The week of April 21, 2025: Tariff legends and reality, the debt, antitrust, and much, much more.
The week of April 21, 2025: Tariff legends and reality, the debt, antitrust, and much, much more.
The stock market recovery of the last two weeks has not been a vote of confidence in the administration’s tariff policy, but the opposite. To oversimplify, stocks rose after the announcement of the “pause,” and then this week they rose on hopes that, one way or another, the White House was stepping back from its hardest line. Oh yes, the president wasn’t going to attempt to force out Federal Reserve Chairman Jerome Powell after all. Hurrah! The S&P 500 rose by 5.6 percent in the week, the tech-heavy (and heavily battered) NASDAQ surged by 8.3 percent, and the Dow Jones Industrial Average was up by 3.1 percent. All three are still slightly below where they stood prior to “liberation day,” and all three are down by rather more year to date (NASDAQ by nearly 10 percent).
The bond market rose marginally, but ten-year Treasuries are still yielding slightly more than just before the April 2 Rose Garden announcement, something that points to trouble ahead. After some seriously, uh, questionable event occurs, investors flee into Treasuries, widely perceived as a (very) safe haven. Indeed, that was the initial reaction to the unveiling of the proposed new tariffs. Yields on Treasuries fell, only to surge, indicating the extent to which the tariff policy — and the brawl within NATO — had tarnished America’s reputation for reliability. This will add to the government’s borrowing costs, at least for a while.
Quoted in dollars, the gold price eased to $3,320, well off the peak of just over $3,500 seen earlier in the week, but still above the mid-$3,100s at which it had been trading before that grim tariff table was unleashed. The dollar index moved up a little, but is still more than 4 percent below where it stood pre-tariff, and even more against the Swiss Franc another bolt hole. On the eve of “liberation day” a dollar bought 88 Swiss centimes. It now buys about 83.
Any sense of calm is deceptive. At best, markets have settled into a wait-and-see mode, and their willingness to wait will not be indefinite. With so much uncertainty, wait-and-see is not confined to the financial world: Anxious companies and consumers are doing the same. They are already cutting back on spending (when they are not pre-buying ahead of tariffs to come), a blow to the economy. Signs of problems to come are detectable in recent data as well as in a cascade of deteriorating economicprojections that themselves darken the mood, a feedback loop that hurts the economic outlook still further.
The University of Michigan consumer survey (based on interviews between March 25 and April 8 (the tariff pause was on April 9)):
Consumer sentiment fell for the fourth straight month, plunging 11% from March. This decline was, like the last month’s, pervasive and unanimous across age, income, education, geographic region, and political affiliation. Sentiment has now lost more than 30% since December 2024 amid growing worries about trade war developments that have oscillated over the course of the year.
New York Fed manufacturing survey (survey taken between April 2-9):
Firms turned pessimistic about the outlook, with the future general business conditions index falling to its second lowest reading in the more than twenty-year history of the survey…
And there is plenty more gloom to pick from.
Before long, Jerome Powell may well find himself confronted with a nasty dilemma. On the one side, remnants of Biden-era inflation still persist, increasing the risk that the (supposedly) one-off price shock brought about by the tariff increases will reignite inflationary expectations, which are already starting to heat up. Ordinarily, that would mean that the Fed chairman should keep interest rates where they are, especially given the reduction in America’s safe haven status. But if the tariffs weaken the economy, or concern about them triggers even more turbulence in the financial markets, the conventional response will be to cut rates.
So, what to do?
Powell’s decision will not be made any easier by pressure from President Donald Trump (whether the president has or has not decided to fire him that day).
The Trump tariffs are, at their core, the product of the eccentric views of one man, and the power he claims to have (Congress or the courts may disagree one day) to get them underway. In this he has been helped by a supine congressional GOP, but also by the persistence of various myths about the U.S. and free trade.
There are plenty of such myths to choose from (what follows is not a complete list). The most powerful may be that American manufacturing has been “hollowed out” by the trade liberalization of the past thirty years, a notion hard to square with the data. For example, in constant 2017 dollars, total U.S. manufacturing value added increased from $1.4 trillion to $2.37 trillion between 1997 and 2024.
Nevertheless, in absolute numbers, the total employed in manufacturing has come down a long way, peaking at nearly twenty million in the early summer of 1979, and drifting down to around 17 million in2000 (the decline is sharper if measured as a percentage of the population). By December 2001, the total had shrunk to 15.7 million, hit by a recession with causes that included the dotcom bust. That was the month that China joined the WTO, something to which the West, befuddled by the “end of history” foolishly agreed.
