Outside the Beltway

Amazingly Bad Reporting

Steve Verdon · Friday, September 22, 2006 · 2 comments

Like Michael Cannon, this article in the Washington Post strikes me as a particularly bad case of reporting on economic policy. The article is on tariff suspensions and is caste in a typical fashion of domestic businesses being beaten by foreign competitors, Wal-Mart bashing and how it is bad for tax payers.

Lets take the last one first. The article repeatedly referes to how these suspensions cost tax payers money. How does this work? The reasoning goes like this: because tariffs are reduced or eliminated there is less money flowing into the U.S. Treasurey and as a result tax payers are on the hook for that decreased revenue. What the author of the article, Joe Stephens, apparently didn’t realize is that these tariffis also cost tax payers money as well. Tariffs make imported goods more expensive, which is why domestic businesses like them. Take for example the dog leash/collar tariff. That basically adds a 2.4% tax on foreign produced dog collars and leashes. Given the tens of millions of dogs that are owned in this country that means we are probably talking about millions of dollars. So, sure, reducing or eliminating the tariff does mean that there is less tax revenue, which if we are operating under a balanced budget assumption means higher taxes on tax payers. But at the same time it also means lower prices faced by consumers. And the population of tax payers and consumers are pretty much one and the same. By highlighting just the loss in revenues to the treasurery Joe Stephens is giving, in this case literally half the story.

As for the tariff suspensions being bad for domestic business, no kidding. But the history of protectionist policies (and tariffs are protectionist) is pretty grim from a populist stand point, IMO. Typically tariffs increase the prices and hence profits of domestic firms, but do little to raise domestic employment. Typically, a firm that faces less competition will produce less of the good. Consider the extreme case of a monopolist. The efficient level of production is to produce so that the marginal cost (cost of the last unit produced) is equal to the price. Monopolists select the profit maximizing level of production which is lower and equates marginal revenue (revenue on the last unit sold) to marginal cost. Hence less competition generally means less employment all other things being equal. To many this may sound counter-intuitive in that without tariffs there is more competition and some domestic firms in a given industry will shut down since they can’t compete. However, with free trade each country will shift factors of production (including labor) to those industries where it has a comparative advantage.

Basically this news story covers only half of the story and actually implicitly argues for higher prices for millions of consumers.