When Government Emphasizes Production Over Consumption: Washing Machine Edition

 

The new thinking on the populist right is that US economic policy has long focused far too much on consumption vs. production. Making stuff is important, too! But what does a change in emphasis look like in the real world?

Well, a new research paper from economists at the Federal Reserve and the University of Chicago seems to give a pretty good idea. In “The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines,” Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot find that President Trump’s decision to impose tariffs on imported washing machines did create about 2000 jobs as foreign companies shifted production here — but at a cost $820,000 a job. Although the tariffs generated $82 million for the US Treasury, they also raised consumer prices by $1.5 billion.

More from New York Times reporter Jim Tankersley on the study:

The new tariffs ended a yearslong decline in the price of washers in the United States, which rose about $86 per unit because of the tariffs last year, the authors calculate. But tariffs also raised prices for dryers, largely because manufacturers of laundry equipment used the tariffs as an opportunity to raise prices on things that were not, in fact, affected by the tariffs.

Consumers, Mr. Tintelnot noted in an interview, often shop for a new washer and dryer at the same time. Their costs are similar. Rather than raise prices by 20 percent on washers and throwing off that balance — no one likes an unbalanced washing machine — companies instead raised both washer and dryer prices, by 11.5 percent each. “Given that many consumers buy these goods in a bundle, the price increases were partially hidden by raising the price of dryers,” Mr. Tintelnot said. “That’s very clearly visible.”

It is hardly surprising that the tariffs drove up the price of foreign washers. Perhaps more unexpectedly, they also prompted American manufacturers to raise their prices.

Companies that largely sell imported washers, like Samsung and LG, raised prices to compensate for the tariff costs they had to pay. But domestic manufacturers, like Whirlpool, increased prices, too, largely because they could.

And from the study itself:

… the full impact of consumer prices is only realized once we account for the equivalent and simultaneous increase in the price of dryers, a complementary good not subject to tariffs. Taking the effects on both goods together, the overall tariff elasticity of consumer prices is above 100 percent for the 2018 safeguard tariffs. Despite the increase in domestic production and employment, the costs of these 2018 tariffs are substantial: in a partial equilibrium setting, we estimate increased annual consumer costs of around $1.5 billion, or roughly $820,000 per job created.

There are 11 comments.

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  1. Hang On Member
    Hang On
    @HangOn

    Funny math. That’s 18.3 million washing machines to account for the $1.5 billion, but only 10 million are sold each year. Which means there is some funny accounting going on. But that’s right – it’s an economics study.

    • #1
  2. EJHill Podcaster
    EJHill
    @EJHill

    To sum up the report, instead of taking advantage of the price difference and advertising that to consumers, domestic manufacturers decided to play the short game instead of the long one. Because they, too, are looking forward to the day when they can move production to totalitarian counties and take advantage of their slave labor.

    They may hang us, but damn it, we’ll turn a profit on the rope!

     

    • #2
  3. Mark Camp Member
    Mark Camp
    @MarkCamp

    I’d like to see James’s proposal to encourage entrepreneurship in this key area.

    Perhaps the US Government could subsidize colleges that offer classes teaching bright young Americans how to start businesses in the job creation industry.  Low-interest loans could be offered by Washington to fund companies who are willing to buy AI-driven robots that could churn out high-quality, American-made jobs at very low prices.

    Or I might have that backwards.

    Since the purpose of production in the New Economy is no longer goods and services, but Jobs, and good Jobs have high wages, I get confused.  Do we want low-priced Jobs, so we consumers don’t have to pay $820,000 each for the new Job?  Or high-priced Jobs because high salaries allow the new job-holders to afford the affluent middle-class lifestyle that hard-working Americans deserve?

    Jim’s New Economics always mixes me up.  I’m going to go back and study my Labor Theory of Value.  Anybody lend me a copy of “Das Kapital”?

