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The Economic Effect of Tariffs

If Tariffs Are Bad For The Economy, Why Do We Have Them?

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Study after study has shown that tariffs, whether they be one tariff or hundreds, are bad for the economy. If tariffs do not help the economy, why would a politician enact one? After all politicans are reelected at a greater rate when the economy is doing well, so you would think it would be in their self interest to prevent tariffs.

Recall that tariffs are not harmful for everyone, and they have a distributive effect. Some people and industries gain when the tariff is enacted and others lose. The way gains and losses are distributed is absolutely crucial in understanding why tariffs along with many other policies are enacted. To understand the logic behind the policies we need to understand The Logic of Collective Action. My article titled The Logic of Collective Action discusses the ideas of a book by the same name, written by Mancur Olson in 1965. Olson explains why economic policies are often to the benefit of smaller groups at the expense of larger ones. Take the example of tariffs placed on imported Canadian softwood lumber. We'll suppose the measure saves 5,000 jobs, at the cost of $200,000 per job, or a cost of 1 billion dollars to the economy. This cost is distributed through the economy and represents just a few dollars to every person living in America. It is obvious to see that it's not worth the time and effort for any American to educate himself about the issue, solicit donations for the cause and lobby congress to gain a few dollars. However, the benefit to the American softwood lumber industry is quite large. The ten-thousand lumber workers will lobby congress to protect their jobs along with the lumber companies that will gain hundreds of thousands of dollars by having the measure enacted. Since the people who gain from the measure have an incentive to lobby for the measure, while the people who lose have no incentive to spend the time and money to lobby against the issue, the tariff will be passed although it may, in total, have negative consequences for the economy.

The gains from tariff policies are a lot more visible than the losses. You can see the sawmills which would be closed down if the industry is not protected by tariffs. You can meet the workers whose jobs will be lost if tariffs are not enacted by the government. Since the costs of the policies are distributed far and wide, you cannot put a face on the cost of a poor economic policy. Although 8 workers might lose their job for every job saved by a softwood lumber tariff, you will never meet one of these workers, because it is impossible to pinpoint exactly which workers would have been able to keep their jobs if the tariff was not enacted. If a worker loses his job because the performance of the economy is poor, you cannot say if a reduction in lumber tariffs would have saved his job. The nightly news would never show a picture of a California farm worker and state that he lost his job because of tariffs designed to help the lumber industry in Maine. The link between the two is impossible to see. The link between lumber workers and lumber tariffs is much more visible and thus will garner much more attention.

The gains from a tariff are clearly visible but the costs are hidden, it will often appear that tariffs do not have a cost. By understanding this we can understand why so many government policies are enacted which harm the economy.

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