Paul Krugman points out that wealth and power attract people who tell you what you want to hear. There are wealthy men with enough humility to accept constructive criticism — “I’ve met some of them. But such men don’t seem likely to play a role in the incoming administration,” Krugman says:
What this means in the current context is that almost all attempts to refute Trump’s claims that he can replace income taxes with tariffs aim too high. I’m a great admirer of Clausing and Obstfeld’s work on the amount of revenue we could possibly collect from tariffs, showing that it couldn’t possibly replace the income tax. Here’s their chart showing that there really is a tariff-rate Laffer curve.
But when Trump or Andreesen ask why we can’t go back to the McKinley era, when the government subsisted on tariffs and didn’t need an income tax, their problem isn’t failure to understand the revenue function; it’s failure to appreciate the simple fact that in the 1890s America barely had a government by modern standards:
Sure, tariffs could pay for a government without Social Security, Medicare and Medicaid, at a time when even the military was tiny. But the constituency for returning to that kind of small government consists, as far as I can tell, of a couple of dozen libertarians in bow ties. And the kind of government we have now needs a lot more than tariffs to pay its way.
Which brings me back to what is likely to happen on tariffs. You might think that it’s obvious that Trump’s announced plans, or concepts of plans, are unworkable. But it’s probably not obvious to Trump — and who’s going to tell him?
So he may really try to go through with this stuff.
