This article was published by The McAlvany Intelligence Advisor on Wednesday, September 18, 2019:
Economist Murray Rothbard was a central intellectual figure in economic thinking called the Austrian School. He brilliantly applied common sense to the study of economics that Keynesians had distorted out of all proportion.
One of his primary principles rankles Keynesians to this day: Consumers determine prices, not producers. Accordingly, those producers exist at the mercy and discretion of consumers.
Staffers at National Public Radio (NPR) bought the Keynesian line. They were sure that not only could they show that Trump’s tariffs were costing suppliers dearly, but that those suppliers were going to pass on those costs to consumers. Staffers from NPR went shopping at Walmart to confirm its pre-ordained conclusions.
In August 2018, NPR staffers began tracking the prices on some 70 items at a Walmart store in Liberty County, Georgia, ranging from toilet paper and black beans to lightbulbs and TVs. They got a surprise when they learned that of those 70 common everyday items, only 24 of them saw increased prices, 12 of them saw decreased prices, and the remaining 34 saw no change in price.
The staffers had to backtrack on their preconceived notions: “Many makers and sellers have so far chosen to absorb most of the tariffs, spread them across dozens of [other] items, or pressure suppliers to bear more of the burden.” They added, “Some prices actually declined. The two most expensive Chinese-made items in NPR‘s basket got cheaper: a TV by 12% and a microwave by 17%.” And price hikes on some items “had more to do with bad weather and low catch rates [for cod, which jumped 66%] than the trade war.”
NPR certainly expected different results. In May, it had already made up its collective mind with its headline: “New Round of Tariffs Takes a Bigger Bite of Consumers’ Budget,” expecting “the prices of things we buy, from floor lamps to canoes and bicycles … to go up literally overnight.”
That echoed expectations from Katheryn Russ, an economics professor at the University of California at Davis, who predicted that tariffs would cost consumers $500 a year. JPMorgan researchers calculated that the cost to consumers would be much higher: between $1,000 and $1,500 a year.
In the real world where real business owners have to make decisions based on all available information, many are making adjustments. Jim Kittle, the owner of Kittle’s Furniture in Indianapolis, managed the initial round of tariffs last fall by pressuring his Chinese suppliers to absorb most of their impact. The cost to his customers amounted to three percent.
Macy’s CEO Jeff Gennette told CNBC that consumers have “no appetite” for price increases. Earlier this year, the giant department store chain tried to raise prices on luggage, housewares, and furniture, but shoppers weren’t interested. Macy’s, noted CNBC, “had to adjust accordingly.”
This reveals just how prices are set in a free market: not by suppliers or sellers, but by consumers. Keynesian statist economic theory still teaches at nearly every college in the land that prices are set by costs of production, and consumers are left either to pay them or not. But of course consumers have many options: to purchase or not to purchase, to make a counter offer, to wait for sales that offer discounts, to shop elsewhere, or put off making the purchase until later. As Rothbard put it: “prices are determined by ultimate [consumer] demand … and not in any sense by the “cost of production.”
NPR , without explaining how, concluded that the overall costs of those 70 items tracked since last August have increased by three percent. Whether they used “weighted” averages or just ran a simple addition-subtraction-division calculus doesn’t really matter. In that same period of time, the favorite measure of price increases used by the Federal Reserve – the Personal Consumption Expenditures Price Index, or PCE – shows price increases across the board and across the land at between 1.3 and 1.4 percent on an annual basis. If that is so, where is the impact of Trump’s tariffs? Shouldn’t PCE be higher? According to the U.S. Labor Department, current inflation (sic: price increases) rates have been steadily dropping. Its latest read is that price increases have slowed by one full percentage point since last August, when NPR began its Walmart shopping.
So, who’s eating the tariffs, if not the US consumer? Part of the answer lies in the present state of increasing deregulation, allowing firms to operate more efficiently under less government interference. Part of the answer is competition: entrepreneurs continue to come up with ways to make things more efficiently. Part of the answer is China’s manipulation of its currency, reducing its value so the impact on US importers is lessened. But that means that the Chinese consumer, using the cheaper currency, can buy less with that money. Translation: the Chinese consumer is bearing much of Trump’s burden, not the US consumer.
The best news of all is this: Mr. Trump’s tariffs aren’t designed to bring American jobs back home. Only business owners can make that decision and many of them are moving jobs out of China to places like Vietnam, not Detroit, Toledo, or Pittsburgh. What those tariffs are designed to do is bring the reluctant but self-aware Chinese communists to the negotiating table before their economy craters completely. Following an enforceable agreement, tariffs are likely to be greatly reduced, with tariffs on many goods dropping to zero.
That, according to Wall Street seers, should drive the Dow close to 40,000. Once the headwinds of Trump’s temporary tariffs are removed (having accomplished their intended purpose), entrepreneurs will be able to lure sovereign shoppers and consumers with ever-lower prices.