Does History Show Trump’s Tariffs Are Doomed to Fail?
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Is capitalism still alive and kicking in the United States? Sometimes it doesn't seem so with both political parties now pursuing higher taxes and industrial policy.

But never fear, Phil Graham is here to talk about his new book, The Triumph of Economic Freedom, debunking the seven great myths of economic capitalism. Welcome. I'm Paul Gigo with the Wall Street Journal Opinion Pages and here for Potomac Watch, our daily podcast. And with me today, Phil Graham.

economist and former senator, one of the heroes of Reaganomics in the 1980s. And I'm grateful to say he's still writing for The Wall Street Journal, still producing a lot of excellent copy for us and fighting for the causes of economic liberty, which, of course, requires constant attention, as we all know.

And he's written this new book with economist Don Boudreau, who also writes for us from time to time. So welcome, Phil. Thank you, Paul. So why this book now? Well, I noticed when I got to Washington that when I tried to explain things to people, that their conception about how the world worked and what happened at various points

critical times in American history made it very difficult for them to accept views that I thought were clearly backed up by the facts. And in fact, the more I've looked at it, Jefferson said, good men with the same facts are prone to disagree. But if you had the Republican Senate leader and the Democrat Senate leader here, and you asked him where they stand on public policy, they would be

miles apart. But if you then ask them, what happened to working people during the Industrial Revolution? How successful was progressive era regulation? What caused the Depression? Was manufacturing hollowed out by trade at the end of World War II?

what caused the financial crisis and their views on inequality and poverty, they would be completely out of sync. And unfortunately, the view that capitalism failed in these cases is conventional wisdom. So the objective of the book very simply is in each of those areas to present

the undisputed facts and then present what we call the myth, which is basically in almost every case conventional wisdom. And then we set out to debunk the myth. And of course, it's up to the reader to use their good judgment whether we succeeded or not. But I think we did. Well, yeah, you just sort of recounted some of the historical myths. Four of the myths I see in the book of the seven you cite are really

correcting the conventional wisdom about economic history. Did the Industrial Revolution impoverish workers? I think your argument is, no, it elevated them. It created them. Yeah, well, you know, there's a huge gap between Victorian-era literature and British history.

And if you read Victorian-era literature... Dickens. Yeah, Dickens. A perfect example. 1846, wrote the book, came out in December. And Dickens, because our knowledge is what we learned in the past...

And as Dickens looked at the history of the world that he had known or read about, we had had no economic growth really from the fall of the Roman Empire to about 1800. So the point of the book is that the only way that poor people can ever be elevated is through charity. But what he didn't realize is that at that very moment that the level of economic growth was expanding faster in Britain than it had ever

ever expanded in the history of man on this earth. And in fact, Ebenezer Scrooge, a wealth hoarder, was basically accumulating wealth and investing it to build the railroads, to build the factories.

And he was funding this revolution that was occurring. And if you look at Britain in the 19th century, no people on this earth have ever seen their living standards grow faster until the same event occurred in America. And yet the Victorian literature and, in fact, the critique of that whole period

is that you saw the horrible things that were happening in London as people flooded into London because there were opportunities, right? And a lot better opportunities and lifespans than you'd get in the British countryside in an agricultural profession. I mean, we've seen that happen throughout history in India, for example.

They have pursued a more capitalist policy since merely the 1990s. And Mumbai, if you look at it without going there, you'd say, well, there's an awful lot of horrible things here. I mean people are living in terrible conditions. But go out to the countryside. Peter Robinson: Exactly. Well, in the late 1800s, people saw the working poor in rural areas.

from the veranda of the manor house across the creek, and it looked romantic. But conditions were terrible. Opportunity was nonexistent. And so when the factories came, it gave people an opportunity to vote with their feet. And conditions were bad in the city, but they were better than they had been on the farm.

