All Commentary
Tuesday, July 21, 2020

Hey Congress: Here’s One Economic Stimulus Proposal That Wouldn’t Cost Taxpayers Trillions

Here’s a proposal for another kind of stimulus that would do much more good and cost much, much less.

Image credit: pxfuel | Public domain

Congress isn’t known for learning from its mistakes. So, it’s not exactly shocking that despite the many failures of their last effort, lawmakers from both parties are pushing for another massive relief bill to stimulate the economy amid COVID-19 and the continued economic fallout.

The GOP has at least expressed a desire to keep the spending package under $1 trillion. (You know, just a measly $7,000 per taxpayer). Meanwhile, the Democrats’ bill comes in at $3 trillion, a whopping $21,000 per taxpayer.

But the truth is we can’t afford either.

The federal government is already set to run an astounding $3.7 trillion deficit this year. The scale of this figure might not be immediately obvious, but consider that at the very peak of the 2008 financial crisis under President Obama we only ran a $1.4 trillion deficit. This will result in future generations, not the septuagenarians in Congress, facing higher taxes, lower economic growth, and reduced opportunity.

Indeed, the already bleak trajectory of our public finance only looks worse now due to the pandemic and Congress’s massive response bills. The federal government is now set to hit a 100 percent ratio between debt and the size of the economy—considered a red flag among economists—this fiscal year.

But what if there was a way to further stimulate the economy without compounding our debt crisis? It won’t satisfy either party’s partisan policy wishlist, but if the federal government really wanted to jump-start the economy without further burdening taxpayers it could do so by abolishing barriers to international trade en masse.

President Trump could start unilaterally by rolling back the tariffs he has imposed on goods such as washing machines, solar panels, aluminum, and steel. According to Tax Foundation estimates, eliminating these tariffs would increase the size of the economy by $58 billion, raise wages, and prevent the destruction of 180,000 jobs. This reform would decrease the federal government’s tax revenue marginally and thus cause some additional debt, but the expense certainly pales in comparison to trillion-dollar stimulus packages.

And these tariffs would just be the beginning. The federal government could also abolish the billions in current tariffs in place on goods as varied as textiles, leather, and shoes and prompt similar economic gains. There’s no downside: By definition, eliminating trade barriers is a net positive for the economy in all cases.

The merits of free trade are a rare area of near-consensus among economists. A 2012 survey found that 85 percent of top economists agreed that free trade boosts productivity and benefits consumers more than enough to substantially outweigh any effects on specific industries’ employment.

To understand why, simply consider what trade is by definition: a voluntary transaction where both parties are left better off. In any given transaction, if the two parties weren’t both better off as a result of the trade, neither would choose to engage in it. While sometimes lucrative for the industry groups or special interests that lobbied for them, trade barriers prevent these mutually beneficial transactions, raise prices, and hobble the economy as a whole.

Consider the following passage from Adam Smith’s Wealth of Nations explaining why artificially raising costs through tariffs hurts a country’s economy:

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers.

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better to buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.

Smith’s 17th-century language describes a simple reality that’s still just as true today.

If we all are free to buy the cheapest products through trade in a global market without tariffs or other distortions, consumers will reap the rewards. Our productive resources will naturally flow to our strongest, most skilled economic areas while “outsourcing” others to countries more efficient in a given field. As economist Gregory Mankiw put it, “Americans should work in those industries in which we have an advantage compared with other nations, and we should import from abroad those goods that can be produced more cheaply there.”

Image credit: Peterson Institute for International Economics

The trade barriers we have in place today prevent this realignment from taking place in full. In doing so, they limit economic growth, decrease wages, and kill far more jobs than they “protect.”

Perhaps the most obvious objection to eliminating trade barriers to jump-start the economy is that there’s no reason to believe other countries would do the same in return. But that actually doesn’t matter. As the Mercatus Center’s Veronique de Rugy wrote in the New York Times:

By lowering its trade barriers, a government enriches its citizens regardless of the policies implemented by foreign governments.

Even if Canada never removes its 270 percent tariffs on our dairy products, Americans would gain if Uncle Sam, regardless of Ottawa’s trade policies, unilaterally removed…all tariffs on imports from Canada. Don’t forget that Canada’s dairy tariffs are paid by Canadian consumers. It defies logic for an American president to punish American consumers in order to prompt Justin Trudeau to be kinder to Canadians.

Additionally, imposing trade barriers probably isn’t going to force the target country to remove theirs. It’s much more likely to lead to another retaliatory round of tariffs placed on the US in response. Unilateral free trade is always the best approach, and will always produce a faster-growing economy than the alternative.

So if policymakers want to jump-start the economy without running up more in debt, they should start by removing barriers to trade. The repeated failure of bloated big government bills has already shown us that the best thing the government can do to help the economy recover is getting out of the way.