No good options for controlling inflation

Americans are pissed about inflation and who can blame them?

It’s good news for Republicans, in a way, because voters tend to vent their economic anxieties at the polls. So no one will be surprised if they retake Congress in November, especially after all their recent gerrymandering and voter suppression efforts.

To control inflation though they would have to do a lot of non-Republican stuff like, say, break up the companies that control a lot of these markets due to lack of competition: think oil, meat processing and telecommunication services (like Comcast). In previous (mostly Republican) administrations, they passed over most anti-trust laws that would have prevented this.

In reality there’s not much else that can be done. Oh, they’ll want to open more federal lands to oil leasing, but oil companies will sit on their hands. Why should they drill for more oil when it’s chancy and they can enjoy record profits by simply constricting supply?

But also, there’s little anything any government can do to fix the problem because it’s not a national problem; it’s an international one. If you keep up on the news, you’ll discover people everywhere are experiencing the same thing; in fact it tends to be worse elsewhere else. In many third world countries, inflation means cutting meals or starving: they can’t afford the price of regular commodities. Everyone affected wants some sort of magic cure or, failing that, to shift the costs on someone else. Inflation and the pandemic have been causing a lot of global civil unrest. Global climate change is contributing to the problem as it interferes with growing patterns.

President Nixon tried wage and price controls, which artificially kept inflation in check for a while, then quickly zoomed up when controls were lifted. What most people want though is to have their cake and eat it too: check inflation and have the benefits of a fast growing economy. Supply bottlenecks, particularly from overseas where we get most of our goods, affects everyone. We can’t control that the Chinese government decided to shut down Shanghai for two months to control the pandemic. So prices go up and those who can’t afford the higher prices do without. Sometimes this amounts to malnutrition and starvation.

That’s basically the Federal Reserve’s approach to controlling inflation. Their main tool is to control interest rates and lately they’ve been going up. Applied long enough this should reduce inflation, but it’s a little like breaking legs of random people on the street in an attempt to control the problem of too many pedestrians. The Fed tries to do it as painlessly as possible, but it’s not a painless process. Pain is the whole point. If there is no pain, no easing of demand, then inflation continues to soar.

It’s just that a lot of things you really can’t do without. Like housing, for example. Except, yes, you can do without housing; you can join the growing ranks of the unhoused. By adding incredible amounts of stress to a lot of people’s lives, basically by impoverishing them, you cut demand and control inflation. You also dash a lot of other dreams, or at least defer them, such as buying a home.

President Biden is, of course, doing what he can. But it’s all at the edges because in reality there’s not much a president can do. It amounts to a lot of wishful thinking and hope. Open up some more oil leases and maybe oil companies will start drilling. But even if they do, bringing this new oil on the market will take years. Lately, he ended temporarily tariffs on solar panels. This will make it cheaper to set up solar systems and if more people move toward electric cars, maybe cut demand for gasoline too. But don’t expect it to do much before the midterms.

Changing policy in a meaningful way requires changing the law. It requires Congress to find consensus and to work in the national interest. There’s little of that going on now and you can expect less of it after November as our political polarization deepens some more. Which means that government will only become more ineffectual, making it easier for authoritarians to make their case. After all, as Trump told us, only he can fix it. Only of course he didn’t because the President of the United States is not God.

So any solution to inflation is likely long term at best. Real solutions require close international cooperation and tackling systemic issues like climate change. One thing I can say for certain though is that putting Republicans in charge of Congress next year won’t do a damned thing to make it better.

Digital currencies won’t save you from inflation

As Rod Serling might have put it: submitted for your consideration: the value of BitCoin and Ethereum (actually Ether), two prominent digital currencies, over time since 2016, compared to the U.S. dollar:

Bitcoin and Ethereum value in dollars since 2016
Bitcoin and Ethereum value in dollars since 2016

The dollar of course hasn’t increased in value since 2016: inflation has eroded its value. Since 2016 though both BitCoin and Ether have returned astronomical returns: over 11,000% for BitCoin and nearly 22,000% for Ethereum.