The fall in manufacturing jobs did not end with the recession. By December 2007, the beginning (more or less) of the financial crisis, another two million had disappeared. Was trade liberalization — and, more specifically, China’s membership of the WTO — to blame? In part, yes. Adhesion to the WTO allowed China to increase the competitive advantage offered by its cheap labor, the fruits of decades of communist failure. But other developments, notably automation, were also taking their toll, a phenomenon not unique to the U.S.
The list of culprits does not stop there. Writing in the Manhattan Institute’s City Journal, Mark Mills points to over-regulation.
[Since] 2000, the federal government has added more than 1,400 new “economically significant rules” that work to hobble American businesses—that’s over double the number of rules added from 1980 to 2000……[W]ithout the crush of new federal regulations, businesses could have spent those hundreds of billions in compliance costs on new technology. (Excessive regulation tends to lock-in outdated tech.) That investment in turn would have boosted growth in manufacturing productivity. Had productivity growth remained at its long-run average, output would have risen, and the U.S. would likely have retained roughly 2 million of the 3 million manufacturing jobs lost since 2000. (Some productivity-driven job loss would still have been inevitable.)
One of the major achievements of the first Trump administration was deregulation, a process reversed under Biden. Deregulation is again resuming, but its benefits may be offset by the wasted time, expensive maneuvering and voluminous paperwork that an onerous and complex tariff regime brings in its wake.
Peer even deeper into the numbers to find this, via the American Enterprise Institute’s Michael Strain:
[T]his focus on the effects of Chinese imports fails to account for the fact that open trade also increases exports. Studying the 1999-2011 period, economists Robert C. Feenstra, Hong Ma, and Yuan Xu found that the 411,000 jobs gained from America’s ability to export goods to a global market almost fully offset the 533,000 jobs lost from import competition.
No clean line can be drawn between domestic and international production, a concept that the White House appears to have trouble understanding. Thus the “protection” provided by the Trump tariffs of 2018-19 to American manufacturing proved not only to be illusory but destructive. The steel tariffs alone are estimated to have cost 75,000 jobs. Much more of America’s manufacturing base uses steel than makes it. More generally, by increasing the price of (imported) components and materials used to make products in American factories, tariffs will hurt the manufacturing sector they are supposed to help.
This is not a niche issue. According to economist Fariha Kamal, writing in 2024, “half of all U.S. imports are industrial supplies and capital goods…used as intermediate inputs by manufacturers.”
Moreover:
Manufacturers that both export and import represent half of all exports and 40% of all imports, underscoring the complementarities between exports and imports in U.S. production…Exporter-importer firms are not only major employers but also the largest net job creators in the manufacturing sector. Over three-quarters of all net new jobs created in the manufacturing sector are by exporter-importer firms.
Awkward thing, facts. But Trump 47, seemingly having learned nothing from Trump 45’s previous failure in this area, appears to be determined to repeat it, but on a larger scale. In time, import substitution and other workarounds should allow many manufacturers to reduce this problem, but by spending time and money that before “liberation day” could have been put to more productive use. And they will be forced to do so on virtually no notice, at a time when, thanks to higher tariffs, demand is shrinking. That is not a recipe for a healthy industrial sector. It is a recipe for lost American jobs, declining American productivity and, while these adjustments are being made, a supply shock. A “golden age” marked by (“temporary”) shortages has, I suppose, the virtue of novelty.
Meanwhile, the idea that the loss of manufacturing jobs is an ever worsening problem has, as Dominic Pino explained recently, been exaggerated:
In the 15 years since 2010, manufacturing’s share of total employment has only dropped by one percentage point, from 9 percent to 8 percent.
That’s because the number of U.S. manufacturing jobs, with the exception of the Covid years, increased from 2010 to 2022. That’s right, the supposedly hollowed-out industry that only loses jobs actually gained jobs for most of the past 15 years.
It’s also worth noting that manufacturing’s share of employment generally declines the richer a country becomes. Even China is going the same way.
As Norbert Michel and Jerome Famularo noted in an article for the Cato Institute, manufacturing employment has been shrinking as a percentage of U.S. employment since … 1943. Over the same period, the share of service jobs has increased:
[T]he total number of jobs rose roughly five-fold (from about 30 million to almost 160 million). If the decline in manufacturing was so bad for so many Americans, they would not have experienced strong income growth. But they did, as has been documented by many researchers, despite the political spin.
Francis Menton of the Manhattan Contrarian, adds:
Yes, manufacturing in the U.S. has declined as a percent of GDP, and as a percent of employment, and as a percent of worldwide manufacturing. None of those is the same as saying that it has “declined,” or been “hollowed out.” The fact that manufacturing has declined as a percent of GDP just means that other things (e.g., tech and services) have grown faster. The fact that manufacturing has declined as a percentage of employment just means that productivity has grown. The fact that U.S. manufacturing has declined as a percentage of world manufacturing just means that the developing world is developing. Despite all these things, it remains the case that U.S. manufacturing has been growing continuously, and not by small amounts.
