“The current average credit card interest rate is 21 percent, but it didn’t get there overnight. In 2008, the average rate was 14 percent, at a time when the savings rate was much lower and consumers were overextended. In 2009, a Democratic supermajority in Congress passed the CARD Act, bringing a bevy of new regulations for credit card companies, such as requiring advance notice of any rate increases and limitations on fees for late payments.
Interest rates began rising immediately following the passage of the CARD Act and continued to rise as the risk-free rate—the Federal Reserve’s overnight lending rate, currently about 4.75 percent—fell to 0 percent throughout most of the 2010s. Objectively, credit card interest rates are high today, but they are arguably high as a direct result of legislation passed at the end of the 2000s. Capping credit card interest rates is simply an intervention to correct the results of previous interventions.”
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“There is a reason that credit cards carry a higher average interest rate than mortgages (7 percent) or car loans (8 percent). Mortgages and car loans are secured lending—the bank has collateral in the event of a default which increases recovery rates. Credit card borrowing is unsecured lending—lenders rely on nothing more than trust in the borrower. When losses occur, they are total and catastrophic. Credit card lending is inherently risky.
The vast majority of borrowers are unprofitable at a 10 percent interest rate. If credit card interest rates were capped at 10 percent, it wouldn’t just disrupt individual finances—it could destabilize the entire credit system. Major credit card lenders, such as Capital One Financial, would likely terminate the accounts of millions of their less creditworthy customers, which could mean anyone with a credit score of 780 or lower. To the extent possible, they might introduce new fees to make up for the loss of interest revenue, but the Consumer Financial Protection Bureau is already taking a hard look at late fees, which can be large relative to small credit card balances.
Customers who lose access to credit would have to resort to cash or debit cards—and find that it is hard to function in modern society without a credit card. Even renting a car or getting a hotel room are activities that require a credit card.”
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“Interest rates are prices—the price of money—and all prices are signals. Capping credit card rates might sound like a win for consumers, but in practice, it’s a lesson in unintended consequences. Policymakers must tread carefully, weighing the broader economic impacts before introducing well-intentioned but potentially devastating reforms.”
We should care about the economy. The economy is people’s lives.
We should think about where markets work best and where the government works better. We should consider the structure and incentives of a particular market.
“a one percentage point increase in imports from China caused a 1.9 percent decline in U.S. consumer prices, saving a representative American household roughly $1,500 a year”
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“prices are not just about prices. When consumers have more purchasing power, they use it to buy goods and services in other, more high-productive sectors. Higher tariffs would lead to lost jobs, and inputs would become more expensive for American producers.
Some research suggests that competition from international trade can lead to better wages in new roles for U.S. workers. A 2017 paper by the economist Ildikó Magyari estimates that the American companies most exposed to Chinese imports expanded employment 2 percent more per year than other companies did. Some of these were manufacturing jobs—with higher wages, because they are in the stages of production where workers add more value—and some were complementary service jobs, in such areas as engineering, design, research and development, and marketing.
Apple offers a fascinating example. Trump has often complained that China is the biggest beneficiary of the iPhone, just because the devices are often assembled there. But when researchers Kenneth L. Kraemer, Greg Linden, and Jason Dedrick disassembled an iPhone 7 in 2018, they found that almost all of its value was captured by Western producers of parts, including hundreds of thousands of American researchers, designers, programmers, salespeople, marketers, retailers, and warehouse workers. China just got 1.3 percent of the price paid for an iPhone, and that offshoring made it possible to move U.S. labor to the more value-added parts of the supply chain.”
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“more than a million American jobs depend directly on exports to Chinese consumers. About 0.5 percent of the U.S. work force would lose their jobs if the U.S. lost access to its third-largest goods exporting market.”
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“more opportunities would be lost in the future, since protectionism reduces competition and innovation. If the United States shuts its doors to the best manufacturers of, say, electric cars, that may save some jobs in the short term, but it will turn the U.S. into a fenced-off auto show for more expensive and less efficient vehicles. American consumers will have to pay much more, and foreign consumers will be much less interested.”
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“A United States bent on decoupling from China risks pushing many more innovators and entrepreneurs to the Far East. On paper there are good reasons to stop the export of sensitive technologies to geopolitical rivals, but what good does it do to fence in a geopolitical rival if cutting-edge producers feel the need to join that rival behind the fence?
One German producer of lasers and chip toolmakers, Trumpf, has faced increased obstacles and costly delays after the U.S. government pushed Germany to restrict its exports to China. In response, Trumpf moved some of its 3D-laser-cutting production to China.”
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“This comes from a company in one of America’s closest allies, a country dependent on America’s security guarantees. Imagine how countries diplomatically closer to China will react if forced to choose between Beijing and Washington.”
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“When economies slow, governments have a harder time keeping the populace satisfied. That often leads them to crack down on dissent. China is now doing the bare minimum to fit into the global order, and it has an awful human rights and civil liberties record at home. There is a great risk that a declining, more isolated, and less interdependent China could be much worse on both fronts.”