So congratulations to you savvy speculators who bought both of these currencies back in 2016. Hopefully you were smart enough to buy them in large quantities because you knew they would be the winners in this space. I imagine you are independently wealthy now. Perhaps it was your enormous private yacht I saw in Barbados in December, though I heard it belonged to a Russian oligarch.

I’m betting though that, like me, you didn’t own either of them back then. Until last year I owned neither. Had a client not paid me in BitCoin, I’d likely still not be in that market. Anyhow, I was paid $86.14 in BitCoin in early July 2021. To sell it, I set up an account on BlockFi, deposited $100 and bought $100 worth of Ether on November 1, 2021. So I invested $184.14 and at the moment it’s worth $176.69. So I’m losing money.

Chances are if you invested in crypto you’ve lost money too. I’ve lost a whopping $7.45 and that’s after a lot of interest credited to my account by BlockFi. Obviously, if I invested a lot more, my losses would be greater.

These so-called digital currencies were supposedly created to save us from the ravages of inflation. I sometimes think crypto currencies were invented by nerdy libertarians. To libertarians, Ronald Reagan and much of the Republican Party, government is the problem. While waiting for glorious freedom via anarchy, they can at least move their money into these new digital currencies and beat inflation, which they largely attribute to wasteful government spending.

Except, at least so far, crypto doesn’t seem to be living up to its promise. The value of crypto currencies seems to have tanked along with stock markets in general. You might want to attribute it to Russia’s invasion of Ukraine, but even before Russian troops amassed outside its borders, both Ether and BitCoin were down with the equities markets. This happened both recently and in 2018 when markets were down. So apparently crypto is subject to the laws of supply and demand just like everything else. Who would have thought?

The good news is that when markets rose, BitCoin and Ether rose too, disproportionately so. If there’s an upside to these currencies it is that so far at least it is likely to appreciate faster than markets. The downside is that so far it appears to depreciate faster than the markets too.

From this I can infer that these two “coins” are more volatile than the market in general, which doesn’t surprise me because there’s nothing behind them. If I buy a share of Amazon stock, I own a piece of the company. If I buy some BitCoin, its value is irrelevant until I go to sell it, then it’s whatever someone else is willing to pay for it. In some sense I own some part of the value of creating the coin in the first place, which you can assume was done with a lot of dirty energy. But it’s not tangible. I can go to a local Amazon warehouse and imagine my stock in Amazon is worth the value of one of its loading docks. Should Amazon go under, at some point I will at least get a check for my portion of its value. With BitCoin though, its value is entirely virtual.

The case for digital currencies seems to be that if you invest enough in an emerging currency that takes off, you can become extremely wealthy. Also, if it’s a reasonably popular currency, if you buy low and sell when markets are going up, you’ll probably do very well, assuming you are fortunate enough to time the market well.

So it’s definitely a risky form of investment of something with absolutely no intrinsic value, no matter how much the huskers want you to believe otherwise. Like the U.S. dollar, it’s a fiat form of currency because its true value is based on supply and demand. Unlike the U.S. dollar though there is no Federal Reserve entity to prop up its value.

I can see if these get used enough that central banks may decide to prop up these currencies so their economies are impacted less. So maybe rather than being an escape from the tyranny of governments, it will eventually be governments that keep these things going.

In any event, governments are onto you. President Biden is likely to sign an executive order shortly directing the federal government to look into regulating crypto. Lots of other governments are doing the same, recognizing that these currencies have national security implications as they gain wider adoption.

If you are hoping to escape capital gains and interest on your crypto, you are likely to be disappointed. Apparently, there is no free lunch when it comes to crypto, particularly since you are likely to pay a fee to those who process blockchain transactions when you buy, sell or exchange crypto.

