The importance of ‘Liberation Day’ tariffs to productivity
So, how was your Liberation Day?
Economic issues, particularly inflation, have been given much of the credit for President Donald Trump’s victory in November, but yesterday the president announced wide-ranging “reciprocal” tariffs that will roil global markets.
In his address to Congress, the President said there was going to be “a little disruption” and there has been enough early chaos that the Fed has revised its forecast to suggest that in the coming year growth will be a bit slower, inflation stickier and unemployment a bit higher.
Lost in all this is the question of what the administration’s policies might do to promote or harm productivity.
Writing in the most recent issue of Foreign Affairs, Mathew Slaughter of Dartmouth and David Wessel of Brookings argue that if we really want to achieve greater economic growth that we cannot ignore this issue.
Consider that since World War II, productivity in the American economy has been on somewhat of a roller coaster. Between 1945 and 1973 it increased annually by 2.8%. Over the next 22 years it averaged just 1.4%. Then, from the mid-1990s to 2005, it averaged 3.0%. Over the last 20 years it has gyrated but averaged less than 2.0% the last five years.
Quoting from the 2015 Economic Report of the President, Slaughter and Wessel note that if the rate of productivity had maintained the 2.8% rate from 1973 to 2013, the median household income in the U.S. would have been $30,000 higher.
The impact of that would have been profound. Not only would Americans be richer, but also the federal government would have had more revenue meaning that our deficits could have been lower, and the Social Security and Medicare trust funds would be in better shape.
So, how does one make an economy more productive? The writers argue that output per worker can be raised in one of two ways. The first is increasing the amount of capital invested in each worker — for example, in training, plants and equipment.
The second is through innovation — finding more efficient ways to produce the same amount of goods and services with less input or developing wholly new products.
What definitely does not work, they argue, is creating barriers to the flow of ideas, capital and people.
The president believes that his tariffs will compel foreign companies to invest in America while raising revenue that would allow for the continuation and expansion of his tax cuts, but skepticism among economists remains high. Surveys of consumer confidence show that average Americans also have strong doubts.
What is more worrying is that Elon Musk has taken special aim at cutting federal support for research by laying off scientists and ending grants. Some DOGE team members apparently believe that the federal government should not fund any research at all.
No research — no innovation. A recent study found that between 1948 and 2013, 80% of the growth in U.S. per capita GDP was created by the development of innovative ideas.
Add to this the president’s desire to kill large chunks of Biden programs such as the Chips Act, to curtail immigration, and his so-called war on universities, and one can see just the kinds of barriers Slaughter and Wessel warned about.
The Congressional Budget Office projects a productivity rate of just 1.4% from 2024 to 2054 because of falling support for research, among other factors. Maybe Artificial Intelligence (AI) will raise that number, but the CBO’s projection should raise alarms.
Targeted tax breaks, robust support for R&D, judiciously cutting back regulation, and support for education and training can fuel our economy and make it more stable and Americans richer.
• Keith Peterson, of Lake Barrington, served 29 years as a press and cultural officer for the United States Information Agency and Department of State. He was chief editorial writer of the Daily Herald 1984-86. His book “American Dreams: The Story of the Cyprus Fulbright Commission” is available from Amazon.com.