And how about that surging flood of imported goods into the U.S? Another myth: It amounted to 14 percent of GDP in 2013 but fell to 11.6 percent in 2023, not a particularly high number (in Germany, which has a trade surplus in goods, the figure was some three times higher).
Underpinning the Trump tariffs is the myth, based on little more than paranoia, that trade is a zero-sum game, a fantasy reflected in the calculation of the supposedly “reciprocal” tariffs. This was based on the idea that any surplus (other, mysteriously, than an American one) was based on skullduggery. There are many reasons why this makes little sense (see Adam Smith and others for details), or just look at the numbers.
Joseph Gagnon of the Peterson Institute sets out a few:
Trade in both directions carries abundant advantages, which a forthcoming Policy Brief by Gary Hufbauer and Zhiyao (Lucy) Lu estimates to be worth around $2 trillion in additional income for the US economy (an earlier 2003 analysis estimated the amount at $1 trillion)…
That’s not to deny that there is cheating. One trick is for a country to keep its currency artificially low (thus making its goods cheaper for foreigners to buy). That happens, and China has been a significant offender in the past, but not of late. If anything Beijing has been trying to prop up the yuan. No major U.S. trading partners are currently playing games with their currencies.
The administration has also been making the case that value-added (or similar) taxes (VAT) amount to a tariff or export subsidy, an argument ably dismissed by Brian Albrecht here. In brief, if countries imposed VAT on goods for export, consumers would, in many countries, effectively pay double taxes, VAT in the exporting country and sales tax in their home states. On the other hand, waiving VAT on U.S. imports would give them a substantial price advantage over domestic goods. The OECD favors taxation based on destination rather than origin as the least trade-distorting option, and the WTO rejects the idea that it is a subsidy.
But, as Allison Schrager relates in City Journal, America’s trading partners are not blameless. She highlights the EU’s non-tariff barriers, while concluding that they hurt the EU more than the U.S., a viewpoint backed up by the EU’s lackluster economic performance. That said, some of the EU’s lightly disguised protectionism, such as its repeated looting of American high tech under the guise of antitrust, is inexcusable and merits retaliation. And China, of course, is a persistent cheat. Unfortunately, the U.S. has built up such a dependency on Chinese goods that cutting it back, essential on both economic and geopolitical grounds, is work for a scalpel rather than the chainsaw the administration is wielding. This may have effects so drastic that they are politically counterproductive, something that Beijing will exploit.
And then there’s the McKinley myth. According to Trump, President McKinley “made this country rich,” a telling phrase. No single politician can “make” a country rich. The key to America’s rise in the McKinley era was extraordinarily abundant resources, huge swaths of land (meaning that large amounts of capital did not have to be tied up in real estate), a broadly reliable legal system, secure property rights, a flow of cheap labor, openness to foreign investment, relatively stable (and democratic) politics, a developing hinterland, a culture of innovation and entrepreneurialism, and, not so unconnectedly, a light touch, if not quite laissez faire government.
Tariffs may have been necessary as a source of revenue in the time before income tax, but they did little to advance America economically. They may even have held it back, by lowering productivity, reducing business size and — something that should alarm Republicans elected because of Biden-era inflation — keeping prices higher than they would otherwise have been. The prospect (and then the reality of) rising prices brought about by the higher tariffs introduced by (then) Congressman McKinley in 1890 led to disaster for the GOP in the midterms that year. The presidential election in 1892 left the Democrats with the presidency and both houses of Congress for the first time in 34 years.
Trump has mused that “there is a chance that the money [from tariffs] is so great that it could eliminate the income tax.” No, there is not. In 1901, tariffs raised an amount equivalent to 1 percent of GDP.Currently, the U.S. income tax (which didn’t exist in 1901) raises around seventeen times that (around half the federal government’s revenues), and yet the country runs at an enormous deficit (federal spending is around ten times — as a percentage of GDP what it was in Mckinley’s time). For tariffs to fill the gap left by abolishing the income tax is impossible even if other taxes (a VAT, say) were drafted in to help out. Apart from anything else, for the math to be made to work, tariffs would have to be so steep that the math could not work. Consumers would forego buying the imports on which they were levied.
Some national conservatives mock their free market opponents as zombie Reaganites still dreaming of the 1980s. Don’t they know “what time” it is? Well, yes. And it isn’t 1890.
Updated to make clear that the additional regulatory costs imposed by a tariff regime are more than “paperwork.”
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which is hosted by financier David L. Bahnsen makes use of another medium to deliver Capital Matters’ defense of free markets.
In the 228th episode, David explains his various criticisms of Jerome Powell this week, but points out how we make things much worse, not better, if we believe it a good idea for the Fed to be a pawn of the president. In this case, it is counterproductive; for future precedent, it is downright dangerous.