Crypto is also useless if you can’t buy stuff with it. Russia is now largely disconnected from the world’s financial networks due to its invasion of Ukraine. This makes it a herculean endeavor for ordinary Russians to buy anything made elsewhere. They can try to buy stuff with rubles, whose value has plummeted about fifty percent since the invasion. Maybe some vendor will accept their Ether to buy some electronics not made in Russia. It’s unclear if they can get it shipped to them in Russia.

It turns out money is pretty meaningless if you can’t get a physical product or a service from trading it. It’s likely that Russia’s control of the internet is pretty severe, probably making trading crypto not an option for most Russians. China has already figured out digital currencies are a threat, and simply disallows them.

So crypto isn’t now and is unlikely to be your hedge in our new inflationary times or for your distaste for government. If at some point it becomes that hedge, it’s likely to be because governments facilitate its use.

The causes of inflation are probably not what you think they are

Sick of 7.5% inflation? Most of us are. Who likes paying higher grocery and gasoline prices? Who likes to see their rents go up twenty percent or more?

Well, some like it, but they tend to be corporations. One of the major causes of inflation is due to less competition in the marketplace. Before the pandemic there were a whole lot more retails stores out there than there used to be. Now they are harder to find and due to the pandemic we are buying more of our stuff online.

As a result e-tailers like Amazon are raising prices in general, but also on Amazon Prime. If you want to compare their prices with those at a local retailer, well, good luck because the local retailer is probably gone.

But some people like inflation. It gave me an excuse to raise my prices. I provide internet services from my home. It’s been four years since I changed my pricing. I don’t really need the money but my work is pretty steady and inflation makes it worth less every year. So I upped my prices about twenty percent in general. So far I haven’t seen customers go elsewhere, in part because there’s not a whole lot of people who can provide the unique services that I provide. Supply and demand, baby!

Two houses in my pretty upscale retirement village went on the market recently. Both were sold within days. The one I know for sure about had its owners accepting an offer $100,000 over their asking price. A lot of renters feel the pressure to own, particularly while mortgage rates are still relatively cheap. So they will jump into the bidding war, fearing even steeper rent increases.

Costs are up in part because there’s a whole lot more money floating around. We probably got close to $5000 in pandemic stimuli, money we didn’t need because no one saw fit to do any means testing. To companies, the Federal Reserve basically made money available at zero percent interest.

Add that to the problem of having a hard time getting stuff you need it because it’s in short supply, and it’s no wonder that inflation is at 7.5%. For most people, the real rate of inflation is a lot higher, because it’s the stuff you absolutely need that is the most demand, which further pushes up these prices.

Some of us pushed up prices by retiring, or effectively pricing ourselves out of the labor market. We saw that it literally wasn’t worth the costs to stay in the labor market, not when you factor in the dangers of the pandemic, our ages, our obesity and in some cases the bloated size of our 401K’s. This exacerbated a labor shortage which helped to push up wages which unsurprisingly also helped push up prices.

Anti-vaxxers and anti-maskers caused a lot of inflation they now decry. They caused our emergency rooms to overflow and for nearly a million people to die of covid-19, probably about 80% of them unnecessarily had we had done a good job of managing the pandemic. It certainly contributed to the smaller labor market, as in dead people can’t work.

And simple greed caused a lot of inflation. In Atlanta, 32.7% of homes in the last quarter were bought by investors who appear to want to rent them up to capture sky-high rental rates. Nationwide, more than 18% of homes in the last quarter were purchased by investors, making it harder to buy a house to own. With rents up 20% to 40% in general, there’s a lot of money to be made by squeezing tenants. This should be considered immoral and sinful, but in America we call it capitalism.

The Fed’s solution to all this will be to raise interest rates. This will have the effect of hurting those with the least ability to pay, which will certainly lower demand, but at the expense of a lot of misery, suffering and homelessness. The Fed’s monetary tricks eventually become counterproductive causing predictable side effects like inflation. Most of us could have predicted these high inflation rates, but the geniuses at the Fed could not.

