The best tariff threat is one you do not have to use

Following up on an earlier post, Reciprocal tariffs as a tit-for-tat strategy in a repeated prisoners' dilemma 

From NY Times:

Trump imposed, quickly withdrew and then threatened to bring back huge tariffs on dozens of countries. Immediately, they began calling and asking what they could do to stop him. “More than 100 countries have already come to the table looking to offer more favorable terms for America and our people,” Karoline Leavitt, the White House press secretary, said at a briefing with Treasury Secretary Scott Bessent on Tuesday. “There has never been a president who has created his own leverage like this president.”

What can Trump get? For starters, some countries are offering to lower their own tariffs on American exports and cut red tape that keeps U.S. businesses out. India said it might lower its tariffs on U.S. farm goods, while Europeans may drop them on cars and machinery if Washington agrees to do the same.

BOTTOM LINE: It looks as though President Trump's Tariff threats are working.

The price of "free" healthcare is the wait

 

While healthcare in Canada's single-payer health care system is technically free, its real price is measured in wait times.  In 2023, the median wait time from a general practitioner's referral to treatment reached 27.7 weeks—the longest ever and nearly triple the 9.3 weeks reported in 1993. (MuskegonPundit)

To see this, think of "free" as a price ceiling of zero.  

• In the short run (Chapter 8), quantity demanded exceeds quantity supplied.  So who gets this care?  Those willing to wait.  In other words, wait times act as prices to ration available supply (AIER). 
•  Even patients whose mortality depends on prompt care--and don't want to pay for care in the US--wait before receiving essential treatments . (Fraser Institute).
• This inefficiency could be lessened by allowing patients to sell their place in line to others.

• In the long run (Chapter 9), fewer providers (physicians, nurses, hospitals, clinics) are drawn into the industry, leading to decreases in supply and even longer wait times, or "prices."  

HT, ZeroHedge: The Wait Is The Price: Quiet Rationing Plagues Canadian Health Care (AIER).

In California, running an auction can land you in jail

Mansion Global: 

Before the palisades fires, a nearbySanta Monica property was listed at $15,000 per month. But afterwards, the landlord held an auction, and there were 10 to 15 offers on the property, and it rented for nearly $30,000 per month.

But,

During an emergency, California law prohibits raising the price of a rental property by more than 10% of what its price was before the state or local emergency was declared.

And so the problem gets worse,

Fears of penalties have worsened housing woes in the city as many agents refuse to deal with rentals altogether. “Because they’re afraid they’re going to be fined, they’re going to lose their license. That’s creating even further a shortage of housing,” Ravitz said.

Earth Day Question: Will the world run out of resources?

Only if you ask an ecologist.

"We are using 50% more resources than the Earth can sustainably produce, and unless we change course, that number will grow fast—by 2030, even two planets will not be enough," says Jim Leape, director general of the World Wide Fund for Nature International (formerly the World Wildlife Fund).

To get the right answer, ask an economist.  They will point out that when a good gets scarce, its price increases, which gives consumers an incentive to conserve or find substitutes, and producers an incentive to find more of it.

But thanks to fracking and the shale revolution, ... [we will find] cheap substitutes for fossil fuels long before they run out.

BOTTOM LINE:  Ecologists could have improved their predictions by studying a little economics.  As a resource becomes scarce due to a decrease in supply, its price goes up which causes two longer run adjustments:  (i) consumers substitute away from the higher priced resource; and (ii) producers find more of it.  

Incentive conflict between the President and the Fed serves a purpose.

WSJ:

On Monday Mr. Trump demanded again that [the Federal Reserve] make “pre-emptive” interest rate cuts to avoid a slowdown.

The Federal Reserve's ("Fed") performance metrics are inflation and unemployment. Presumably, these incentives make the Fed more cautious than the President about cutting rates, as doing so may worsen inflation. The threat to put The Fed under the control of a President who has different incentives would dramatically change their role by changing their incentives. The resulting "...meltdown in stocks, bonds and the dollar, a trifecta of declining confidence," suggests that the incentive conflict between the President and the Fed serves a useful purpose. BOTTOM LINE: In Chapter one, we talked about how to diagnose incentive conflict when it creates problems within an organization. However, organizations may choose incentive conflicts to serve a useful purpose. For another example, many workers and bosses dislike their HR and Legal departments as they seem to pursue different goals than firm profit maximization. However, the resulting incentive conflict can serve a useful purpose by constraining potentially illegal or unethical behavior. EXTRA CREDIT: Think of an incentive conflict within your organization that serves a purpose.

Scale Determines Technology

The robotaxi business is getting another entrant, but also a different kind of entrant. Zoox, a decade old startup purchased by Amazon in 2020, is expected to launch this year. It has developed a vehicle specifically aimed at the autonomous ride share market without a driver seat or controls, sliding doors in the middle, a seats facing each other. No one will mistake the Zoox car pictured below for a sports car, but its features are specific to the purpose.

