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Growth Slows as Tariffs Bite

Economic growth slowed in the second quarter of 2019, according to the Bureau of Economic Analysis. It remained above 2% thanks to a combination of personal consumption and federal and state government spending. Business investment, however, contracted. This suggests that tariffs are beginning to harm the economy, exactly as free market economics suggested they would.

It should be noted that the Tax Cuts and Jobs Act (TCJA), all other things being equal, should have led to an increase in business investment. The supply-side incentives of lower corporate taxes and other measures in the legislation, not to mention ongoing deregulation, should have prompted business owners to invest in their enterprises. However, tariffs have the opposite effect, causing business owners to spend more on operating costs rather than investment. The negative business investment numbers suggest that the TCJA has been overwhelmed by the weight of tariffs.

Moreover, even if business owners are investing more in labor costs, as the low unemployment numbers would seem to suggest, the jobs that are being created are the wrong jobs for a healthy economy. This malinvestment will weigh heavily on the economy for a while, and lead to job losses and the attendant economic fallout once the economy corrects itself.

Finally, it should be noted that, despite the protectionist aim of the tariffs, imports are up. This is most likely a substitution effect as supply chains adjust to less affordable sources and American suppliers who are affected by increases in the costs of their inputs are unable to meet previous demand.

The administration should lift its harmful tariffs now. If it is unwilling to do so, Congress should reclaim its authority over tariffs and do so. Otherwise, we can expect an economic downturn over the next few years.

See also the 2018 study “Traders of the Lost Ark: Rediscovering a Moral and Economic Case for Free Trade.”