Their actions also perturbed where a lot of new money went. It went disproportionately to businesses and the rich. Yes, stimulus helped, but that wasn’t an action by the Fed, but by Congress. While stimulus helped, it was a drop in the bucket compared to the money the Fed created and spent to prop up stock prices. Increased stock prices benefited those who owned stock, which is not most of us.

The result of all this money shifting and a pandemic was a lot of market chaos that was easily predictable. We bought short term relief at the cost of new long term issues, like inflation that will not easily be tamed.

Markets now expect the Fed to come to the rescue to bail them out for their inefficiencies. Government seems to reward those who need to least reward, like Amazon and millionaires, while the rest of us are caught in a whirlwind we didn’t want and left us shell shocked and battered.

Dealing with and maybe profiting from inflation

Last July, I wrote about inflation as it seemed to be back. Six months later we can definitely say that it’s back, with prices up about seven percent compared to a year ago. Certain goods and services are a lot more expensive, generally the stuff you need every day like food, gasoline and shelter.

What’s different now is that stock markets are in bear territory. As usual, those who are nervous or have the most to lose are bailing. The S&P 500 Index peaked at 4801 on December 30, 2021 and is now at 4398. More worrisome are that some of the better known stocks in the index are down a lot more than most, including Apple and Netflix. Finding a safe financial harbor now is tough. If you can find one, it’s likely that continued inflation will eat away at your net worth.

Our portfolio was hit too. It peaked briefly above $2M in December, wavered back and forth, then steadily lost value as markets sagged. Our portfolio is now down about $70K, which could be much worse. Part of the reason it’s not is that certain illiquid parts of our portfolio, mostly our house, keep appreciating.

Crypto is not proving to be market forces immune, as popular coins are down more than markets in general. Apparently the law of supply and demand applies to it as well. So at the moment I feel good that we only own about $200 in cryptocurrencies. Maybe it’s time to invest instead in gold stocks, the safe harbor most used to go for before crypto.

So what can you do to cope with inflation? Some of us are fortunate to be well cushioned. My pension is fully indexed with the cost of inflation, and now that I’m on social security, it is too. Like a lot of retirees, our house is paid off so rent increases aren’t an issue.

One thing you could do is find a better paying job, which is very trendy. This time though not only shop for an inflation-beating raise, but look at a company’s fundamentals. Do they offer a pension? It’s a great reason to work for them. Do they offer a significant employer match to a 401-K plan, like 3-5 percent? That’s even better. It’s free money that can compound until you retire. Today, employees have a once-in-a-generation opportunity that puts them at an advantage in the labor pool. It’s a shame to waste the opportunity, particularly if you can negotiate a work from home contract. You can save thousands of dollars and thousands of hours a year by working from home.

It’s hard to spend less on what are arguably essentials. You probably won’t find cheaper rent elsewhere, and shopping for gas on GasBuddy will only take you so far. If my income were modest enough, and even if it weren’t, I’d be looking to see if I was eligible for food stamps. Some things that cushioned the pandemic are disappearing: the child tax credit and extended unemployment insurance. But most communities have food banks. I’d feel no shame going to one if I needed to. I grew up with second hand clothes. I’d feel no shame buying used clothes at a Salvation Army. Buying new clothes should be considered something of a privilege.

If you do have some spare cash, a bear market is an obvious time to “buy the dip”. No downturn lasts forever. It’s unclear if a dip in markets will translate into a recession, but you’ve got better than even odds that a year from now the markets will be higher than they are now. Stocks like Apple and Netflix are down more than the market in general. These are quality stocks. It would be tempting to buy some now and hold them for five years or more.

If interest rates are doomed to rise, that can be good if you have savings. Shop around for a bank that pays good saving rates. Ally Bank, where I do most of our banking, is one such bank. Also, if you pay off your credit card balances, look for no-fee cash back credit cards and plastic every expense you can. I have a Pentagon Federal Credit Union no fee 2% Power Cash Rewards card, and routinely get $60 – $100 a month in cash back.