And people came to the city looking for opportunity and freedom. And by every measure, from income to lifespan to literacy, they found the opportunity. And as now a young, famous British historian has said that, in essence, it may make historians feel good to talk about how terrible things were in the Industrial Revolution, but it's bad history.

So it's just an example of how we see the world really has a profound effect on our assessment of the facts. Example in my case, I grew up in a working class family. No one in my family ever graduated from high school until my brother. And, you know, I saw opportunity everywhere. And so if somebody is going to convince me

that Bernie Sanders is right, that the system's fixed, you can't get ahead. They're going to get up mighty early in the morning. And that's the way we look at how the world works really profoundly affects the conclusions we reach in reading history. We're going to take a break. And when we come back, we'll talk about the lessons of the financial crisis of 2008 when we come back.

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Welcome back. I'm Paul as you go here on Potomac Watch with Phil Graham and talking about his new book, The Triumph of Economic Freedom. One of your chapters that I really like in part because I reported on that period was the 2000s and the run up to the financial crisis and panic and the conventional wisdom that flowed from the failure of the banks, the trouble that the banks had, the housing collapse.

was that it was all a matter of deregulation. It was all a matter of greed on the part of banks. And I covered that era and I've looked at all the evidence and it's simply not true. No, that's right. And you have zeroed in on this.

And of course, one of the charges about deregulation relates to your banking bill. Bill Clinton signed. And it's defended against all enemies, foreign and domestic. So what do you think was the culprit? What were the culprits for the housing boom and bust? Well, there was really one culprit. And that culprit was American housing policy.

that was trying to force private wealth to serve public purpose. And you can go back actually and

identify the day it started. And that's when Clinton, in his campaign, came out with his proposal to use pension fund investments to promote public purpose, arguing that the return would be similar and society would benefit more. And then when he was elected, even the unions weren't willing to let their pension funds promote somebody else's interests.

And so he turned to HUD, and HUD started by putting pressure on the lending authorities, Freddie and Fannie. And then Congress imposed a series of quotas on how much of their holdings of securitized mortgages had to be in subprime. And by the time the wheels came off,

Over 50% of the loans being made were to people who weren't capable of paying them back. Because the standards had fallen. Yeah, to collapse. Low down payments, 3% down payments. Or zero in many cases. So-called liar loans, where you didn't have to produce a real documentation about your income. Well, and also, we now have...

the documents from inside Freddie and Fannie as to what their risk management people thought. And they were all going crazy that we're taking risks that are totally unjustified.

This is going to create a crisis. And so their people were telling them, but you got to remember, they faced three different quotas set by Congress. Banks held so much in the way of mortgage-backed securities because...

The regulators set mortgage-backed securities as equivalent to government bonds. Trust is safe, supposedly. Yeah. So the question then is, why did they make the loans? Why were banks holding so many of them? Well, the answer is all because of government.

Now, Obama came in and said, well, it was predatory lending and that greed. But there is no evidence to substantiate that. And also, as you mentioned, if you go back 20 years...

Every bill adopted in 20 years added two regulations and provided more budget for regulators. Graham Leach Bliley did allow banks to expand through holding companies that were well capitalized, but it didn't deregulate anything. They had the same regulators.

the same regulations, and they were regulated independently. And they couldn't shift capital among each other unless the government approved. So there was no deregulation. Government created the problem by destroying lending standards. And then interestingly, when President Obama won the election, we rewrote the bank laws

to expand government's power and didn't touch the housing laws. - The politicians at the time did not want, they said, "Oh, we can't touch the housing laws because we'll tank the housing market again. We have to let it grow again and expand." And of course, we are about to make the same mistake. - Again, yeah. - Let's talk about another myth that you write about. And it's obviously very relevant today through trade policy. And that is that free trade

has, over the decades, hollowed out American manufacturing and hurt American workers. It's really one of the main justifications that President Trump uses for his tariffs. You say that that's not true. Well, first of all, there's been no hollowing out. We produce more manufactured products in terms of value today than we've ever produced in history.

