- A libertarian think tank is warning tariffs mean higher prices and fewer goods for Americans, and the broader they are, the more prices will increase. Any other explanation for tariffs doesn’t track with economics, the Cato Institute claims.
Fox Business Network host Larry Kudlow recently shared a hypothetical in which the price of one good goes up but the price of another goes down because people have less to spend. It was a defense of President Donald Trump’s tariffs. The Cato Institute, a libertarian think tank cofounded in 1977 by billionaire Charles G. Koch, doesn’t share that perception.
“If Trump’s tariff proposals singled out just one or two individual goods, this hypothetical may have been a valid example of the administration’s (still bad) policies,” vice president and director of the Cato Institute’s Center for Monetary and Financial Alternatives Norbert Michel and research fellow Jai Kedia wrote Monday.
But tariff defenders are missing the economics of it all, the authors wrote. The tariffs in place are broad, and reciprocal tariffs are set to be even broader, they said. So a lot of products will be taxed, and companies tend to pass those extra costs onto consumers. And while tariff-induced inflation might be transitory because it could be a one-off increase, that increase could be substantial and will hurt the economy, they argued. Not to mention, the hypothetical itself suggests Americans will feel tariffs, Michel and Kedia noted.
“Justification for the president’s trade policies keeps getting stranger by the day and moving further away from anything recognizable as economics,” Michel and Kedia wrote.
In a statement to Fortune, Kudlow said: “My friends at Cato seem to disagree with me regarding the effects of tariffs on inflation… I respect their disagreement. But this is surely a disagreement, not a discrediting.”
To be clear, libertarians value free markets and free trade; tariffs can get in the way of that. Still, the Cato authors called tariffs “a recipe for making Americans worse off.”
Consumers are harmed in two ways, Kedia told Fortune. For one, they’ll suffer through an increase in prices. Tariffs are meant to protect the domestic industry from import competition, but it is more expensive to produce goods in the U.S., which in turn means higher prices. Consumer prices hit a four-decade high in June 2022, and while prices are no longer escalating at such a rapid pace, people are still feeling the pain. Secondly, tariffs reduce the amount of products that can be supplied, meaning Americans have fewer goods to buy.
Economists warned tariffs would be inflationary before Trump was elected. Since his victory, the Peterson Institute, another think tank, estimated Trump’s tariffs would cost a typical American household an extra $1,200 a year. Homebuilders estimate levies could mean an additional $9,000 on the price tag for every home; the housing market is at a standstill mostly because so many people can’t afford to buy a home. And transitory or not, the central bank left interest rates unchanged so it can keep an eye on prices while the administration’s tariff and trade policies play out.
“The President has sometimes used tariffs as a negotiating tool, but the administration should understand that the tariffs hurt U.S. consumers just as they hurt foreign producers,” Kedia told Fortune. “As the trade war escalates and reciprocal tariffs start being imposed in both directions, no one is economically better off.”
