don boudreau write:
Unlike the you I found Duncan Blade’s May 6thth A rant against free trade supporters “Devastating”, I think it tends to be. The Blade writes triumphantly as if we free traders have been caught up in yet another Keystone Cop shenanigan, particularly here our efforts to blame tariffs on inflation. But no competent economist or free trade advocate has committed this ludicrous crime. If so, Blade’s evidence for free traders’ belief that tariffs cause inflation is part of every place, vox.
If inflation means an increase in the money supply, then no, tariffs do not cause inflation.
If inflation means a higher, sustained rate of growth in the price level, then no, tariffs do not cause inflation.
But if inflation means an increase in the price level, then yes, there will be tariffs. do cause inflation.
One of the most useful equations for understanding macroeconomics is MV = Py. (M is the quantity of money (either M1, M2, or some other M), V is the velocity of money, P is the price level, and y is real income.)
Adding tariffs makes the economy less efficient and real incomes are lower than they would be otherwise. Imagine that a number of tariffs were added, resulting in real income being half a percentage point lower than it would have otherwise been. By the way, there are a lot of them. Then, if M and V are unaffected, the price level P will be 0.5 percentage point higher than it would be in the unaffected case. QED.
Does this mean that additional tariffs are the main cause of inflation? Of course not. Half a percentage point in a given year (the year the tariff is added) is just a fraction of the 3 or 4 percent inflation rate. The 0.5 percentage point is a rounding error, considering that inflation has averaged more than 4% per year over the past three years.