What happened is, is that in 1953, we reached a peak of the percentage of the labor force that hired in manufacturing. And that has declined on a secular basis from about 33 percent of the labor force down to 8.1 percent.

But we ran our last trade surplus in 1975. We produced two and a half times as much manufactured products in value terms as we did then. And we run a trade deficit every day since that period. So, one, there's been no hollowing out. Two, there is no evidence that

that tariffs benefit a nation in terms of its ability to produce or the availability of goods or real living standards.

And we've had tariffs going back almost 300 years. In fact, a major cause of the Revolutionary War were British tariffs. Americans have always hated tariffs and never tolerated them for very long. It is true that at the beginning of the republic, the federal government didn't have the power to tax income.

They tried to tax whiskey, and it caused the whiskey rebellion. And so they funded the government largely with tariffs because they were easy to collect as goods came in. And often if they were low, people didn't even know they were paying them. And Alexander Hamilton understood you've got to keep them low or else people don't import, you don't collect revenues, and they smuggle.

So then in 1828, and I'm not going to go through the whole history, but that was the first time that Congress arguing that they were helping domestic business, but also they wanted to fund all these public works. And so we had the tariff of abominations. There was a political revolt against it.

And within a year, we'd had a turnover in government. And that has been the pattern. Now, final point on the 19th century. From the time that the tariff of abominations was repealed until 1860, tariffs in America fell by 70%.

And during that period, the country industrialized at 6.2% a year. Never in the history of man on this earth had there ever been industrialization at that pace. Okay. And you've got a lot of great history in this book about that, much more into the 20th century and the Smoot-Hawley era and so on. But I want to ask you about the current moment because...

There's a lot of arguments that says, "Look, China is a special case." Okay? What they've done is they practice mercantilism. They subsidize manufacturing in their country.

that allows them to export and flood the world with all kinds of goods at below rates that other countries can build and the prices. And therefore, they put jobs out of business in whole sectors of the world. And I think the Chinese trade surplus now in the world is something like a trillion dollars a year. I mean, it's enormous.

Is China a special case on trade because of its practices? Well, first of all, if everything you said about China is true, and largely I think it is true, the president imposed tariffs

on almost 140 countries. What does China have to do with Great Britain? The EU has lower average tariffs than we do. We have a free trade agreement with Mexico and Canada, and the president has imposed massive tariffs on them, abrogated unilaterally an agreement adopted by law by the Congress. So let me go to China. China

does subsidize industries. My experience in looking at it is that most of the subsidies, as you would expect, are thrown away because they're subsidizing non-competitive industries for political reasons. Mm-hmm.

Domestic employment, principally. Yeah, domestic employment and sort of domestic stability. And you've got a province that's important politically, and they've got a major facility, and it's non-competitive. And countries have a hard time accepting creative destruction. And that is when new technology comes, new tastes come, it destroys things as well as builds them.

But anyway, I sort of have a reaction when I hear, you know, they subsidize electric vehicles. Well, what are we doing?

- subsidizing electricity. - Yeah, exactly. And we're now into all this industrial policy and doing the very things that we accuse China of, and we're not doing them any more effectively than they are. - Let me give you a specific case in shipbuilding, okay? Right now, China has an overwhelming shipbuilding capacity advantage over the rest of the world. And our shipbuilding capacity has really diminished. Yet if we got into a hot conflict,

and we lost ships, we would not have the capacity, the workers or the industrial base, to be able to build those ships rapidly enough to reinforce our forces in any kind of an extended conflict. Is something like shipbuilding...

which has defense ramifications, an exception to where the government should stay out of setting industrial policy. Yeah, clearly it is. Even Adam Smith recognized the defense argument. The problem, Paul, is the Jones Act was a national defense act.

The Jones Act was an argument that we need to be able to build ships and deliver goods among states in the Union because we need that capacity. That was a 1920s era statute? Yeah. And now it has destroyed our merchant marine.

