Chief Economist Eugenio J. Alemán discusses current economic conditions.
Tariffs seem to have become a staple of Americans’ dictionaries lately as the new administration uses this policy instrument to achieve objectives that are not directly tied to the reasons tariffs have been used in the past. That is, typically, the US has used tariffs to protect a sector of the economy either temporarily or, sometimes, for the long haul, and as an instrument for collecting fiscal revenues.
In fact, fiscal revenues from import tariffs were the largest source of fiscal revenues during the first 100 plus years of our country, as the graph below shows.
The US has used tariffs forever while the move to freer trade started after the Second World War and intensified during the last several decades. And while there are some that suggest otherwise, the US has benefited the most from this move toward freer trade. It is true that there are inequities, and some countries subsidize sectors and protect others in order to give those sectors a competitive advantage that would have normally been absent. But every country in the world, at some point in time, has done something similar.
At the beginning of our history as a nation-state, the South was so distrustful of the North that we enshrined the Export Clause into our Constitution. In Article 1, Section 9, Clause 5 of the constitution it says, “No Tax or Duty shall be laid on Articles exported from any State.” However, nothing was said about import taxes (i.e., tariffs), perhaps because in the early days the US government’s income came, fundamentally, from tariffs on imports. But tariffs were always a problem for the US economy. According to the CATO Institute, “From 1789 to 1934, tariff-seeking industries were notorious for diverting resources into rent-seeking, or the lobbying of Congress for preferential rates with bribes and backroom deals.”¹ The corruption generated by import tariffs, according to CATO, was one of the reasons the US passed the 16th Amendment of the Constitution, which created the federal income tax system.
The US has also used tariffs to protect sectors of the economy from competition from abroad. In the early 20th century, we decided to protect the agricultural sector with price-support mechanisms, which is one of the reasons why food is so expensive in the US compared to other countries. That was our choice. And it has worked for us, as one of the defining characteristics of agricultural production, i.e., overproduction/underproduction, has been tamed over time by using these price supports.² However, that has also meant that we don’t import cheaper agricultural products that compete with domestic agricultural production. Our importation of agricultural products is limited to temporary quotas opened to complement domestic production and/or import non-seasonal products into the US.
Another famous tariff is called the ‘Chicken Tax,’ which is a 25% import tax on the importation of light trucks, which was imposed back in the 1960s during the ‘Chicken War’ between the European Economic Community (EEC) and the US. It originated with a tax on the importation of chicken from the US into the EEC and the US retaliatory response to impose a 25% tariff on the importation of light trucks into the US. The tariff on chicken imports is long gone but the 25% tariff on the importation of light trucks is still in place!
In summary, tariffs are problematic. While they may be useful in temporarily solving unfair trade schemes, they create more problems than they solve, especially if these tariffs persist over time, as they create vested interests that make them very difficult to eliminate. At the same time, and as US history has shown, tariffs generate corruption and graft opportunities that are more pernicious to the economy than the reasons tariffs were implemented in the first place.
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 12/6/2024
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