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“If a rising power can see a future in which it prospers and is allowed to take its place in the established world order—or become so dominant that it can easily replace that order—it makes sense to hide its strengths and bide its time, as Deng Xiaoping encouraged the Chinese to do. But delay is defeat if further rapid growth seems impossible: if it suffers demographic decline, or if geopolitical rivals decide to starve it of resources or markets. Then the country must either accept that it will never realize its grand ambitions, or lash out.”
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“Xi knows an invasion of Taiwan would result in an economic war with the West that would cause China tremendous pain. But what if China had already been deprived of those lucrative markets and had already lost access to investments and technologies it needs?”
“Any new tariffs imposed by the incoming Trump administration will function the same way as every other tariff: It will drain wealth from American consumers and businesses to enrich the U.S. Treasury. That’s what tax increases do, even when they are proposed by a Republican president and cheered by a crowd of Republican lawmakers, donors, and administration officials.
Indeed, study after study after study has found that the tariffs Trump levied during his first tenure were paid nearly entirely by American consumers and businesses.”
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“The big change Trump is proposing this time around is the creation of a new “External Revenue Service” that will collect tariff revenue. The exact contours of that new agency are still unclear, but it is probably best thought of as a public relations maneuver rather than a meaningful policy change. After all, there’s already a governmental entity that handles tariff collection—that’s the “customs” in U.S. Customs and Border Protection. Changing the name won’t change anything about the transactions that occur.”
“Trump told reporters Monday night that he’s thinking of imposing tariffs of up to 25 percent on Mexican and Canadian goods. The Peterson Institute for International Economics recently published a study finding that such tariffs “would slow growth and accelerate inflation in all three countries.”
Though the details of Trump’s tariffs remain uncertain, he promised in his inauguration speech to establish an “External Revenue Service [ERS] to collect all tariffs, duties, and revenues,…massive amounts of money” from foreign sources. The Secretary of the Treasury was directed to establish the ERS on Monday night by the America First Trade Policy order. Howard Lutnick, Trump’s pick to run the Commerce Department, said that “the External Revenue Service will put up tariffs, or walls that protect you.” They will do just the opposite.
As Reason’s Eric Boehm explains, “The tariffs Trump levied during his first tenure were paid nearly entirely by American consumers and businesses.” Trump has to choose: Complement his deregulatory agenda with free trade policies that decrease the price of consumer goods, manufacturing, and production, or hinder them with protectionism that benefits select industries at the expense of the American people. Let’s hope the president chooses the former.”
“On the campaign trail, Trump pledged to put a tariff of between 10 percent and 20 percent on all imports to the United States, along with a 60 percent tariff on Chinese goods and a 25 percent import surcharge on Canadian and Mexican wares — at least, until our neighbors choke off the flow of all migrants and drugs across America’s northern and southern borders.
This protectionist agenda is far more radical than anything Trump attempted during his first term. It threatens to hamper American tech companies by increasing the cost of semiconductors, depress stock valuations by reducing economic growth and fueling a global trade war, and disrupt the US auto industry, whose supply chains were built around the presumption of duty-free trade with Mexico.
Thus, American investors, executives, and entrepreneurs watched Trump’s first day in office with bated breath: Would his inaugural address and initial executive orders prioritize corporate America’s financial interest in relatively free global exchange — or his own ideological fixation on trade deficits?
Trump’s Day 1 actions did not fully clarify his priorities on this front. In his inaugural speech, the president reiterated his broad commitment to protectionism. Meanwhile, his administration prepared to launch federal investigations into America’s trade deficit in general, as well as the trade practices of China, Mexico, and Canada in particular.
Nevertheless, Trump did not actually establish any new tariffs on his first day in office, as his administration’s arch-protectionists had hoped that he would.
Investors interpreted Trump’s caution as a sign that he would be heeding his advisers’ push for a more limited and incremental tariff policy; stocks rose Monday while the US dollar fell (stiff tariffs would increase the value of America’s currency).
Wall Street’s relief may be premature. Trump appears as ideologically perturbed by America’s trade deficit as ever.”
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“Imposing even a 10 percent tariff on all imported goods would not only harm various business interests, but would also likely increase costs for consumers. Thus, such a duty would harm both Trump’s donors and voters.
If Trump’s first term is any guide, his universal tariff would not even redound to the benefit of American manufacturers, who would be vulnerable to higher costs and retaliatory tariffs from foreign nations. Generally speaking, presidents seek to avoid enacting policies that harm the bulk of their coalition, to the benefit of a narrow band of ideologues. And this is what implementing Trump’s grandest visions for trade policy would likely entail.
Second, the imposition of a universal tariff would roil stock markets. During Trump’s first term in office, he monitored the markets’ performance obsessively, tweeting about it incessantly and suggesting that stock values were a barometer of sound policy, warning in 2018, “If Democrats take over Congress, the stock market will plummet.”
