Coyote Blog

1. Is this the most destructive Federal economic action in my 63-year lifetime? I am trying to think about the competition for this title. Certainly Nixon's wage and price controls would be up there in the top 5. The banking regulations that treated mortgages as preferred risk-free bank capital might be on the list. Perhaps we would include something like Biden's attempt to forgive a trillion dollars in student loans. There was some COVID craziness, including lockdowns and eviction moratoriums. But even looking at this collective Mt Rushmore of economic fail, I still think Trump's tariffs are at or near the top. This is as dumb as even the worst ideas of folks like AOC who the Republicans mock.
2. How is this possibly Constitutional? Article 1 Section 8 gives Congress sole "Power To lay and collect Taxes, Duties, Imposts and Excises" and "All Bills for raising Revenue shall originate in the House of Representatives." I understand the spineless Congresses have delegated all sorts of powers to the Executive Branch, but good God there has to be some sort of limit. Where is that nationwide injunction when you need it? This is as a good a case as any for the courts to test both Executive taxation power, limits to delegation of authority, and the general use of emergency powers.

The tariffs also bring to mind several ironies:

1. Trump called it "liberation day" but the actual day we celebrate liberation is the day the Declaration of Independence was signed. That document explains the King's injustices, including: "[the King] has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:...For cutting off our Trade with all parts of the world [and] For imposing Taxes on us without our Consent" Can't find any exceptions for emergencies in this document or in the Constitution.**
2. Republicans have spent 5 years (rightly) complaining about the exercise of emergency powers when the person who gets the power also gets to declare an emergency. And now they have topped anything Biden ever did with COVID emergency powers
3. In economics, independence is the road to poverty. The most economically independent people in the world are the isolated primitive tribes in the Amazon. This stuff is not hard, we have understood it since David Ricardo was writing over 200 years ago. We literally understood how trade created value before we had invented the telegraph or the railroad or knew that germs caused diseases. We understood it before Iodine was discovered. My post on aluminum tariffs helped show the value of trade.
4. This almost goes without saying, but after campaigning on inflation, Trump is directly adding to inflation. Back of the envelope, given that imports are about 16% of GDP, then a 25% average tariff on imports adds something like 4% to prices. Immediately inflation rates for this year go from 3% to 7%, and I am fairly certain this simplistic approach underestimates the problem. A family member works in the finance department of a well-known low-margin retailer and said that they were absolutely going to have to pass through tariffs and spent today working on the numbers. Sure, Trump is going to identify a few high-profile companies to name and shame for raising prices to pretend that companies should not be passing through these costs, but this is -- ironically again -- exactly as ignorant as Elizabeth Warren blaming grocer greed for food price increases, something that Republicans mocked by the way.***

I only have the time, and frankly the stomach, to put down these few quick thoughts on this one. More later.

Update: From Pat Toomey vis Powerline, this is as good of an explanation as I have seen for the theory in Trump's head that is driving tariff actions. This explains pretty well the calculathttps://www.powerlineblog.com/archives/2025/04/toomey-on-trumps-tariffs.phpion of the tariffs, which appear to be more correlated with individual trade deficits than current reciprocal tariffs

This, I’m afraid, is going to take us down a bad path, Dominic. I think that we’re going to experience more aggressive tariffs than a lot of people think, because the president really believes that — what he really wants to go after is the trade deficits. What he really objects to, and from all of my arguments with him, I’m convinced that he believes — and if you listen to his language — he believes that if you have a trade deficit with another country, that is the measure of the amount that country steals from you. And that of course disregards that we get something when we purchase products from other countries, but this is the way he views it. He thinks that the Canadians are ripping us off, because we buy some more goods from them than they buy from us (by the way, the difference is fully explained by oil imports that are quite useful and important to us). But this is where we are. We’re going to have relearn this lesson. I do think the markets are going to respond very poorly, if I’m right and on April 2 we discover we’re having a more aggressive round of tariffs than we expect.

We are really in trouble. This is really next-level ignorance.

** Postscript: Tariffs rather than immigration is the topic of the day, but I was reminded in perusing the Declaration of Independence for this post that it also says this: "He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither"

***Postscript #2: The reason this likely underestimates inflation is because it does not take into account domestic producers raising their prices to partially match the price increases of their foreign competitors

Trump has proposed -- and depending on the time of day -- is actively planning to put large tariffs on aluminum imports (25% in the last version I saw). The implication is that there is some unfairness that has other countries producing a product we should be making domestically. Typically the argument is that the other governments are somehow subsidizing the product unfairly. Personally, I have never understood this argument -- as a US consumer I am perfectly happy to have taxpayers of another country subsidize my purchases. It turns out aluminum is a great example to look at because it is very clear why it is produced where it is.

First, let's look at where aluminum is produced, via wikipedia (perhaps taking Chinese reported production statistics with a grain of salt).

