The purpose of this article is to describe what happens when political behavior collides with economic reality, as illustrated in one area where the government is taking steps – tariffs – and another in which debate among politicians is heating up – restrictions on the capitalist system.

Tariffs

Tariffs are very much in the news these days.  Many people applaud the current administration’s decision to impose tariffs against China. After all,  the simple story is that tariffs  reduce our trade deficit with China, support U.S. manufacturers and protect U.S. jobs.  Although, tariffs are a tool with potential benefits, they also come with costs and risks. They can help some parts of the economy and simultaneously harm others.  The question is whether the trade-offs that come with tariffs are worth it.  Simply put, tariffs are a tax paid by exporters and presumably passed on to consumers in the countries into which goods are imported.  If tariffs are paid by consumers in the importing nations, what’s to be accomplished by imposing them? In short, it’s done to raise the cost of foreign goods and thus discourage their consumption. No matter how logical they appear on the surface, these tariffs have knock-on effects.  One study of the Obama administration’s imposition of tire tariffs found that  Americans spent an extra $1.1 billion on tires in 2011.  These tariff s preserved, at most, 1,200 American jobs. That is almost $1 million per job, for jobs paying an average of about $40,000.  If for some reason we just want to help tire producers and their employees, this move makes sense but if we care about consumers it doesn’t make sense.

Socialism

Liberal politicians regularly document the alleged shortcomings of free-market capitalism. Politicians like Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez point to rising inequality and a supposed lack of upward mobility to make the case for socialism. Today, less than half of young adults have a positive view of capitalism.  One piece of proposed legislation  that has caught my attention is “The Worker Dividend Act” which would mandate that companies buying their own shares must also pay out to their own employees a sum equal to the lesser of either the total value of the buyback or 50 percent of all profits beyond $250 million.

Stock buybacks are a way of returning capital to companies’ owners. Why should each one be accompanied by giving an equivalent amount to workers? Wouldn’t the next step be to say, “Whenever a company pays a dividend, it has to distribute an equal amount to its workers”? And wouldn’t that be tantamount to saying that workers own half of the equity of the company? Who would start a corporation in the future if it meant the workers would be entitled to half the gains?

If economic reality is ignored in a political tug-of-war, our politicians run the risk of weakening the very pillars of democracy that the US stands on.  Ray Dalio, Chief Investment Officer at the world’s largest Hedge Fund Bridgewater, sums it up aptly, “ The way forward is for sensible and skilled people from both sides to come together in a bipartisan effort to reform capitalism, so it works well for most of the people.”