18 Feb 2017

Latest Lara-Murphy Show and Contra Krugman

Contra Krugman, Lara-Murphy Show 10 Comments

I can’t remember if I posted this already, but in ep. 34 of the LMS, we talk about the general economic prospects of a Trump Administration.

In ep. 73 of Contra Krugman, Tom and I talk about tariffs and the wall. A quick highlight reel:

7:15 I suggest the layout of the show: We first talk about tariffs on Mexican products, whether this would “pay for the wall,” and then the broader GOP tax reform plan (swapping a VAT for income tax).

8:50 Tom discusses the Rothbardian point that businesses can’t simply “pass on” a new tax to its customers. It’s more nuanced than that.

12:30 Along the same lines, I explain that yes, Trump fans are wrong for thinking “Mexico will pay for the wall” because of a tariff. However, Trump critics went too far the other way when they said, “Ha ha, a tax on Mexican imports would just raise prices for Americans.”

20:40 I make my civil libertarian point that a giant wall gives me the heebie jeebies. NOT because all Earthlings possess a “right to immigrate,” but because a necessary condition for a future US police state is a border barrier keeping people in.

25:00 I discuss the Feldstein/Krugman article and how it kinda sorta validates the Navarro/Ross position on income taxes versus VATs, and how the US is at a disadvantage.

10 Responses to “Latest Lara-Murphy Show and Contra Krugman”

  1. Transformer says:

    ‘Along the same lines, I explain that yes, Trump fans are wrong for thinking “Mexico will pay for the wall” because of a tariff’

    Ultimately US workers will probably pay the full cost of the wall if it gets built.

    It is true that in a literal sense a tax on Mexican goods could be used to finance the wall. However economists are right to point out that the burden of the tax would almost certainly be split between Mexicans and Americans.

    The US govt could if wanted to increase the tax on imports so that the revenue raised was used not only to pay for the wall but also to compensate Americans for their part of the burden (they could subsidize consumers to the full extent of the tax imposed on Mexican suppliers). In theory this would work but it would have the ironic effect of increasing imports (the only way that US spending on goods other than he wall could remain constant while the wall is being built is by transferring that spending to imports).

    However the Mexican govt is very unlikely to allow the burden to be passed on in this way. They will do their own taxing on US goods until the burden is fully passed back. At this point not only will American be paying the full cost of the wall but everyone will be worse off because the trade restrictions

    • Transformer says:

      So I think ”However, Trump critics went too far the other way when they said, “Ha ha, a tax on Mexican imports would just raise prices for Americans’ is probably wrong.

    • Bob Murphy says:

      Transformer wrote:

      “However economists are right to point out that the burden of the tax would almost certainly be split between Mexicans and Americans.”

      Transformer, I’m being serious, show me the economists who said that. That’s the reason Tom and I stressed it. I literally did not see a single other economist say that.

      • Transformer says:

        I honestly haven’t studied what economists actually have said on this – I just assumed it was obvious that the burden of taxes on goods is split between suppliers and consumers. If I’m producing something and the govt starts taxing it and demand is not perfectly inelastic so I have to sell it cheaper and/or sell less of it then I don’t see how I can not be worse off.

        I do see that Krugman says:

        ‘As economists quickly pointed out, however, tariffs aren’t paid by the exporter. With some minor qualifications, basically they’re paid for by the buyers — that is, a tariff on Mexican goods would be a tax on U.S. consumers. America, not Mexico, would therefore end up paying for the wall.’

        Which seems wrong – especially when you look at goods where the suppliers are price takers.

        However by adding the extra stuff it tried (probably badly) to explain I think you still end up the conclusions that the burden will ultimately fall on Americans.

        • Transformer says:

          typo: ‘it tried’ = ‘I tried’

      • Tel says:

        I did a quick scan:

        CNN Money (Jan 26)

        “The notion that a 20% tariff is a way of forcing Mexico to pay for the wall, it’s just a falsehood. It’s a way of forcing American consumers to pay for the wall,” says Edward Alden a trade expert at the Council on Foreign Relations.

        Forbes (Jan 27)

        Memo To Trump – 20% Mexican Import Tariff Means Americans Pay For The Wall

        Tho Bishop @Mises Wire (Jan 26)

        A Tariff with Mexico Will Ensure Americans Pay for Border Wall

        New Your Times (Jan 26)

        Mr. Trump, of course, has also talked about taking the United States out of the global trade accord. But that might seem a bit too drastic just to get Mexico to pay perhaps $20 billion for a wall. It is likely to impose enormous costs on the American and world economies, opening the door for a free-for-all trade war. But if the president did it anyway, the people paying the 20 percent tariff would not be Mexicans, but American consumers. That 2017 Ford Fusion built in Hermosillo, Mexico? It would no longer cost $22,610. It would cost $27,132.

        Tim Haab @Environmental Economics (Jan 27)

        So to answer the question of who pays the 20% import tax, the answer is that both U.S. consumers and the producers of TortiXXa pay the tax.

        I will leave it to you to decide whether that means Mexico paid for the wall.

        There’s diagrams with this one and some genuine working that went into the solution (shock!!).


