Kevin Hassett Shows Basic Misunderstanding of Trade and Tariffs

Hopefully he's better behind closed doors, but I'm starting to wonder.

One of the slim hopes I had held out for economic understanding in the Trump administration’s inner circle was that Kevin Hassett, currently director of the National Economic Council, would be saying sensible things about trade and tariffs. Hassett was a very successful chairman of the Council of Economic Advisers during the first Trump term, and he did quite a good job of laying out the positive economic effects on household incomes of the 2017 tax cut.

Unfortunately, those hopes were dashed yesterday. Kevin appeared on ABC News’s “This Week with George Stephanopolous,” where he was interviewed by ABC’s Jonathan Karl. The transcript is here.

I’ll quote selected passages and then give my responses.

Karl: Can -- can you just explain in short what is driving the president's decision-making on this?

Hassett: Sure. Let's go through what happened this week because I -- I didn't really think that the way you guys characterize the tariffs made sense to me. So I just want to go back to what happened.

What happened was that we launched a drug war, not a trade war, and it was part of a negotiation to get Canada and Mexico to stop shipping fentanyl across our borders. And as we've watched them make progress on the drug war, then we've relaxed some of the tariffs that we put on -- on them because they're making progress. And so, that drug war is something that's been going on since really the beginning of the Trump administration.

DRH comment: Notice Kevin’s collectivism. He and Trump wanted to “get Canada and Mexico to stop shipping fentanyl across our borders.” But countries don’t do anything. People do. Kevin well knows that the Canadian government is not shipping fentanyl across the border with the United States. It’s individuals who are doing that. And the Canadian government has limited power to stop that. He probably also knows that, as I pointed out in a December 19 article:

As Washington Post reporter David Lynch wrote in a November 26 news story, “During the recently ended fiscal year, CPB [US Customs and Border Protection] confiscated 43 pounds of fentanyl along the northern border, 0.2 percent of the volume seized along the US-Mexico boundary.”

Hassett is too good an economist to think that you can ever use government policy to drive the amount of crime down to zero.

Later, Kevin says:

And now on the reciprocal thing, remember that just about every country on Earth charges a much higher tariff than we do. And so, when we pass an act that says that we're going to have the same tariff they charge us, then you're covering it as if the only possible outcome is that our tariffs go up. But maybe they decide to go down, right?

DRH comment: “Just about every country?” Not quite. In a February 20 article, I wrote:

As Cato Institute scholar Scott Lincicome recently pointed out, forty-four countries have average tariff rates that are less than America’s average tariff rate. Most of those are small countries, but they also include Canada, France, Germany, Italy, and Japan. Will Trump start to lower tariffs against those countries? I’m betting not.

And here’s Kevin at his absolute worst:

HASSETT: Well, I think what the president's tried to do is make it so that when we produce something, we produce it at home. Make no mistake: the trade deficit with Canada and Mexico, they cumulate about a trillion dollars a year. And China, it's one and half trillion.

And in a free market that didn’t have any kind of finger on the scale, then what we’d see would be that those trade deficits would decline over time as currencies adjusted. Be that's not happening.

And so what happens now is, for example, in a typical month, $35 billion worth of cars are imported, and our manufacturers export about $13 billion worth of cars. And those are all jobs that Americans don't have.

President Trump wants to bring the jobs home, bring the wealth – the wealth home, and bring the wages home. And you saw that in the first jobs report. So, what you saw in the first jobs report, after having 110 manufacturing – 110,000 jobs destroyed in the last year of the Biden administration, we had 10,000 created in just the month of February, 9,000 of them are going to be auto jobs, because auto manufacturers and thinking, geez, ahead of the tariffs we need to start to move the stuff back home.

Now, what that does is it bids up the price of labor, it makes wages higher, makes incomes higher, and it makes it easier for people to pay for things. And so, if you’re looking at tariffs in isolation and not thinking about the job creation that tariffs create, then you're doing only half the picture.

DRH comment: Kevin must surely know that trade deficits are hardly affected by tariff policy. If we raise our tariffs, our people buy fewer imports and that gives foreigners fewer dollars to buy our exports, and so they buy fewer of our exports. So it’s an approximate wash.

When we have large trade deficits, we also have large surpluses in foreign capital investment. One of the drivers of large foreign capital investment is that, at least so far, the United States has been an attractive place to invest. Another is that our savings rate is relatively low. You don’t like our large surplus in foreign capital? Then save more and invest it here.

Kevin says, “President Trump wants to bring the jobs home, bring the wealth – the wealth home.” But Trump doesn’t show it. The way to have more wealth, as any trade economist can tell you, is to have fewer restrictions on trade, not more.

Kevin says, “Now, what that [the tariff on car imports] does is it bids up the price of labor, it makes wages higher, makes incomes higher, and it makes it easier for people to pay for things.” No. It makes auto workers’ incomes higher. It makes auto buyers’ real incomes lower, making it harder to pay for things.

And his crescendo, “[I]f you’re looking at tariffs in isolation and not thinking about the job creation that tariffs create, then you're doing only half the picture” is the opposite of the truth. If you look only at auto workers’ jobs, as Kevin is doing, he’s not looking at the whole picture; he’s looking at about 2% of the picture.

Here’s the strange thing. We now have an unemployment rate of 4.1%. Most of us economists are used to thinking of that as full employment. I doubt that Kevin thinks differently. Which means that with tariffs drawing more workers into the auto industry, they won’t mainly be drawn from the ranks of the unemployed; they’ll mainly be drawn from other industries, where, by their choices, they showed that they had a comparative advantage in those industries.

There’s so much mistaken thinking in Kevin Hassett’s answers that showing his answers and asking students to critique would be a good way to test undergrads’ and grad students’ understanding of international trade.

Note: I still have one small hope. That is that Kevin is making these nonsensical statements for the camera, really knows better, and is arguing behind the scenes for freer trade. The only one of the three I’m still confident about is the middle one: he knows better.