The Reagan White House Rejected Trump’s Tariff Power Claims

Section 122 was never meant to justify tariffs over ordinary trade deficits.

By Phillip W. Magness. Excerpt:

"Since 1976, the United States has had a near-continuous annual trade deficit. In 1984, this pattern prompted Congress to ask President Ronald Reagan to investigate its causes. The Senate Finance Committee submitted a list of questions to the White House about possible policy responses, including the following: “We would also like your analysis of the applicability of section 122 of the Trade Act of 1974 to the current [trade] imbalance, and the utility of surcharges or quotas to deal with this imbalance.”

The task of answering this question fell to Martin Feldstein, a longtime Harvard economist and a leading expert in macroeconomics, international economics, and public finance. At the time, Feldstein was serving as the chair of Reagan’s Council of Economic Advisers. He delivered the administration’s answer on Section 122 in a committee hearing on March 23, 1984:

On a more technical level, section 122 appears not even to apply to the current situation. The specific language of that section provides for the imposition of a tariff surcharge under two conditions: To deal with large and serious balance-of-payments deficits, and second, to prevent an immediate and significant depreciation of the dollar in foreign exchange markets.

Feldstein then carefully explained the conceptual difference between the “trade deficit” and a “balance-of-payments deficit” as contemplated by the statute:

Now, although we have a trade deficit and a current account deficit, we do not have a balance-of-payments deficit, in the strict sense envisioned in section 122. The technical definition for the balance-of-payments is the rate of accumulation of official reserve assets, including gold. Since net U.S. sales of other assets to foreigners, in other words net private investment in the United States, last year was more than enough to offset our current account deficit, the official U.S. reserves didn’t have to be drawn upon.

At the time of these remarks, official reserve drawdowns had become a thing of the past. Under the old Bretton Woods system, other countries maintained an official currency peg to the U.S. dollar. The dollar was, in turn, pegged to gold. Participants in this arrangement followed a complex set of rules administered by the International Monetary Fund to keep their currencies valued within the target ranges of the peg. As part of the deal, other governments could redeem their U.S. dollar holdings for gold at $35 an ounce. When a foreign government exercised this clause and exchanged dollars, it drew down on official U.S. reserves in gold and led to a “balance-of-payments deficit.”

In August 1971, President Nixon closed the gold exchange window and terminated this policy in a bid to stave off the depletion of U.S. gold reserves. The “Nixon Shock” threw the international exchange system into chaos, although for a while the United States attempted to reinstate a number of fixed exchange rate regimes. Congress passed the Trade Act of 1974, including the Section 122 tariff provision, amid this chaos in an attempt to provide negotiating leverage for a successor to the Bretton Woods system. That successor never emerged and in 1976 the International Monetary Fund formally amended its articles to terminate the fixed exchange rate system. The United States formally gave its assent to this change in October 1976, and exchange rates have floated on an open currency market ever since.

As a result of these changes to the international exchange system, the “balance-of-payments deficit” contemplated under Section 122 is now a relic of the past. Official U.S. reserves are no longer tied up in maintaining a fixed exchange system and are therefore not typically drawn down into deficit. Feldstein explained as much in his 1984 testimony:

Thus, although the current account deficit will be larger in 1984 than it was last year, there is no reason at this time to expect that there will be a balance-of-payments deficit in 1984. We will have a trade deficit, we will have a current account deficit; but there is no reason to think that we will be drawing down U.S. reserves or selling off our gold stock, and therefore we don’t have the balance-of-payments deficit that is required as a condition for triggering section 122.

Trump’s interpretation of Section 122 is not only a misreading of its terminology—it’s a misreading that past administrations investigated in response to similar trade deficit conditions. As Feldstein’s testimony shows, the Reagan Administration explicitly rejected Trump’s current argument and found that a “balance-of-payments deficit” did not exist under the current floating exchange rate system."

Jones Act Waiver Talk Highlights the Law’s Costs

By Colin Grabow of Cato. Excerpts:

"Although routinely defended as essential to national security, Jones Act waivers are often floated precisely when a genuine national security crisis or economic emergency arises. It’s an implicit acknowledgment by policymakers of what the law’s defenders rarely admit: It constrains transportation options and raises costs. A law portrayed as indispensable to national security suddenly becomes optional when pressures mount."

"Of the world’s nearly 7,500 tankers for moving crude oil and refined products, just 54 comply with the law. And those that do are dramatically more expensive than their international counterparts. Constructing a medium-range tanker suitable for carrying gasoline or jet fuel in a US shipyard costs roughly $190 million more than building one abroad. Building a crude oil tanker is said to cost over $400 million more. Annual operating costs run $8 million–10 million higher per vessel.

Combine those cost premiums with a minuscule fleet size and the result is predictable: Coastal tanker shipping in the United States is structurally expensive."

