Everyone Got Tariffs Wrong? Not Economists

We’ve long acknowledged that their effect on prices is complicated

Letter to The WSJ. 

Economists never claimed that tariffs immediately or inevitably cause inflation (“Why Everyone Got Trump's Tariffs Wrong,” Page One, Dec. 16). We’ve long acknowledged that their effect on prices is complicated.

The first reason for that is the substitution effect: When tariffs raise the relative price of imports, consumers often shift their spending toward other goods. Some import prices may even fall, particularly if demand dries up. The net effect, then, is ambiguous.

The second factor is the income effect. Higher import costs give consumers less bang for their buck. If iPhone prices double because of tariffs, for instance, consumers enjoy less real income. Tighter budgets mean consumers have less to spend on other goods.

Moral of the story: If you’re looking solely at the inflation rate to see the effects of tariffs, you likely won’t find it. In a vacuum, the levies cause a one-time jump in an economy’s price level but not a continuous rise in its growth rate. What happens after that depends on how policymakers respond. In any case, tariffs’ most predictable and immediate effects are sputtering growth and declining consumer welfare.

Ask yourself: Doesn’t that resonate with your experience over the past nine months?

Scott Burns

Southeastern Louisiana University

Baton Rouge, La.

Caleb S. Fuller

Grove City College

Grove City, Pa."