    • #3
  4. Stad Coolidge
    Stad
    @Stad

    James Pethokoukis: Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot find that President Trump’s decision to impose tariffs on imported washing machines did create about 2000 jobs as foreign companies shifted production here — but at a cost $820,000 a job. Although the tariffs generated $82 million for the US Treasury, they also raised consumer prices by $1.5 billion.

    Both parties do this.  You sound shocked . . .

    Cost per job saved has never been part of a politician’s math.

    • #4
  5. Slow on the uptake Thatcher
    Slow on the uptake
    @Chuckles

    Who cares:  I bought my washer/dryer (Whirlpool, of course) before the tariffs even began to be discussed.

    • #5
  6. Mark Camp Member
    Mark Camp
    @MarkCamp

    It ain’t what economics Mr. Pethokoukis–and his fellow would-be programmers of the US economy–don’t know that gets us into trouble.  It’s what he knows for sure that just ain’t so.

     

    • #6
  7. Valiuth Inactive
    Valiuth
    @Valiuth

    Hang On (View Comment):

    Funny math. That’s 18.3 million washing machines to account for the $1.5 billion, but only 10 million are sold each year. Which means there is some funny accounting going on. But that’s right – it’s an economics study.

    Doesn’t that number include the accompanying dryer? Since the two sell together most of the time? 

    • #7
  8. Randy Weivoda Moderator
    Randy Weivoda
    @RandyWeivoda

    I wonder what areas of the economy suffer when government makes things more costly?  I used to travel to see the Chicago Auto Show almost every year, but do to economic circumstances that I won’t go into, it’s been three years.  So money that I have had to spend on other things like health insurance is money that I cannot spend at American gas stations, American hotels, American restaurants and nightclubs, American museums, etc. 

    Some people complain about our clothing being manufactured overseas and want it made here, again.  But if the average household has to spend hundreds of dollars a year extra for clothes and shoes, you haven’t just kept money out of the hands of those dastardly foreigners, you’ve also kept it out of the hands of American businesses whose former customers can no longer afford their services.  Sorry kids, we can’t go bowling anymore because we only have enough money for the necessities now.  But look on the bright side; when you grow up you can get a job where you’ll be parked at a sewing machine for 8 hours a day.

    • #8
  9. Mark Camp Member
    Mark Camp
    @MarkCamp

    Randy Weivoda (View Comment):

    I wonder what areas of the economy suffer when government makes things more costly? I used to travel to see the Chicago Auto Show almost every year, but do to economic circumstances that I won’t go into, it’s been three years. So money that I have had to spend on other things like health insurance is money that I cannot spend at American gas stations, American hotels, American restaurants and nightclubs, American museums, etc.

    Randy,

    I know it seems logical that your reduced spending on those things shows up as  the economy suffering.  After all, at an individual level, a merchant thinks he is 20 dollars worse off if he doesn’t get your 20 dollars.

    In other words, to us as individuals, money appears to be valuable goods, just like a car or food or a movie.  But for the economy as a whole, that is an illusion.  Just remember this much: At the level of the whole economy, money is worthless.

    In fact, the economy suffers when government intervenes in markets, or fails to secure property rights.  It is

    • the real consumption goods, which
    • the people were willing to pay for with their labor and land, but
    • never get, because
    • they were never produced,
    • because producer and consumer prices and interest rates were distorted.

    It is hard to explain in a short comment, but the only reason that in a healthy economy,  

    • the goods they want
    • where and when they want them
    • at the price they want to pay

    get produced to begin with is because of the signals sent to producers, savers, and investors by market prices and market interest rates.

    Some people complain about our clothing being manufactured overseas and want it made here, again. But if the average household has to spend hundreds of dollars a year extra for clothes and shoes, you haven’t just kept money out of the hands of those dastardly foreigners, you’ve also kept it out of the hands of American businesses whose former customers can no longer afford their services. Sorry kids, we can’t go bowling anymore because we only have enough money for the necessities now. But look on the bright side; when you grow up you can get a job where you’ll be parked at a sewing machine for 8 hours a day.

