President Trump’s farm bailout plan illustrates a simple principle and a frustrating dynamic. The government meddles in the free market, with tariffs, and this leads to a problem. This generates another government intervention, the bailout, to clean up the mess generated by the first meddling. Rinse and repeat. The cycle can be endless and destructive.
We place tariffs on imported steel and aluminum. Sure, some benefits are garnered by the American steel and aluminum industry. But American consumers of those products are clearly worse off, as are American producers who use steel and aluminum. For every job gained in the steel and aluminum industry, many more are lost in industries that use steel and aluminum.
Quite predictably, other countries respond with retaliatory tariffs on American exports, such as the25 percent Chinese tariff on U.S. soybeans. So, we respond by giving aid to farmers to ease the suffering from the previous policy. And who picks up this tab? It’s not the tooth fairy. The farmers’ gains are the taxpayers’ losses. Taxes must be raised today, or more likely in the future, to finance the current largess. Even more pain.
Trump claims the pain is worth bearing because tariff threats will secure trade concessions from other countries. Get tough and they will change their policies and open their markets toU.S. products.
But will they? The so called “concession” the European envoy made in his celebrated visit to the White House is instructive. Yes, Europe is going to buy more American soybeans. But not because the Europeans are reducing tariffs or restrictions on American soybeans. Rather, they’ll buy more because American soybean prices are falling, precisely because of the Chinese tariff. Their “concession” is they “promise” to do what they were going to do anyway.
So, what happens if these trade disputes drag on? We have two bad options: Either withdraw the concessions demanded, which makes the United States look weak and silly, or follow through with the threatened tariffs, which would further hamstring the U.S. economy. Using tariffs as a bargaining chip is a dangerous tactic that usually backfires.
Rather than addressing the harms inflicted by interventionist policies with other harmful interventionist policies, the sound economic approach is to repeal the interventionist policies that caused the harm in the first place. Interventionist policies like tariffs, subsidies and bailouts create a vicious cycle of economic destruction. Allowing free trade, eschewing subsidies and bailouts creates a virtuous cycle of economic betterment.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.