We should have learned that lesson from Richard Nixon’s wage and price controls.
T o hear Donald Trump’s senior counselor for trade and manufacturing, Peter Navarro, tell it, the president’s proposal for a 25 percent tariff on imported cars and auto parts will do everything and nothing all at once.
The tariffs will yield a bounty of at least $100 billion in revenue to the U.S. Treasury, which will be paid not by domestic consumers but foreign producers. American automakers and repair shops will “eat” whatever additional costs are imposed on them, which, we should remember, amount to nothing. In addition, Congress will pass a retroactive tax cut to cover the zero additional costs that consumers will incur as a result of these tariffs. And none of this will contribute to inflation. It makes sense if you don’t think about it.
Meanwhile, in the reality the rest of us inhabit, the Trump administration is attempting to forestall the inexorable consequences of the president’s artificial trade barriers and the unnecessary economic disruption that will accompany them.
“When President Trump convened CEOs of some of the country’s top automakers for a call earlier this month, he issued a warning: They better not raise car prices because of tariffs,” the Wall Street Journal reported. The president himself reportedly left carmakers “rattled and worried they would face punishment if they increased prices,” but all that muscle has not repealed the laws of supply and demand.
“Tariffs, at any level, cannot be offset or absorbed,” one auto parts supplier mourned. “It is difficult to see how imposed tariffs over time would not have some impact on prices,” Matt Blunt, the president of the trade group that represents the largest U.S. automakers, confessed. “The math would tell you, that’s going to cost us multibillions of dollars,” an exasperated automotive executive lamented. “So, who pays for that?” Who, indeed?
Their frustration is understandable. Tariffs do one thing: increase the price of goods. Honest proponents of trade barriers concede as much. Sometimes, their rationale is understandable if not entirely compelling. If a country is being flooded with below-market goods from a competing country to bankrupt a domestic industry, for example, or — more parochially — some favored constituency is being muscled out of the global market by virtue of its own inefficiencies or inability to compete, appealing to tariffs makes some sense. But trade protectionism makes no sense if your objective is keeping consumer prices for targeted goods low in the near term.
The administration’s hostility to prices is akin to a meteorologist artificially adjusting observed air pressure because he doesn’t want it to rain. Prices are only signals, but they convey a universe of information to the consumers. What is the current demand for a product? What are the costs of the industrial inputs that go into making that product? What is the price and availability of the labor used to make that product? What incentives are compelling producers to generate and market that product? That little barcode conveys all this information and more. Governments can intervene in that process and distort the signals that producers and consumers alike intuit from prices, but that leads to undesirable second-order effects we should all hope to avoid.
Some historically literate observers have concluded that, if the administration followed its own logic, it would soon begin to flirt with something approximating price controls. Prudence dictates that we not rule out that prospect despite America’s unenviable experience with fixing prices, if only because posterity’s lessons appear lost on the Trump administration’s top economic minds.
When Richard Nixon implemented price and wage controls in 1971, the circumstances that compelled him to do so were far more dire than they are today. Inflation was rising steadily, as was unemployment. The nation’s far more robust but equally avaricious labor unions and the corporate entities that catered to them were driving up wages and, thus, consumer costs. The dollar was facing serious pressure from abroad as foreign debt holders sought to redeem their American currency holdings for gold. Voters were feeling the pressure, and they welcomed a 90-day freeze (which was later extended, dropped, and reimposed again over the course of Nixon’s presidency) on price and wage hikes — at least, initially.
The experiment proved a costly failure. Inflation was not “whipped,” and unemployment continued to rise. By 1973, the economic disruptions that accompanied price controls produced behaviors that were simultaneously inexplicably illogical but also entirely rational. In their masterly book, The Commanding Heights: The Battle for the World Economy, Daniel Yergin and Joseph Stanislaw detail the unanticipated costs of artificially low prices: “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets,” the authors wrote.
The result of Trump’s leverage on automakers probably won’t be as dramatic as that. Still, if the White House attempts to force carmakers to swallow the new cost of utilizing the North American supply chain — which, especially for cars, is now so thoroughly integrated that total automotive autarky is hard to envision — the pain automakers are willing to absorb would still not shield consumers from the effects of price distortions. Consumers would experience shortages, fewer available options, and lower quality: all conditions that induce some predictable behaviors from consumers and producers alike.
“Automakers may spread that cost between U.S.-produced and imported models, cut back on features, and in some cases, stop selling affordable models aimed at first-time car buyers, as many of those are imported and less attractive if they carry a higher price tag,” Reuters reported. In the short term, carmakers that are less exposed to foreign supply chains may suffer lower revenue to crowd upstarts out of the market. In the long run, “major automakers would have to decide whether to ride out tariffs on a bet that they won’t last,” the dispatch added. But because most car and parts-makers will have to shift at least some additional costs onto consumers, “tariffs will cause annual U.S. vehicle sales to fall to a range of 14.5 million to 15 million in coming years from 16 million in 2024.”
All this is quite unnecessary. It’s a rejection of the hard-learned lessons Yergin and Stanislaw described. By the end of the 1970s, “what had been confidence in government knowledge was now turning to cynicism,” they observed. “The Keynesian paradigm was not what it seemed to be. It was not all that easy to manage the economy by wielding the levers of fiscal policy. In fact, it was not clear, with all the lags and uncertainties, that it could be done at all.” Thus, the stage was set for the Reagan Revolution and the triumph of supply-side economics.
Today, with progressives now decrying unnecessary governmental red tape and talking up the importance of increased efficiency and Republicans emphasizing aggregate demand, we’re through the looking glass. History’s lessons are, however, clear: The Trump administration can declare war on prices, but that’s like doing battle with gravity. The only question that remains is whether Trump and his allies are so ideologically committed to higher consumer costs that they’re willing to respond to the inevitable consumer backlash before that frustration produces corresponding electoral consequences.