        PBS News Hour (Jan 27)

        There is also the irony that while the tax on Mexican imports can be presented as making Mexico pay for the wall, a significant share of the tariff will be passed through into higher U.S. prices, thus actually resulting in U.S. consumers paying for the wall. It is also possible that instead of this proposal, taxes on Mexican imports could be part of a more radical proposal currently being floating by Republicans in the Congress for corporate tax reform. This plan would involve radically lowering corporate taxes. It would also involve border tax adjustments of questionable WTO legality. Imports would be taxed by disallowing them as an expense, while taxes on U.S. exports would be eliminated. If this plan is adopted, it would be U.S. taxpayers rather than Mexicans who would pay for the wall!

        Fortune Finance (Jan 26)

        50% of the content of imports from Mexico are components and other materials made in the U.S. The tariff would force Mexican companies to raise prices, though probably far less than the full 20%, since they’d take part of the hit by shrinking margins. That would make their goods less attractive to U.S. consumers, and they’d sell a lot less autos and appliances in the U.S. than they do today. At the same time, that would lower any revenue generated by the border tax to pay for the wall.

        But U.S. manufacturers would take a hit as well, since if Mexican imports fall, so do all the U.S. parts that go into those imports. Those lost sales could go to either foreign companies or U.S. players that manufacture the same goods in the U.S., using U.S.-made parts. But if Mexico is the world’s low-cost producer, the system deprives U.S. consumers of those bargain prices. We’d be buying the same stuff from less efficient domestic producers at what could be inflated prices.

        The Economist (Jan 26)

        Crucially, most economists do not view border-adjustment as a barrier to trade. In isolation, either an export subsidy or an import tax is plainly protectionist. But, at least in theory, an export subsidy and import tax of equal size should cancel each other out. Instead of impeding trade, they should push up the dollar to the point where exports and imports cost the same as they did before the tax. (Your blogger’s piece from December provides a fuller explanation). Most rich countries already implement border-adjustment as part of their VATs, a kind of sales tax. Mexico’s VAT irks Mr Trump, but it is not really a trade barrier.

        Border-adjustment would raise a lot of money. Because America runs a large trade deficit, taxes on imports would fill the Treasury’s coffers much more than rebates to exporters would drain them. Mr Spicer noted that border-adjustment would raise about $10bn a year from the trade deficit with Mexico alone, assuming a tax rate of 20% (which is favoured by House Republicans). That would allow Mr Trump to claim that Mexico was paying for his border wall.

        NBC News (Jan 12)

        American Car Buyers Will Pay the Price for a Mexico Tariff

        Fox Business (Jan 26)


        Not quite.

        The U.S. could recoup some of the wall’s costs by changing the tax and trade policies with Mexico. But the money wouldn’t necessarily be coming from Mexican taxpayers or the Mexican government.

        While the tax would land first on companies exporting from Mexico, the costs would likely be passed on to consumers. That leaves Americans footing much of the likely bill.

        MSN USA Today (Jan 27)

        A proposed import tax floated by the Trump administration to pay for a wall along the Mexican border could ultimately be passed on to American consumers.

        • Transformer says:

          If that was all you could find I think you should go back and do a long search.

          • Tel says:

            I could have only posted Tim Haab as a lone counter-example to Murphy’s assertion “I literally did not see a single other economist say that”. However, given that I set out determined to find at least someone, probably would not be a statistically fair sample unless I also reported a suitable spread of other opinions.

            Admittedly, Tim Haab is probably not as yuuge as Tom and Bob amongst economic circles; so might let Bob off the hook for missing Haab’s article. It’s interesting that Haab selected beer as his example commodity, because I would have thought that although the overall demand curve for beer is fairly stiff (I’m talking about aggregate beer consumption, for all beer types), for any one specific beer (e.g. TortiXXa) the demand curve would be heavily effected by substitution. Even people who do like Mexican beer might be sorely tempted to switch when they see a significant price differential against a local beer that’s also pretty good.

            That’s the key to the entire argument (I doubt Trump draws lots of diagrams, but I’m convinced he has a good intuitive feel for it). You see a diagram here on Wikipedia remarkably similar to what Haab has drawn on his article…


            See the section “Effect on tax incidence”. Under the diagram is a note:

            When demand is more inelastic than supply, consumers will bear a greater proportion of the tax burden than producers will.

            Hmmm, no doubt that works in reverse as well… when demand is highly elastic the producers carry the tax burden.

            Now, with a substitution effect in play, from the perspective of a given beer producer, their particular market demand would be highly elastic IMHO. At least temporarily the substitution effect will also reduce supply elasticity as it throws more production load onto the other suppliers (which they can adapt to over time).

        • Bob Murphy says:

          Thanks Tel! I truly hadn’t seen another economist make the (elementary to me) point. Glad I was wrong.

  2. Bob says:

    Regarding ContraKrugman, an enhancement request to consider: include not only a link to the article, but also the same article via archive.is or archive.org. Doing it is easy and free, and it ensures the content remains available (and unchanged) even if the source site dies or gets reorganized or the content is changed without a correction notice (happens every day!), etc. For people wishing to reduce the traffic to the NYT site / their advertisers, this also provides a way of enabling people to follow along the article without benefiting NYT any more than necessary. Cheers either way, great show!

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