It's cheaper to ship oil from Saudi Arabia to New York than from Texas to New York. And the problem is implementation. How do you do it? Secondly, you've got a question, and that is, when I came to Congress, I was on the Armed Services Committee and the Defense Appropriations Committee first. And we were then looking at a come-as-you-are war.

that the idea that we were gonna ever fight another World War II type war where we were gonna have years to industrialize was absurd. And so if you wanted it, you better build it. And I'm not sure we're out of that period. It's so hard. I found in doing defense work that everybody I dealt with that really knew something had a vested interest. And so I had a very hard time

Sort of separating out that vested interest and getting the facts. I look back to rumors that were passed through the Armed Services Committee about the Soviets had these tanks that had porcelain interiors and they couldn't be knocked out by any of our tank weapons. Well, hell, we proved in the Middle East that you don't need to penetrate turrets. You just knock it off. Yeah.

So, yeah, there is a defense argument. I think we need to look at it. I think we need to be very selective and be sure that we're building things that we really need. And remember, when you're doing that and you're paying 50% more for them, you're getting less defense. A perfect example

The president just imposed a 50% tariff on steel and aluminum. We are in the process now of trying to rebuild our stock of munitions because of Ukraine.

We're in the process of replacing equipment we gave Ukraine. And we just are committing to $100 billion of new defense buildup. Well, every one of those items has a large component of steel and aluminum. So we have raised that price by 50%. At the very moment, we're getting ready to do a major defense buildup. It's as if we've been blockaded.

by a foreign power, and we can only get 50% of those items into the country. So we have done to ourselves what belligerent powers historically try to do. We've done to ourselves what the Germans did to Britain during the naval situation in Britain, where you had the submarines attacking. Marking all the merchant ships from lead leases.

All right. We're going to take another break. And when we come back, we'll talk about the political impact, especially for the Republican Party, if the present tariffs continue when we come back. The spirit of innovation is deeply ingrained in America, and Google is helping Americans innovate in ways both big and small.

The Department of Defense is working with Google to help secure America's digital defense systems, from establishing cloud-based zero-trust solutions to deploying the latest AI technology. This is a new era of American innovation. Find out more at g.co slash American innovation.

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Welcome back. I'm Paul Gigo here with Phil Graham talking about his new book, The Triumph of Economic Freedom. I want to ask you about the Trump trade policy so far. Now, before Trump came into power the second time, the average U.S. tariff on all goods was about 2.4, 2.5 percent. That's right. Okay. Now it's upwards of at least 15 percent. The Fed thinks it's about 18 percent, depending on how you calculate it.

Either way, that's a huge tax increase. So why haven't we seen more economic damage so far from the tariffs? Because you had a surge of front running of the tariff.

where you brought a lot of goods in, many of those tariffs are still in limbo as to what the president's ultimately going to do. Right. You've got many companies that aren't laying off people because they don't know if the tariffs are staying. If they knew they were staying, they would lay them off.

They're not raising prices because they don't know what is going to happen in terms of supply. But this won't last. I am fearful that this last tariff action on steel and aluminum is so big that it could potentially, it's going to affect all of manufacturing, all heavy manufacturing. That with the uncertainty and the higher tariffs that are already in place could tip us into a recession.

Obviously, I don't want that to happen. And I'm not against these tariffs because I'm against Trump. I want Trump's program to succeed like all Americans should want the program to succeed. But these tariffs, based on everything we know in American and world history, are going to fail. In the first term, Trump imposed tariffs.

You were highly critical of them. Certainly, I was highly critical of them in the journal's columns. But the economic impact, first of all, they're relatively small compared to these ones now. But the tax cut and the reform and deregulation, I think, offset the damage from the tariffs. This time, I'm concerned that what we're doing mainly on the tax bill is just extending the current rates. And the bang for the buck

in terms of growth isn't really there in the tax bill. So we won't get enough. I mean, there'll be real benefits from deregulation as it goes ahead, but there's not gonna be enough there to offset the economic harm from the tariffs. Well, let me go back to the first term. In 2017 and 18,

The economy really moved. We got a 13-year high in GDP in 2018. And then Trump imposed his tariffs. Now, they were tiny compared to what we're looking at now. But his objectives in the tariff were to reduce the trade deficit. The trade deficit went up, not down. His objective was to increase industrial production. It went down, not up.

