When it comes to tariffs and trade, I love Henry George's smackdown:

He begins by asking, if you were starting a brand-new city, and you could choose any place on Earth to locate it…where would you place it?

Would you place your city in the middle of a desert to isolate it from trade routes? Or would you locate it next to a river or ocean with easy access to global trade? The fact that virtually all major cities are located along bodies of water answers this question for us. If trade were harmful, cities would flourish in the isolation of the Sahara Desert. But this clearly doesn’t happen, the most prosperous cities are located along trade routes.

But perhaps, you might say, while trade is overall good, one must protect certain key industries with tariffs, but this notion also defies logic. Remember that people and companies trade, not countries. The borders between countries are as arbitrary and man-made as the borders within countries, such as those between towns, cities, and provinces. If tariffs on key industries were good for jobs and growth, naturally, it would make sense that all government jurisdictions levy tariffs at every level.

We all know that taxing cars made in Michigan when they get shipped to Florida makes no sense, yet we fail to extend that logic to taxing cars from Canada or Mexico.

Expand full comment

"Reducing a trade deficit through tough, smart negotiations is a way to increase net exports"

I think you meant to say reducing trade deficit is a way to increase GDP?

Either way, point taken. Accounting identities can be abused like any other tautology.

Expand full comment

"Just as we never reason from a price change..." - as in the price change is the observed outcome from changes in an underlying mechanism. But causality does not work the other way around. So, a change in price tells something has changed, but you just don't know what caused it. E.g. it could be demand pull inflation, cost push inflation or whatever.

Was that the intention of the text in quotes?

Expand full comment

You may want to correct the part that says "C EQUALS C + I + G + NX" .

Expand full comment
Jun 27, 2023·edited Jun 27, 2023

Do you think Isabella M. Weber argues from an accounting identity?

As you say, we need to ask: “what changed?” Weber gives an answer: “… sector-wide shocks can create tacit agreements between firms to hike prices, since all firms protect their profit margins and know that the other firms pursue the same goal. … supply bottlenecks can grant temporary monopoly power which allows firms to hike prices to not only protect but increase profit margins. … Emergencies can create a pretext to legitimize price hikes.“

My reading of these quotes to answer your question of what changed: Inflation expectations have increased (due to fiscal expension) and monopoly power has increased (due to supply bottlenecks). This environment allowed firms to increase prices that is not justified by underlying cost increases. We can interpret this as kind of a cartel without explicit agreement. If all firms play it benifits all of them. If one doesn’t, they will get punished by investors (Weber elaborates on this in her paper). Further monopoly power strengthens this effect.

Is this reasoning from an accounting identity?

Expand full comment

I feel sorry for your students getting miseducation by you. Accounting is predicated on double book-keeping entries and thus never lie. In contrast your beloved price theory in its neoclassical version is founded on ridiculously absurd assumptions of the sort: rational economic agents, possessing full knowledge in a timeless environment, maximising either utility or profits, operating in perfectly competitive markets, always gravitating toward equilibrium which is associated with Pareto efficiency. This is pure fiction and has nothing to do with the real world. If you want to learn some down to earth macroeconomics based on double book-keeping principles start reading MMT, beginning with Prof Stephanie Kelton’s best seller “The Deficit Myth”.

Expand full comment