Some of this makes sense, but UAE? Bahrain?? Wtf? Let's explain:

Aluminum is produced pretty much the same way today as it was when the mass production process was first invented in the late 19th century -- using a LOT of electricity. Essentially, aluminum oxide from the raw bauxite ore is separated into pure aluminum and oxygen through an electrolysis process. I am not an expert, but estimates I have seen place electricity costs at 30-40% of the entire cost of aluminum. It takes something like 17,000 kWh of electricity to make one ton of aluminum. At some level you can think of a block of aluminum as a block of solid electricity**.

If you look at the top aluminum producers above, there is only a partial correlation with the top bauxite ore producers. That is because aluminum is generally not produced next to the bauxite mine but wherever the cheapest possible electricity can be found. The US historically produced a lot of aluminum, much of it in two places -- the Pacific Northwest and around Tennessee. You know why? Because these are the two largest areas of hydropower production, generally the cheapest source of electricity (its also why these were the two areas favored for early uranium separation). As US electricity costs have risen (and as we have actually reduced our total hydro power production under environmental pressure), aluminum production has moved to other countries.

Every one of the top six producers, excepting Canada, have electricity prices less than half those in the US. That is why Bahrain and UAE are on the list -- the are effectively converting their excess natural gas that might be wasted or flared to aluminum via electricity. Canada's electricity prices are also well under the US's though not as low as half, but Canada has a lot of very cheap hydropower in their eastern provinces and that keeps their aluminum industry viable.

It would be great to import 5-cent per kWh electricity from Bahrain, but there is no viable technological way to do that. So we do it the next best way -- we import cheap aluminum. This is a great example of why tariffs are absolute madness. Why would we possibly NOT want to take advantage of such fundamentally lower production costs in other countries for such a critical raw material?

The only possible political argument for doing so is that the government might wish to rebuild the US aluminum industry. But there is absolutely no way that is going to happen, for at least two reasons:

• Given the amount of electricity in the production costs of aluminum, to bring production to the US where electricity costs are more than 2x those of other producing countries would be to accept at least a 50% cost disadvantage, which is not going to be undone by a 25% tariff.
• But the more important point is this: No one in their right mind is going to invest based on the promise of tariffs that Trump himself changes almost daily and that will likely be politically undone long before any new plant is paid for, or even built. A new aluminum plant costs in the billions of dollars and it would be crazy to invest based on fleeting political promises. [OK, I freely admit that there do seem to be investors willing to make huge investments on the basis of what were likely fleeting political promises of government support -- solar, wind, EV's all come to mind. But "enticing investors to destroy capital" is not a very compelling reason to support subsidies and tariffs.]

If President Trump wants to rebuild the American aluminum industry, the best way would be to take actions that would free up regulations and mandates so that we could reduce the cost of electricity.

** Postscript: This is why aluminum is one of the very few items that it makes economic sense to recycle with current technology. Aluminum made from recycled scrap takes something like 1/20th the electricity of aluminum from the raw ore.

Headlines on Conservative outlets bragged that Trump was already turning the economy around. Breitbart was typical with this headline:

US Manufacturing Expands For Second Month Under Trump, Driven by Stronger Demand and Policy Shifts

In the body of the story they write:

After years of stagnation, the U.S. manufacturing sector is showing renewed strength under President Trump’s leadership. The latest data signal a reversal from the prolonged contraction during Biden’s term. Businesses are responding to policy shifts aimed at strengthening domestic industry, securing supply chains, and encouraging investment. [ed: no evidence is supplied for this last sentence]

This is an example of a the totally irritating genre of media stories that take the form of "President blames his predecessor for bad economic numbers" and "President takes credit for good economic numbers." Politicians' ability to do this, even when the narrative they use reverses month to month, is just amazing. Biden to the end of his Presidency was blaming Trump for every bad economic story and now, barely 42 days into in term, Trump supporters are taking credit for good economic numbers, even those magically created by time-travelling Trump in the first 20 days of January.

This connection between Jan/Feb manufacturing numbers and Trump is dead wrong for two reasons

1. The economy does not work this fast. The economy is a massive river like the Mississippi where changes in flow in Minneapolis won't be seen for quite some time in New Orleans. In particular, manufacturers are producing to orders they received weeks or months ago for customers in turn who likely are responding to orders and demand they saw even further in the past. If they are sourcing from overseas or selling overseas the delay is even longer. And negative things flow through more slowly than positive. I suppose the President on January 20 could order the CEO's of the 3 largest companies in America put up against a wall and shot and we might see the panic in the economic numbers by March 3, but I am not even sure of that.
2. I can say with total confidence -- having been a strategic planner at the top levels of Emerson Electric, Honeywell, and AlliedSignal -- that there are very few manufacturing companies in the last 60 days who have been racing to expand their business. The chaos of Trump's changing tariff demands is making planning impossible. Again, nothing changes quickly and projects in progress have to be finished, but I guarantee no one is starting new capital investments in manufacturing that they can defer. Everyone is frozen. And anyone doing business with the government or who needs Federal approval of permits is totally frozen as well because none of that work is getting done. Even if we give Trump the benefit of the doubt to say his intention is to streamline permitting and approvals, right now it is total gridlock. In government offices right now, it is gridlock where everyone has walked away from their cars. I think it is a total lock that we are going to see a dip in manufacturing investment in the coming months.