"By opening domestic routes to internationally flagged shipping, relief from the Jones Act would vastly increase the supply of vessels available to move American crude oil and refined products to US ports. That, in turn, would unlock new and more efficient supply chains."

"only a single Jones Act–compliant crude oil tanker currently serves the East Coast. With additional ships, US refineries could more easily source oil from Texas rather than import it from Libya or Nigeria. California, which currently imports fuel from the Bahamas as a costly Jones Act workaround, could obtain it more directly from the Gulf Coast."

"“if there was not a Jones Act, then there probably would be more movements of crude oil from Texas to Philadelphia.” The source of that quote? The same Jones Act tanker firm CEO who recently downplayed the benefits of waiving the 1920 law."

"Among liquefied natural gas tankers, only a single compliant vessel exists, and it is restricted to serving Puerto Rico. Among oceangoing dry bulk carriers, the workhorses of fertilizer transport, precisely zero exist in the Jones Act fleet."

"By the industry’s own admission, eliminating the Jones Act would increase domestic energy movements. That means fewer market distortions and more competitive pricing at the margin." 

Why is the USDA Involved in Housing?!

By Alex Tabarrok.

"In yesterday’s post, The 21st Century ROAD to Housing Act, I wrote that Trump’s Executive Order “cuts off institutional home investors from FHA insurance, VA guarantees and USDA backing…”. The USDA is of course the United States Department of Agriculture. In the comments, Hazel Meade writes:

USDA? Wait, what????
Why is the USDA in any way involved in housing financing?
Are we humanly capable of organizing anything in a rational way?

It’s a good question. The answer is a great illustration of the March of Dimes syndrome. The USDA got involved with housing in the late 1940s with the Farmers Home Administration. The original rationale was to support farmers, farm workers and agricultural communities with housing assistance on the theory that housing was needed for farming and the purpose of the USDA was to improve farming. Not great economic reasoning but I’ll let it pass.

Well U.S. farm productivity roughly tripled between 1948 and the 1990s as family farms became technologically sophisticated big businesses. So was the program ended? Of course not. Over time the program subtly shifted from farmers to “rural communities”–the shift happened over decades although it was officially recognized in 1994 when the Farmers Home Administration was renamed the Rural Housing Service. Today rural essentially means low population density which no longer has any strong connection to agriculture.

So that’s the story of how the US Department of Agriculture came to run a roughly $10 billion annual housing program for non-farmers in non-agricultural communities. And how does it do this? By supporting no-money-down direct lending and a 90 percent guarantee to approved private lenders. Lovely.

It’s a small program in the national totals, but an amusing example of the US government robbing Peter to pay Paul and then forgetting why Paul needed the money in the first place."

Ellen Wald's Misunderstandings about Gasoline Shortages and Oil Markets

It takes price controls to cause a shortage

By David R Henderson. 

"That leaves us at the precipice of the worst-case global energy scenario. The United States, by virtue of its robust domestic oil and gas industry and its synergy with Canada’s oil industry, is in the best possible place to weather a global energy crisis. If this war had happened in 2012, we might soon have been reliving 1973, complete with gasoline lines and rationing. But it is 2026, and domestic oil production is the highest ever. Our imports from Persian Gulf countries are the lowest since 1985 and account for a small percentage of the oil we import and consume.

So writes Ellen R. Wald, “This is How an Energy Crisis Starts,” The Free Press, March 8, 2026.

This paragraph leaves out a crucial factor and also shows Wald’s misunderstanding of the world oil market.

The crucial missing factor: whether or not we have price controls on oil and gasoline. The reason for the gasoline lines and rationing in 1973, as almost all informed economists know, is the presence of Nixon’s price controls. These controls prevented the domestic price of oil from rising to $11 per barrel, which became the world price in late 1973 after OPEC cut output. That caused a shortage at both the crude level and the retail gasoline level. Countries, like Switzerland, that avoided price controls also avoided gasoline lines. Contrary to Wald, if this war had happened in 2012, we would have avoided shortages and gasoline lines if our governments had avoided price controls.

Wald also shows a misunderstanding in the quoted paragraph about how world oil markets work. Whether or not we produce much or little of the oil we consume, we will be subject to the world oil price. Price is determined in a world market. I’m guessing you noticed that fact if you drove by a gasoline pump today.

To be fair, it is true that the increase in the price of oil hurts us less when we import little than when we import a lot. The reason is that “us” includes oil producers. So most of the loss to U.S. consumers goes to U.S. producers."

White House wrong to push Railway Safety Act

By Sean Higgins & Steve Swedberg of CEI.

"The White House is reportedly urging lawmakers to include new restrictions on freight rail operations in upcoming infrastructure or transportation legislation. CEI policy experts Sean Higgins and Steve Swedberg explain how this plan would do more to impose red tape than improve safety.