His objective was to increase employment and manufacturing as a percentage of total labor force that went down, not up. His tariffs, even though they were small and we survived them, achieved not a single one of his objectives.

Now they are so large. I mean, people forget we're getting into the low range of the smooth hauling tariff here. This is a big deal. And the world, I mean, Canada and Mexico, you know, we are now economically one country. When you look at those numbers of how many times component parts come across the border. Six, seven times for a car. And it's just, you know, if I were in Congress,

And I couldn't stop this legislatively. I think I would try to cut NAFTA out of it and basically say this was an act of Congress when we put this into place. And we're going to overturn the tariffs that apply to Mexico and Canada. We could help ourselves a lot by doing that.

Interesting. Political impact here, and we'll end on this note, but the political impact of tariffs. You've written for us that you think that if on the present course of where the president is on tariffs, Republican Party is going to suffer in 2026. Why don't you elaborate on that?

Well, first of all, we've got data on this to go back for the whole history of the country. The tariff of abomination. And the Smoot-Hawley. You know, we lost the presidency for 20 years as a result. Smoot-Hawley Act of tariff act of 1930. Yeah. And you go all the way back.

The president likes to talk about the McKinley tariff. McKinley lost his seat within a year of promoting that tariff. Before he was president. Yeah, before he was president. And then when he became president, as you know, he decided that the era of protectionism was over.

And that our challenge was finding a market for the products we produced. But in any case, the president missed that part of McKinley history. But in any case, basically, there's no doubt about the fact if the president cannot find a way

to get out of these tariffs soon, that we're going to end up having a bad election cycle. And historically, you tend to have a bad one in the first midterm election anyway. I guess George W. Bush is the last one that actually increased his majority, but it doesn't happen very often. So what the president really needs to do is find somebody who understands that

that reciprocal trade agreements mean we reduce tariffs, they reduce tariffs, and everybody benefits, and to go out and negotiate these things. And I would start with Britain. There's no reason that we don't have a free trade agreement. Well, he says we've already struck a deal with Britain. Yeah, we have. But you know what the deal with Britain was?

We had such a big club in their political situation is such that they basically gave in and took a 10% tariff. But the EU is not going to do that. They're going to retaliate. And you've got an interesting situation in Canada because you've got the prime minister who was the head of the central bank and who understands these things. And so his dilemma is,

He's under political pressure to retaliate, but he understands that retaliation, imposing tariffs in Canada, hurts Canadians. Right. So he is suffering from too much knowledge. Well, we shall see. That's good advice to the administration about what the president could do to get out of this. I think there are people inside the administration who are urging him to do those kinds of deals you say.

suggest as the exit strategy for him. I'm not sure the president thinks of it that way. He's got other people, as you know, Peter Navarro and others who think tariffs are virtuous for their own sake. Phil Graham makes a compelling argument that that is not true, both historically, economically, and also politically. So Phil, I want to thank you for coming in. He's got a new book. It's called The Triumph of Economic

Freedom, Debunking the Seven Great Myths of American Capitalism with his fellow economist, Don Boudreau. Thanks for writing it and thanks for coming in, Phil. Oh, thank you, Paul. And thank you for what you do at the Wall Street Journal. God bless you. I appreciate that. Thanks, everybody, for listening. We're here every day on Potomac Watch. The spirit of innovation is deeply ingrained in America, and Google is helping Americans innovate in ways both big and small.

The Department of Defense is working with Google to help secure America's digital defense systems, from establishing cloud-based zero-trust solutions to deploying the latest AI technology. This is a new era of American innovation. Find out more at g.co slash American innovation.