Nearing retirement age? Retirees generally flock to southern states like Arizona and Florida. As a result both states help lead the country in increased house valuations. If your house is paid off, the better value may be to stay right where you are. But if you do want to move, there are places where housing prices aren’t going through the roof. This is true of much of the Midwest and northeast.

I recently had a discussion with my friend Tom from childhood, whose career went south toward the late 2000s due to market forces. He now lives in Oregon. He’s been scrambling on a lot less income and much of his nest egg is gone. I recently suggested he move back to where we both came from: upstate New York. I’ve known others other than me who did this and profited.

In my case, moving from the D.C. area to Massachusetts made financial sense because my pension is exempt from state taxes, offsetting the higher real estate taxes. Unless you are clustered in or near a major city like New York, house prices are awfully cheap in places like Binghamton where I grew up. It’s not at all hard to find a nice house in a safe neighborhood for $100 – $150K.

Many of these states are known for high property taxes, but if your house isn’t worth much and you buy a house for cash from the proceeds of selling your current house likely worth a lot more, paying $5000 a year in property taxes which you are probably paying already shouldn’t be that big a deal. Seniors tend to get extra exemptions and various tax breaks too and these states tend to offer better social services for the extra taxes they charge. All this and you are positioned well for climate change: these states are cooler in general, greener and have good water supplies. Run the numbers and you may be surprised.

In general, to the extent you can, stick with a sound financial strategy: invest regularly and methodically in a broad range of funds and time will likely ensure that you beat inflation. The world is changing but in some ways for the better. Working from home was not an option for me for most of my career. Now the infrastructure is in place to make this doable for many of us in the service sector. Major changes like we are going through now also permit major opportunities not generally available. By capitalizing on these changes, you can profit from them. That’s one way to beat inflation and have a better life too.

Is inflation really a problem?

Prices are up, in some cases by a lot. These include food, gas, rent, rental cars, and airline tickets, to name a few. Why is this? Is it going to be a lasting thing? What does it all mean?

I ask the latter question because most Americans have never had to deal with significant inflation. You have to be an oldster like me growing up in the 60s and 70s to remember significant inflation. The funny thing is that it seemed kind of normal at the time. Generally wages kept up with inflation and even home mortgage rates close to twenty percent didn’t seem to deter too many home buyers. Yes, there were periodic gas lines that no one liked, but while inflation seemed pretty bad, at least assets tended to keep up with inflation. I remember renting a room in a house in 1979. Its absentee owner lived across the river in Leesburg, Virginia. The house was an investment and something of a hedge against inflation.

Something like that is underway right now, as real estate prices are one of the leading signs of inflation. Stocks too, although yesterday’s two percent selloff in the markets may indicate the days of double-digit stock growth are over. Prices are up, but wages are often up too, certainly on the low end. The federal minimum wage may be $7.25/hour, but almost no employers are paying it.

These days, the effective minimum wage is closer to $15/hour because if you want to hire workers that’s about the wage floor that employees will accept. Arguably though $15/hour is not what its proponents once hoped it would be: a living wage. In part because food and rent cost more, the price of a real living wage just keeps going up. On average, you would need to make $20.40/hour to be able to afford a one bedroom apartment in this country, assuming you have only one full-time job.

The premise is that inflation is bad. By that logic, deflation is good, but no economist I know of wants deflation. For one thing, in a deflationary period there is no incentive to spend as your money tomorrow will buy more than it will today. What economists really mean is that significant inflation is bad. Ideally they want to see it in the 2% – 3% per year range.