Finally, Trump has recently shown some sensitivity to the interests of his newfound friends in tech, even when those interests conflict with the tenets of rightwing nationalism. Over the holidays, Elon Musk feuded with their co-partisans over the desirability of high-skill immigration and the H-1B visa, which help American tech companies to hire foreign talent. Trump ultimately expressed support for Musk’s position.”
“Donald Trump will soon become the second president to serve non-consecutive terms. Naturally, this invites comparison between Trump and the first president to serve non-consecutive terms, Grover Cleveland. In one crucial respect that juxtaposition is both instructive and cruelly ironic.”
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“When tariffs are too high, Cleveland argued, it means that corrupt politicians and businessmen are able to exploit consumers, often imposing severe hardships through price increases. Just as bad, it means that the government is failing to treat all citizens as equal before the law, instead picking winners and losers in the aforementioned “communism of pelf.”
This was the situation that existed in America during and after the Civil War, when politicians imposed weighty tariffs under the pretext of supporting the nation’s burgeoning business community. While American consumers initially accepted the additional taxation as a wartime necessity, the high rates persisted even after the nascent military-industrial complex had been wound down.
The problem was both simple and intractable: There were thousands of manufacturing, industrial, agricultural, and other business interests that profited from high tariffs. Each special interest group disregarded the national welfare to protect themselves, and as a result, the government accumulated massive surpluses—$113 million in 1886–1887 alone.
Despite this growing crisis, initially, Cleveland did not prioritize tariff reform. For the first two-and-a-half years after taking office in 1885, Cleveland concentrated on rooting out government corruption, which had reached such a nadir that in 1873 Mark Twain dubbed the post-Civil War era as a “Gilded Age.” To the extent that Cleveland’s anti-corruption agenda involved vetoing legislation he deemed financially wasteful, he indirectly picked off some of the rotten fruits that grew from the protectionist tree. However, it was not until 1887 that he shifted his attention to a need for sweeping tariff reform. When he did, he transformed the presidency and America in the process.”
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“Cleveland’s tariff reform proposals passed the Democrat-controlled House of Representatives but failed in the Republican-controlled Senate. Even worse, despite winning the popular vote, Cleveland lost the 1888 election to Republican nominee Benjamin Harrison amid Electoral College disputes in the key states of New York and Indiana. (Unlike Trump, Cleveland accepted his defeat with grace and peacefully ended his term in 1889.) The Republicans took office and passed a high tariff law (framed by future president William McKinley, then an Ohio congressman). The McKinley tariffs raised the average duty on imports by almost 50 percent, and as Dartmouth University economist Douglas Irwin demonstrated in 1998, these tariffs did little to stimulate the economy even as they imposed considerable suffering on low-income Americans.
This is why, just like Trump, Cleveland was able to comfortably get elected to a non-consecutive term by promising to lower prices. The key difference is that, unlike Trump, Cleveland proposed an intelligent solution to the problem—lowering tariffs, not raising them.
Unfortunately for both Cleveland and the Americans of his time, he would not live to see his vision for tariff reform realized. America plunged into an economic depression shortly after he took office in 1893, compelling Cleveland to confront a number of unrelated crises before he could get to tariff reform. By the time a tariff bill did reach his desk in 1894, special interest groups in both parties had diluted it almost to meaninglessness.”
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“Tariff reform along the lines Cleveland advocated would not become the law of the land until the Underwood-Simmons Act of 1913, which was promoted with far more political effectiveness by Woodrow Wilson, the first Democratic president to serve after Cleveland’s administration. By then, Cleveland had been dead for five years.”
“Trump’s position on tariffs begins with his longstanding misconceptions about international trade, which he erroneously views as a zero-sum game with rules that are rigged against the United States. “We’re subsidizing Canada to the tune [of] over $100 billion a year,” he told Kristen Welker on Meet the Press. “We’re subsidizing Mexico for almost $300 billion.”
Trump was referring to U.S. trade deficits with those countries, which are about half as big as he claimed. Those gaps between exports and imports are not subsidies; they reflect goods that Americans voluntarily purchase, which means they get something of value in exchange for their money.
As Trump sees it, however, trade deficits are inherently bad, and he aims to eliminate them by imposing tariffs. Although that is feasible only if tariffs raise the cost of imports, making them less competitive with domestically produced alternatives, Trump contradicts that logic by insisting that tariffs do not raise prices.
“Americans are not paying for the Tariffs” on Chinese goods, Trump averred in 2019. “They are being paid for compliments of China.”
Trump, the self-described “Tariff Man,” clearly does not understand how tariffs work. They are taxes collected from importers, not from the exporting country.
In theory, exporters could respond by cutting prices, or importers could swallow the additional cost. But study after study has found that the cost of tariffs is paid mainly by American buyers of intermediate goods and finished products.”