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Old 05-02-2018, 04:11 PM
 
Location: Old Bellevue, WA
18,794 posts, read 13,583,139 times
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I heard an economist claim this on NPR yesterday. The host made a point of touting the economist's credentials, but I did not catch her name unfortunately. Anyway, I don't see how a tariff would cause inflation. Tariffs obviously would raise the relative prices of affected imported goods, but inflation is an increase in the general price level.


I did find this link, which claims that it is 'universally agreed' by economists that tariffs are inflationary.
https://economics.stackexchange.com/...ease-inflation




Suppose we have 3 guys, x, y, and z, stranded on a proverbial desert island. They decide to form a central bank, and everybody is issued 100 clam shells per year, to serve as their currency. x excels at collecting coconuts, y catches fish, and z gathers berries. They use their 100 clam shells/yr to trade among each other.


Now they decide to impose a 1 clam 'tariff' on the trading of coconuts. The cost of coconuts goes up, so y and z presumably buy fewer of them. But that is just a relative price. Presumably y and z buy fewer coconuts now. But the total spending per year on the island remains at 300 clam shells per year, so the overall price level has to remain the same. Inflation would only result if they decided to start issuing (say) 110 clams per year rather than 100. That would result in a rise in the general price level.
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Old 05-02-2018, 04:56 PM
 
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Tariff is a tax. That's what it is. Tax is never a good thing to economy (good for government).

To use your analogy, if they trade 3 coconuts per day before tax, they'd trade only 1 coconut per day after tax. If you buy one pair of new shoes from Walmart at $35 once a year, and if there is a tax making shoes cost $2,000 a pair, then you'd buy a pair of new shoes every 20 years. The equilibrium price would be higher and quantity would be lower.
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Old 05-02-2018, 05:02 PM
 
Location: Old Bellevue, WA
18,794 posts, read 13,583,139 times
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Quote:
Originally Posted by 6oo9 View Post
Tariff is a tax. That's what it is. Tax is never a good thing to economy (good for government).

To use your analogy, if they trade 3 coconuts per day before tax, they'd trade only 1 coconut per day after tax. If you buy one pair of new shoes from Walmart at $35 once a year, and if there is a tax making shoes cost $2,000 a pair, then you'd buy a pair of new shoes every 20 years. The equilibrium price would be higher and quantity would be lower.
I agree with this. But how is it inflationary? If tariffs are inflationary, wouldn't excise taxes in general be inflationary? But I've never heard that latter point claimed by any economist.
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Old 05-02-2018, 05:10 PM
 
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If steel cost $1000 a ton prior to tariff and after the tariff it costs $1,250 it will impact pricing on all goods made from steel. So, cars, buildings, appliances, furniture etc. The cost increase will be some lower percentage of the increase, since goods use varying amounts of steel, but in the end prices will rise.

Inflation is defined as:

a general increase in prices and fall in the purchasing value of money

Since costs rising means a fall in purchasing power per dollar spent by the buyer, that would mean that yes, Tariffs can be inflationary.

Now it isn't always that easy, you have to take into account substitution, supply of goods, location prior to making broad statements about what a Tariff will actually do, but in general, yes, they are inflationary.
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Old 05-02-2018, 05:17 PM
 
Location: Honolulu, HI
4,589 posts, read 1,145,353 times
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Quote:
Originally Posted by 6oo9 View Post
Tariff is a tax. That's what it is. Tax is never a good thing to economy (good for government).

To use your analogy, if they trade 3 coconuts per day before tax, they'd trade only 1 coconut per day after tax. If you buy one pair of new shoes from Walmart at $35 once a year, and if there is a tax making shoes cost $2,000 a pair, then you'd buy a pair of new shoes every 20 years. The equilibrium price would be higher and quantity would be lower.
Good post, well said.
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Old 05-02-2018, 05:19 PM
 
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If that's not clear, remember these two equations:

1). Walmart = cost of living
2). cost of living increase = inflation
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Old 05-02-2018, 05:35 PM
 
Location: midvalley Oregon and Eastside seattle area
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Yes.
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Old 05-02-2018, 05:42 PM
 
Location: Old Bellevue, WA
18,794 posts, read 13,583,139 times
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Quote:
Originally Posted by aridon View Post
If steel cost $1000 a ton prior to tariff and after the tariff it costs $1,250 it will impact pricing on all goods made from steel. So, cars, buildings, appliances, furniture etc. The cost increase will be some lower percentage of the increase, since goods use varying amounts of steel, but in the end prices will rise.

Inflation is defined as:

a general increase in prices and fall in the purchasing value of money

Since costs rising means a fall in purchasing power per dollar spent by the buyer, that would mean that yes, Tariffs can be inflationary.

Now it isn't always that easy, you have to take into account substitution, supply of goods, location prior to making broad statements about what a Tariff will actually do, but in general, yes, they are inflationary.
Would you then say that excise taxes in general are inflationary? After all they do the same thing: raise the prices of affected goods.
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Old 05-02-2018, 06:25 PM
 
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To be inflationary, it is necessary broad. Tobacco tax does not affect everyone, and it won't cause inflation. But, cost of steel and everything in Walmart have a profound impact on economy.
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Old 05-02-2018, 06:30 PM
 
Location: Montgomery County, PA
13,642 posts, read 8,664,774 times
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Quote:
Originally Posted by aridon View Post
If steel cost $1000 a ton prior to tariff and after the tariff it costs $1,250 it will impact pricing on all goods made from steel.
That's not a given. What if the supplier eats the tariffs? We're not talking mom and pop steel mill. We're talking China.They can afford it. So much of the discussion is tainted with politics today that you're never sure you're hearing the straight story. I can guarantee that anti-tariff folks are also anti-Trump.
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