CEI Research Fellow Sean Higgins:

“The legislation would mandate minimum two-member crews (one conductor, one engineer) on freight trains. There is no evidence that such a mandate would make trains any safer, but it would prohibit attempts to further automate them. Railroad companies have reduced crew sizes for decades while also reducing accident rates. The two-crew rule exists solely for the benefit of unions that represent railroad workers. If there is any form of transportation that should be on the leading edge of automation, it is trains, which have a natural safety edge because they don’t use public roads or the skies.”

CEI Finance and Monetary Policy Analyst Steve Swedberg:

“The White House’s push to include the Railway Safety Act in a broader infrastructure or transportation bill risks enshrining policies that do little-to-nothing to improve rail safety or address root causes of rail accidents.

Instead, the legislation includes prescriptive government mandates that needlessly increase costs, diminish innovation, and slow rail operations. Locking technologies and procedures into federal law would impede the rail industry from adopting new technologies that achieve safety gains. Congress should be wary of any plan that imposes rigid rules instead of actual safety standards.”

Related analysis: The Railway Safety Act would derail progress one provision at a time" 

Live Nation Settled Its Lawsuit With the Feds. Don't Expect Concert Tickets To Get Any Cheaper.

Fans are responsible for sky-high ticket resale prices, not primary ticket sellers.

By Jack Nicastro. 

"Live Nation Entertainment and the federal government have reached an agreement to end a yearslong antitrust lawsuit. If you think that's going to make your Bad Bunny tickets cheap, think again.

On Monday, Politico reported that Live Nation, the largest producer of live music concerts, settled with the Justice Department. This settlement ends the lawsuit filed against the company following public outrage at dizzying resale ticket prices for Taylor Swift's Eras Tour, alleging that Live Nation had monopolized the markets for primary ticketing services. 

In addition to paying $200 million in damages to 39 states and the District of Columbia, Live Nation accepted a handful of structural remedies: the company must divest itself from more than 10 amphitheaters, reduce the length of long-term exclusivity contracts between Ticketmaster and event venues, allow "venues to allocate a portion of their tickets to competing platforms," and "open parts of its platform to rival ticketing companies," reports Politico.

Following its 2010 acquisition of Ticketmaster, Live Nation became "the world's leading live entertainment ticketing sales…company," according to the Justice Department, achieving an 86-percent share of the primary ticketing market for live events, excluding sports. Given this massive market share, one might assume that Live Nation is responsible for jacking up ticket prices to concerts. 

But this isn't how the primary ticket market works. Performers themselves set the price, which ticketing companies sell for a fee of about 7 percent of the ticket's face value. Even including venue and ticket fees, which increase the all-in ticket price by as much as 30 percent, there are far more tickets demanded than available at this low price. Scalpers resolve this shortage by auctioning tickets to the highest bidder, which performers rationally refuse to do out of reputational concern.

In the case of the Eras Tour, tickets were sold for $130, but resold for thousands of dollars. One mother asked The New York Times if it was OK to sell her daughter's extras on a Facebook group for $2,400, considering they were selling for $3,900 on secondary markets. (While concert ticket resale generally accounts for about 2 percent of Ticketmaster's revenue, the company only facilitated the primary sale of Eras Tour tickets.)

Requiring Live Nation to unbundle its venue and ticketing services, and forcing it to host rival ticket sellers on Ticketmaster, may reduce primary ticket fees. "Shorter exclusivity contracts give venues a more credible threat to switch ticketers, competitive pressure on Ticketmaster reduces venue-facing fees, and some portion of that reduction passes through to consumers as lower service charges," explains Brian Albrecht, chief economist at the International Center for Law and Economics. However, "requiring Ticketmaster to open its platform to SeatGeek and Eventbrite will not suppress resale prices," says Albrecht.

The Justice Department might notch Live Nation's settlement as a win in the war on affordability, but as long as performers price tickets markedly below what their fans are willing to pay, scalpers will be strongly incentivized to purchase these tickets at this below-market rate and get them in the hands of the fans who value them the most. The answer is not more government intervention, but allowing prices to work."

U.S. LNG Exports to the World’s Rescue

Ten years ago, Cheniere Energy began an export boom that is saving the world economy today

WSJ editorial. Excerpts:

"the boom in shale fracking that began in the mid-2000s unleashed cheap and abundant natural gas. Cheniere Energy took the risk of converting what had been an LNG import facility into an export platform in 2016."

"The U.S. now boasts eight LNG export terminals"

"America has surpassed Australia, Qatar and Russia to become the world’s top LNG exporter."

"Trump lifted the [LNG export permitting] pause upon retaking the White House" 

"U.S. LNG exports surged nearly 40% last year"

"The U.S. now exports about as much gas to Europe as Russia did before the war"

"The reality is that prices rose last year from a near-record low in 2024. Prices last week averaged $3.13 per million BTU—about the same as in 2017"

"Limiting LNG exports won’t reduce domestic energy prices, though it could suppress natural gas production"