In the 229th episode, David goes after the two-sided coin of central planning meant to help the working class with tariffs on one side and subsidies on another and asks to throw away the coin.
The Capital Matters week that was . . .
The EU
There is no need to recite all the absurdities of the Paris climate agreement. The CSDDD is the result of the EU’s determination to go beyond Paris’s requirements, no great challenge, at least legally. To take one example, under the terms of the Paris deal, the “Nationally Determined Contributions” — the promises for reductions in GHG emissions made by the individual countries — are voluntary and therefore unenforceable. For many major economies, the NDCs are ill-defined; for example, the “commitment” by China is for a “peak” in GHG emissions “around 2030.” How high will that peak be? No one knows. What will Chinese emissions be after the peak? No one knows. What will happen if Chinese emissions fail to peak “around 2030?” That we do know: absolutely nothing. For most other countries, the promised GHG cuts are relative to “business as usual” baselines, which are very easy to manipulate so that the promises are kept without any change at all in underlying emissions behavior…
Tariffs
President Trump inveighs about a “trade deficit” to justify tariffs. Do we have a “deficit” with China? We may just as well say that we have a surplus with China — a stuff surplus…
Some manufacturing firms have been cutting jobs in response to tariffs’ raising their input costs, and the overall economy has been hammered by uncertainty, with a plummeting stock market coinciding with a declining dollar and higher Treasury bond yields. But you can always count on protectionism to be a full-employment program for lobbyists in Washington, D.C., and the Trump administration’s tariff plan is no exception…
One of the defining memories of the Carter presidency is of lines at the gas station. Could one equivalent for the second Trump term be shortages at the store? The way things are going, quite possibly…
Donald Trump’s decision to (partially) renege on USMCA, the trade agreement between the U.S., Mexico, and Canada that he signed during his first term, and Canada’s entirely predictable decision to retaliate is having consequences that will hit car workers in the U.S….
Do any of those steering the administration’s tariff “policy” — too kind a word for the current shambles — have any idea how modern manufacturing businesses actually operate? Despite the dismal consequences of the Trump 45 tariffs, which destroyed more manufacturing jobs than they created, they seem not to…
Before “liberation day,” a group of senators including Rand Paul (R., Ky.) introduced a resolution to terminate the bogus national emergency undergirding U.S. tariffs on Canadian goods. It passed the Senate 51–48, with Paul, Mitch McConnell (Ky.), Susan Collins (Maine), and Lisa Murkowski (Alaska) as the Republicans voting in favor. The House didn’t take it up, not that it would have mattered anyway. Terminating a national emergency requires a joint resolution, which the president must sign, so a veto-proof majority would likely have been required to actually end the tariffs…
The Debt
The U.S. government isn’t an outlier in its cavalier attitude toward living beyond its means. If anything, it has been leading a worldwide movement of governments unconcerned about reckless fiscal policy. As a 2024 analysis of 65 countries by the International Monetary Fund found, “Parties across the political spectrum sound increasingly similar when it comes to fiscal policy: they all campaign on ideas of a bigger government and promising more spending.”
We’re all Argentina now. The world is becoming Greece-ified. Except — Argentina and Greece have actually been shining lights of fiscal responsibility in recent years…
The bond market is whispering a warning that should thunder through the halls of Congress. Since the end of the Obama administration, the likelihood of a repricing of U.S. Treasury debt has grown from a remote risk to a live possibility. Covid‑era borrowing turned that slow fuse into a short one. In a little more than three years Washington floated an additional $6 trillion in marketable debt while the Federal Reserve ended its bond‑buying spree to tamp down inflation…
Antitrust
The Federal Trade Commission recently began an antitrust case against social-media superpower Meta. The case focuses on the company’s acquisitions of Instagram and WhatsApp.
Meta has spurred strong feelings on both sides of the aisle for various policy choices. But regardless of how one feels about how the company decides to run its platforms, this case could have significant consequences for consumers and impact the future of myriad industries…
Tax
That said, I have noticed one glaring omission in most conversations about abundance: tax policy. While deregulation is essential to growth and affordability, an agenda aimed at unleashing America’s productive capacity can’t ignore the tax code. Yet until now, the tax side of the abundance agenda has been mostly missing in action.
Pensions
Thomas Savidge & Jon Miltimore:
Following President Trump’s “liberation day” tariffs, Tesla stock cratered to $210 early the following Monday, a decline of nearly 60 percent from its peak in December 2024. Though the stock has faced ups and downs in the days since, it remains below pre–liberation day values.
The decline must have been welcome news to Minnesota Governor Tim Walz (D.), who last month said he follows Tesla’s struggling stock on his iPhone to get a “little boost during the day.” Walz later claimed he was joking — but the joke, many noted, was on him…
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