, he disparaged the paper for failing to mention (and laud) external considerations, such as income growth or revenues generated by the tariffs — issues irrelevant to the central question of the Fed’s analysis. He accused the authors of pushing a political agenda, but that’s exactly what he was doing.

The fact that tariffs are largely paid by U.S. importers and their customers shouldn’t be at all controversial — so much so that I had serious reservations about even writing about this report and its findings. The point of my blog, however, isn’t to detail what is largely obvious and self-evident. Rather, it is to highlight the use of political authority in a way that dispenses with the truth and undermines public confidence in critical governmental agencies that we rely on for our wellbeing.

It’s a simple fact that U.S. tariffs have increased costs for U.S. consumers — a fact that Hassett should readily admit to. Instead, he uses his position as a partisan prop to perpetrate the lies that (a) these tariffs are good for the economy, (b) they’re being paid not by U.S. consumers but rather by our foreign trading partners, and © that they’re doing nothing to exacerbate the affordability crisis being felt by so many. Hassett has taken the mantle of “alternative facts” to a new level. But for a cast of sycophantic cheerleaders, this kind of economic self-sabotage would never have seen the light of day in the first place.

As an economic advisor, Hassett can’t be trusted. In that sense he seems a perfect fit for the Trump administration.