    Again you are confusing monetary wealth with real wealth. As I said it’s hard to explain in a short note, but what you described is not at all the way the real American economy works. 

    Read Henry Hazlitt’s “Economics in One Lesson”, and articles or books by Thomas Sowell and I think you will start to see why in a freer economy,  your 8 hours of labor gets you a higher standard of living instead of a very low standard of living. It isn’t because you “don’t have enough money.”  If it were, then the Democrats’ ideas would work.

     

    • #9
  10. Randy Weivoda Moderator
    Randy Weivoda
    @RandyWeivoda

    Mark Camp (View Comment):

    Randy Weivoda (View Comment):

    I wonder what areas of the economy suffer when government makes things more costly? I used to travel to see the Chicago Auto Show almost every year, but do to economic circumstances that I won’t go into, it’s been three years. So money that I have had to spend on other things like health insurance is money that I cannot spend at American gas stations, American hotels, American restaurants and nightclubs, American museums, etc.

    Randy,

    I know it seems logical that your reduced spending on those things shows up as the economy suffering. After all, at an individual level, a merchant thinks he is 20 dollars worse off if he doesn’t get your 20 dollars.

    In other words, to us as individuals, money appears to be valuable goods, just like a car or food or a movie. But for the economy as a whole, that is an illusion. Just remember this much: At the level of the whole economy, money is worthless.

    In fact, the economy suffers when government intervenes in markets, or fails to secure property rights. It is

    • the real consumption goods, which
    • the people were willing to pay for with their labor and land, but
    • never get, because
    • they were never produced,
    • because producer and consumer prices and interest rates were distorted.

    It is hard to explain in a short comment, but the only reason that in a healthy economy,

    • the goods they want
    • where and when they want them
    • at the price they want to pay

    get produced to begin with is because of the signals sent to producers, savers, and investors by market prices and market interest rates.

    Some people complain about our clothing being manufactured overseas and want it made here, again. But if the average household has to spend hundreds of dollars a year extra for clothes and shoes, you haven’t just kept money out of the hands of those dastardly foreigners, you’ve also kept it out of the hands of American businesses whose former customers can no longer afford their services. Sorry kids, we can’t go bowling anymore because we only have enough money for the necessities now. But look on the bright side; when you grow up you can get a job where you’ll be parked at a sewing machine for 8 hours a day.

    Again you are confusing monetary wealth with real wealth. As I said it’s hard to explain in a short note, but what you described is not at all the way the real American economy works.

    Read Henry Hazlitt’s “Economics in One Lesson”, and articles or books by Thomas Sowell and I think you will start to see why in a freer economy, your 8 hours of labor gets you a higher standard of living instead of a very low standard of living. It isn’t because you “don’t have enough money.” If it were, then the Democrats’ ideas would work.

     

    You seem to miss my point, Mark.  I want a freer economy.  I don’t want the government distorting the economy by subsidizing some products and leveling tariffs or special taxes on others.

    • #10
  11. Mark Camp Member
    Mark Camp
    @MarkCamp

    Randy Weivoda (View Comment):
    You seem to miss my point, Mark. I want a freer economy. I don’t want the government distorting the economy by subsidizing some products and leveling tariffs or special taxes on other

    Randy,

    When I say that you put forth a belief that is, in my opinion, incorrect, it is not either of these two beliefs.

    Our first disagreement of opinion is about the question below. In economics, to get a valid answer, always start with a valid question: identify the definitions and implicit assumptions.

    You accept it as valid. I don’t.

    Randy Weivoda (View Comment):
    I wonder what areas of the economy suffer when government makes things more costly?

    It implicitly assumes that

    • the structure and process of the production system are static
    • production is virtually instantaneous

    I think that

    • one can assume both things and reach a reasonably truthful conclusion about the qualitative effects on the economy of the a given interventionist action against free markets.
    • one can only do that by considering such a short duration as to make the conclusion practically useless.
    • #11

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