Right now prices are up 5.4% compared to June 2020. Obviously certain costs, like rent and rental cars are up a whole lot more than that, but there are other costs that have risen a lot less than that. Assuming your income grows by at least this amount too, you are at least treading water. A year ago it was pretty hard to find a job if you needed one. Now it isn’t and at least on the lower end of the wage scale you may be better off. “Better off” though is pretty relative. Things likely sucked terribly a year ago, if you remain employed and worked a low wage job. So with rising wages and more jobs available, they are likely to suck less today. It may feel like a skinnier elephant has decided to sit on you.

Low inflation though tends to mask other problems. If wages creep up 2% – 3% a year, who is better off? Probably not you, as it keeps you in pace with inflation so your standard of living doesn’t really increase. The Federal Reserve has the primary tools to manage the inflation rate. It does this principally by setting benchmark interest rates banks use to borrow money from each other.

The practical effect though is to keep the economy from growing too quickly, so if they judge inflation is becoming a problem they will raise interest rates. Higher than usual economic growth though should raise wages if the labor pool is relatively stable. In short, whoever is on the Federal Reserve and the interest rates they set have a huge impact on your life and standard of living. But the Fed is independent from the federal government. In effect, Congress has delegated a lot of its powers to a bunch of unelected people.

Some have argued that the Fed has done a lot of money printing during the latest recession and that’s the cause of the inflation. The Fed is the sole institution charged with creating new dollars and it’s been liberal in its money creation. It hasn’t been using its ability to impact your bottom line, at least not directly. One unique action it has taken this time is that it has been buying corporate bonds with money it’s created. This stabilized financial markets and allowed my portfolio to grow by about twenty percent last year. But arguably its policies have also created the inflation now increasingly seen as a problem. Low Fed rates have spurred low mortgage rates, which helped spur the huge rise in real estate prices.

I’m betting most of you reading this don’t have much in the way of a portfolio and live paycheck to paycheck. In which case, these actions by the Fed don’t mean a whole lot, except maybe it helped the country get out of a recession faster than it would have otherwise. Federal government spending in the form of one-time payments and expanded unemployment benefits likely had more of an effect on most of my readers. In most case, the effect was to keep a lot of people from descending into poverty, which was only partially successful.

For relatively rich people like me with portfolios, the recession was in many ways great! We got a lot of unearned income that significantly padded our already pretty sizable wealth. All these actions then had the effect of further widening the wealth gap, marginally helping those who needed it most while greatly enriching those of us who were already very comfortable.

What may actually help are temporarily child tax credits, $300 per child per month, passed as part of the American Rescue Plan. These credits are now starting to go out. If you have two kids, that’s $7200 more a year in income than your family had before, assuming these credits become permanent benefits. That’s the proposal now in front of Congress which looks likely to pass as part of a budget reconciliation package in the Senate. How would it be paid for? The proposal is to raise taxes on the wealthy, essentially redirecting income from the wealthy to those who actually need it. It’s old fashioned income redistribution, something we haven’t seen changed in a long time. The trend has been to end or cap benefits like these.

As long as inflation is kept low, it becomes harder to address the income gap because leaders assume the economy is under relative control. It is, just not necessarily in a way that benefits the most people. The Fed’s policies in many ways exacerbates and encourages income inequality, in part because of their limited toolset.

Don’t you be fooled: the bottom line is not a low inflation rate, but who controls the wealth and whether the those with less of it have a realistic path to get more of it. The tight reins by the Fed are actually a big part of our problem.

Trade deficits don’t matter but tariffs sure do

A couple of posts ago I pointed out that trade deficits don’t really matter. This is because trade deficits merely report the difference of the value of goods exchanged between countries. A trade deficit with China demonstrates that in general we get better bargains trading with companies in China than from buying them internally or from other countries.

Tariffs on the other hand do matter, a lot. Over the weekend Donald Trump, our “very stable genius” president demonstrated how profoundly ignorant he was on how tariffs work. Trump stated that tariffs are helping to pay down the national debt.