Most entrants, like GM's Cruise pictured below, have modified "off-the-shelf" cars that will have inefficient vestigial elements from when they had human drivers. 

Retrofitted cars that make sense at small scale, may imply relatively higher marginal costs at large scale.They represent a low fixed cost/high marginal cost technology. Zoox's design represents a higher fixed cost/lower marginal cost technology. Its features are more efficient for short-haul, dense traffic, intracity rides but require more substantial upfront investment. Zoox is banking on realizing economies of scale once the service takes off. 

GM canceling plans for its Cruise suggest that at least they expect a greater scale.

The Egg Market Rebounds

To prevent the spread of bird flu, 166 million birds were culled, most toward the end of 2024. Since the US typically has about 400 million egg-laying hens at any time, this was significant. With fewer hens, the supply of eggs also fell causing egg prices to more than double. Thankfully, this market disruption already appears to be behind us. A recent USDA report shows that production and egg prices have mostly recovered to where they were a year ago. 

 

Damn that's fast. And just in time for Easter egg hunts. Not even the Ag sector expected the recovery of the egg industry so quickly. Just last month, Farm Progress forecasted, "The U.S. poultry industry could take a year or so to recover from the recent HPAI outbreak." They were only off by 11 months.

The speed of this adjustment is a testament to market forces. With prices doubled, egg producers saw a huge opportunity for short-run profits. Hens that might have been "retired" a year ago would be kept in service a bit longer. Chicks that might otherwise have been deemed unacceptable would be allowed to mature. Had the policy response instead been to impose egg price ceilings to prevent price gouging, the blunted profit motive would have weakened the supply response. Allowing the market to operate alleviated the shortage in short order. 

S&P 500 Largest Ten Firm Transitions

The Visual Capitalist produces many wonderful visualizations. This one displays how fast firms rise into and fall out of the the top US 10 firms. 

 

Re-shoring as a response to tariffs?

Google on the re-shoring response to 2018 Appliance Tariffs:

In response to the 2018 U.S. tariffs on washing machines and other appliances, both LG Electronics and Samsung shifted manufacturing operations to the United States, effectively reshoring some production. The tariffs incentivized these companies to establish or expand manufacturing facilities in the U.S. to avoid the tariffs on imported appliances.

...The tariffs were credited with creating 1,800 new jobs in the U.S., but also raised consumer prices by an estimated $1.5 billion, according to one study. The study also concluded that the tariffs resulted in a high cost per job created.

Re-shoring of Nvidia Chips in response to 2025 Tariff threats:

Contract chipmaker Taiwan Semiconductor Manufacturing (TSM) has started production of Nvidia Blackwell chips at its plants in Phoenix.

Contract assemblers Foxconn and Wistron are building supercomputer manufacturing plants in Houston and Dallas, respectively. Mass production at both plants is expected to ramp up in the next 12 to 15 months, Nvidia said.

Reciprocal tariffs as a tit-for-tat strategy in a repeated prisoners' dilemma

Trade policy can resemble a Prisoners' Dilemma game: free trade is the best outcome (no tariffs), but that is not a Nash Equilibrium because any country can do better by imposing tariffs on imports as it helps domestic producers.  The Nash equilibrium is for all countries to impose tariffs on imports.

One way out of this prisoners' dilemma is to play tit-for-tat (do whatever your rival did last period) because it gives foreign countries an incentive to keep their own tariffs low:  if foreign countries put a tariff on imports from the US, their exports to the US will be treated similarly.  

However, President Trump is computing reciprocal tariffs as (Trade Deficit with US)/(Exports to the US).  This measure is determined largely by foreign investment in the US, not foreign tariffs on US goods.  For example, China sells ￥to buy $ to invest in the US to buy US Treasuries.  Such an increase in demand for $ raises the price of a $ relative to the ￥.  The stronger $ makes Chinese exports look cheap to US consumers.  This is both a US Trade Deficit (the US buys more Chinese goods than China buys US goods), and a Chinese Investment Surplus (China invests more in the US than the US invests in China).

As a result of the policy, US tariffs on foreign goods are set to dramatically increase, which will likely lead to tit-for-tat responses from foreign countries which will result in less trade.  From Chapter One, we know that voluntary transactions create wealth, and with fewer of them, we are all poorer.  

It might make some sense to set reciprocal tariffs equal to actual tariffs on a country-by-country basis, i.e.,(reciprocal US tariffs on foreign goods) = (foreign tariffs on US goods). 

BOTTOM LINE: Reciprocal Tariffs, as calculated, would harm the US.  

CAVEAT:  The above analysis ignores: (i) the international nature of supply chains--domestic producers are also importers of foreign goods; and (ii) their harmful effect on consumers. 

HT:  Mike, Donna