Economists have given this chaos the name "regime uncertainty" and among many free market economists exactly this sort of shifting regulatory environment under FDR gets part of the blame for the length of the Great Depression. Alex Tabarrok has more here.

This was originally posted on 2-1-25 but was lost in a  server update. 

Trump's first few weeks have been a mix of good and bad for this libertarian, all against a backdrop of horror at how Imperial the presidency has become.  But as of today, perhaps the most destructive and stupid initiative has begun:

Because we are all tired of those fentanyl-toting Canadians crossing the border illegally.   I mean, we all saw the Proposal and know how all those Canadians are trying to cheat US immigration law.

Seriously, this is beyond awful -- and not just because of the threat of retaliation, though that is real.  Even if all the affected countries roll over and accept these modified tariffs without response, this is still a terrible step for the US.  No matter how Trump and his very very small group of protectionist economist friends sell this, this is a tax on 300 million US consumers to benefit a small group of producers.   I don't have time right now to give an updated lesson on free trade -- that will have to wait for when I am not on vacation.  But I will offer a few ironies:

• After campaigning hard on inflation, Trump is slapping a 10-25% consumption tax on foreign goods.  That is a straight up consumer price increase for a variety of key products including much of the lumber we use to build homes, a lot of our oil and gas, a lot of our grain and beef, and many of our cars and appliances.
• Much of this inflation is going to disproportionately hurt Trump's base.  No one is going to care much if a Hollywood actor has the fair trade coffee they buy at Whole Foods go up in price, but Trump voters are going to see a direct effect of this on prices at Wal-Mart.
• Republicans have spent 4 years (rightly) condemning Federal and State governments for the economic disruptions of COVID lockdowns and restrictions.  While some of the inflation of the last 4 years was due to ridiculously high government deficits, another major cause was the COVID supply chain disruptions.  And now Trump is voluntarily recreating them.

The only small hope I have is that Trump is steeped from his business career in a certain style of brinksmanship bargaining that consists of taking an entirely destructive and irrational position in hopes that they folks on the other side of the table will back down and give him more than he should.  My son won poker tournaments like this because he would do so much crazy stuff that no one at the table wanted to challenge him.  I have always said that I don't think Trump is a particularly good business person -- he has run business after business that has failed.  But he is a good negotiator, and has exited numerous bankruptcies with his creditors giving him far more than one would think was necessary.

So I am sure his supporters would say that this is no different from the Columbia situation, when the Columbian president backed down quickly on not accepting repatriation of Columbian nationals under a storm of Trump threats.  Perhaps.  But even if this stuff is reversed, it is incredibly destructive because it is almost impossible for businesses to plan and make long-term investments when something so fundamental as tariff rates is changing so quickly and arbitrarily.

But there is yet another harm.  I know some folks are exhausted with the idea of American exceptionalism, in part because it has been a 75-year excuse to send our military bumbling around the world intervening in every conflict large and small, frequently overthrowing states only to have the replacement be even worse.

But there is one part of American exceptionalism that is important -- our example and our persuasion is a key support beam in upholding two great benefits for humanity -- free speech and free trade.  Every government official anywhere is a potential tyrant (if you think that is extreme, I would argue that this exact fear was one of the fundamental founding ideas behind our Constitution).  And tyrants want to have their opponents shut up and they want to shift economic activity to reward their supporters.  They love censorship and protectionism.

As such, in every country of the world, there is a tremendous headwind against free speech and free trade.  There is some natural gravity affecting government behavior that if there is not a constant, visible pressure to maintain free speech and free trade, they begin to be undermined.  And at least since 1945, the US has been the primary source of that pressure (one might add the UK to this, at least once upon a time, but looking at them now that is pretty much over).

Over the last 10 years, it has been incredibly depressing to see the US start to lose its commitment to free speech, particularly on the Left which has here-to-fore been the natural home of its defenders.  Trump and his supporters say things that seem like a positive step in returning to free speech, but I am a cynical man and I fear that we may only see censorship shifted to different topics rather than actually eliminated.  Time will tell, and I will have more on that later.

But in the case of trade, it is the Right in the US that has been the natural defender of free trade.  To see the Right not only abandon the defense of free trade, but actually start ramming torpedoes into its sinking carcass, is perhaps the most depressing part of Trump's order.