Economists were wrong about tariffs. They need to figure out why. [View all]

[Mosby]

Inflation would surge. Supply chains would crash. And the economy would be plunged into a deep recession while the stock market tanked. When President Donald Trump imposed huge tariffs on imports in April, the mainstream economic establishment and the big forecasters on Wall Street were virtually united on one point: The tariffs would trigger stagflation, at best, and a deep slump, at worst. It sounded like life would resemble a post-apocalypse Netflix series, with survivors dodging zombies and fighting one another for the last few items at the mall.

Goldman Sachs put the odds of a full-blown recession at 45 percent. Torsten Slok of private equity firm Apollo, one of the most respected economists on Wall Street, went a lot further, predicting that the odds of what he termed a “voluntary trade reset recession” were 90 percent. Nobel Prize winner Paul Krugman argued that “the biggest trade shock in history” meant “a recession seems likely.”

And yet, six months on, events have not unfolded that way. The big thinkers got this one wrong — and if economics is to maintain any credibility, they need to address why that happened.

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Finally, it is starting to look as if the United States actually was getting a raw deal on trade. The U.S. now imposes an average tariff of 18.6 percent, the highest since 1933, according to Yale’s Budget Lab. And yet prices are rising by only about 3 percent. It turns out the foreign exporters were making enough money from American consumers that they can absorb most of the new tariffs, either in lower profits or through efficiency savings. They are not being paid by American consumers the way that was predicted. The extra $30 billion a month in revenue the tariffs are already generating is not exactly “free money” (after all, the most enduring lesson of this dismal science is that there is no such thing as a lunch you don’t have to pay for). But it’s as close to it as anything we have seen for a long time.

Washington Post

What economists and the legacy media failed to consider was the enormous profit margins that manufacturers make on their products, and the role elasticity of demand has on pricing.