In the sense that higher taxes make deficits lower if spending is kept constant, Trump is right. But Trump apparently thinks it’s foreign countries that are paying these tariffs, like before a freighter from China unloads its cargo in Los Angeles the government of China wires the tariff to the United States Treasury. That’s not how it works at all. Chinese manufacturers don’t pay a tariff to bring their goods into our country either.

So who is paying? You: the American consumer. Tariffs amount to tax increases, but these tax increases are sneaky. Since you don’t buy directly from companies in China, you don’t see a tariff added to your bill of sale. But when a company you shop at does, like Walmart, they send a check to the U.S. treasury for the amount of the tariff.

Companies can absorb the tariff. Being profit-making though they will almost always pass the cost on to you by raising their prices. We saw this recently when Coke announced it was raising prices, because its cost for imported aluminum used to make its cans went up.

The Coca Cola Company of course can shop around elsewhere for aluminum. It looks like there is no better deal. The kind of finished aluminum they use is either not made in the USA or is cheaper to buy from China in spite of the tariffs. This is true of lots of products in our modern economy. One way for companies to make profits is to specialize. However, the tariff system seems to assume we principally trade commodities like oil and wheat, not rolls of aluminum with the exact thickness Coke needs for its soft drink cans.

Tariffs thus amount to sneaky indirect tax increases. Unfortunately, this is just the beginning of their detrimental effect on our economy. When we have to pay more for the same goods and services, this is inflation. And inflation from tariffs is already showing up. In June 2018, prices rose .4% from May 2018, largely due to tariffs. If this continues at this rate for the next twelve months, prices will be 4.8% higher annually. This is a significant increase in inflation compared to rates we are used to of 2% per year or less. It’s likelier though that the effect of tariffs is just beginning, and that soon inflation in June will seem like one of our better months.

As long as wages keep up with inflation, then perhaps inflation doesn’t matter. Our unemployment rate may be 3.9%, but wage growth has been anemic at best. In fact, most American workers have lost money because wage growth has not kept up with inflation. Unless Americans borrow money to make up the difference, which unfortunately they are doing at record rates, then without commensurate increases in wages they will consume less, dragging down the economy.

So it’s pretty clear that the real effect of tariffs is to stifle overall economic growth. Strict tariffs caused the Great Depression. While they allowed us to do more buying local, retaliatory tariffs as we are seeing now also made it hard to export our goods. With fewer buying our products, commodity prices for things we do make tend to collapse. So when the government charges tariffs, it is playing a very dangerous game. I’d like to think our administration knows what it’s doing, but Trump’s remarks this weekend show he fundamentally misunderstands how tariffs work. Apparently his supporters don’t understand either, as they roared their approval.

In any event, with recent tax cuts that benefit primarily the very wealthy, these modest tariffs will do little to boost tax revenues; the Post article puts the effect at .1%. But even the Post article understates the true cost of tariffs. Here are some of the other direct effects:

  • It increases government spending for social security, government pensions and many entitlements that are tied to the cost of living
  • It increases the cost of medical care, including Medicare, Medicaid and health care for veterans by pushing up prices for imported goods and services like certain medicines
  • It increases the cost of borrowing, as inflation tends to raise interest rates, which means the U.S. Treasury will have to increase interest rates to attract investors
  • Subsidies already announced will cost the government, for example the $12 billion the Trump Administration wants to give farmers to offset the effects of its tariffs

And then there are the indirect costs, which include:

  • Higher prices and inflation in general
  • Reduced employment in sectors affected by counter-tariffs
  • Lower profits as fewer goods and services are bought and sold
  • Likely increases in unemployment

Try as it might, the Trump Administration’s tariffs policies won’t do much more than partially offset tariffs’ downsides. It is likely to raise prices, reduce employment, feed inflation and reduce economic activity. Quite frankly, these tariffs are a disastrous policy.

But don’t take my world for it. The wreckage is already unfolding. It’s only going to get worse and may hit a crescendo around the midterms.