Epistemic humility

Decision-making under uncertainty

[As noted before, none of the following should be viewed as an unconditional forecast of inflation or RGDP growth. Those will depend on policy actions taken in the next few months by Trump, Powell and foreign policymakers.]

I’d like to use the current tariff controversy as a way of motivating a discussion of epistemic humility. Let’s consider a supporter of high tariffs—how confident should he or she be in their beliefs? Here are some things to consider:

1. Some economists support targeted tariffs to deal with special problems such as national security, but the overwhelming majority of economists oppose the sort of sweeping tariff regime that was recently announced. Opposition is especially strong among the most highly qualified international economists.

2. The financial market response to the policy is sending a clear signal that the tariffs are likely to hurt both the domestic and the world economy. Yes, “Wall Street is not Main Street”, but there are many market indicators pointing to weaker real economic growth, beyond just falling stock prices. These include a slightly weaker dollar, falling commodity prices, and a sharply elevated risk of recession in prediction markets. This certainly does not mean “armageddon” (the level of stocks is still not all that low), but it’s clearly expected to be a net negative.

3. The tiny number of heterodox economists that have supported Trump’s tariffs are known for making highly dubious statements about international economics. There were claims that the GDP accounting identity proves that imports reduce GDP, claims that VATs are like tariffs, claims that tariffs don’t significantly raise the price of imports, claims that bilateral trade deficits are meaningful. These are all EC101 level mistakes that a number of Trump’s advisors have made. One key advisor even claimed that tariffs are tax cuts.

4. Many of the same populists that support this policy also supported Brexit, which the British public now overwhelmingly views as a mistake.

5. Proponents of higher tariffs have made predictions that don’t seem to be holding up. Here’s Stephen Miran, from just a few weeks ago:

“I don’t think there is going to be material short-term pain from the tariffs,” Stephen Miran, chair of the White House Council of Economic Advisers, said Monday in a Bloomberg Radio and Television interview with Saleha Mohsin. “US consumers are flexible. We have options. We can produce stuff at home.”

And here’s the NYT from mid-February discussing Peter Navarro:

In Navarro’s conversation on “The Daily,” he says that the strong economic performance and the low inflation during Trump’s first term — when he imposed tariffs on China — show that tariffs don’t have the downsides many economists forecast. “It’s not going to be painful for America,” Navarro said. “President Donald John Trump has proven that tariffs work for the American people, and they’re going to be even more — much more — important this second term.”

Specifically, Navarro argues that the U.S. is such an important market that foreign companies will cut their prices and accept lower profits rather than pass along the cost of tariffs to consumers. He also predicts that suppliers, such as those that sell parts to automakers, will relocate to the U.S.

Trump’s critics have a different view:

Trump and his critics don’t disagree only about whether they are a good idea; the two sides also have diametrically opposed predictions about what will happen if Trump implements even some of the tariffs he has promised.

His critics — including some Republicans — believe that imposing fees on imports will damage the U.S. economy. They say the possibility has already created uncertainty that is anathema to business investment. When more tariffs are in effect, they will raise prices for consumers and hurt more American manufacturers than they help. (Think of an automaker that will have to pay more for the raw materials and parts it buys from overseas.) Some people who are alarmed by Trump even tell me that they’re quietly rooting for him to go big on tariffs because they think it will damage his presidency.

Based on what you’ve seen so far, which view seems more plausible? And why are the people who until recently suggested everything would be fine now talking about the need for painful “medicine”?

How confident should a person be in their own view of complex economic issues? What if you are wrong? Is that even possible? Is it possible that you might not be infallible? If your name is Peter Navarro, it’s not only possible, it is 100% certain that you have been wrong, at least at one time during your career:

In 1984, Navarro published a book titled The Policy Game: How Special Interests and Ideologues Are Stealing America. Reading it, I get the sense of a young Navarro who was a politically moderate and mainstream economist. He argued against the producers’ special interests that politically win out over consumers’ diffuse but more important interests. He blamed protectionist corporations and labor unions. He observed that protectionism “as a job program or form of income redistribution … fails miserably.” Invoking the Smoot–Haley tariff adopted at the beginning of the Great Depression, he pointed out the danger of retaliation and trade wars: “And as history has painfully taught, once protectionist wars begin, the likely result is a deadly and well-nigh unstoppable downward spiral by the entire world economy.” Elsewhere in the book he noted, “The biggest losers in the protectionist game are consumers.” He also warned against the danger of using national security as a justification for protectionism.

Let’s review where we are so far on the epistemic humility question. You are advocating a policy that is strongly opposed by almost all of the top experts in the field. Many trillions of dollars of wealth has already been destroyed in the asset markets, and asset prices are sending out very strong signals that we are facing economic difficulties that could materially damage the well-being of billions of people. In the developing world, that could mean enormous hardship for many, but even in developed countries there could be a significant amount of pain.

Even the very specific goal of a manufacturing revival is in doubt, as stocks in those companies are down much more than would be expected if we were on the edge of a manufacturing boom. One of the easiest things that foreign countries can promise in negotiations with the US is to buy a few more Boeing airliners, and yet Boeing stock is down even more sharply than the overall market. Previously promised foreign investments are now in doubt.

On the other hand, you are confident that your tiny group of heterodox economists is correct and the mainstream experts are wrong. But how confident should you be if you are a rational Bayesian? Many past statements suggest you have a very weak grasp of international economics. Even worse, all sorts of asset prices are moving in ways that you did not anticipate. Your own views have changed over time, indicating that you are not always correct. If you recently found yourself serving four months in prison, should you reevaluate your decision-making ability?

And what of the fact that Trump’s arsonists advisors put out contradictory statements?Some claim that the tariffs are permanent, and are intended to boost manufacturing. Others say they are merely a negotiating tactic, in which case they would not boost manufacturing. (BTW, even permanent tariffs would probably not boost manufacturing, unless you believe Argentina is an industrial powerhouse and Germany is a basket case.)

Given all of these considerations, is it rational to be highly confident that you are correct and all the experts and the financial market participants are wrong?

How big an ego must you have in order to push the button, when the welfare of billions of people is at stake?

PS. People sometimes ask me what I’d do about the trade deficit. I don’t view the trade deficit as a problem, but if forced to come up with a policy I’d tell the president to do everything possible to boost the national savings rate, including sharply reducing the budget deficit and reducing the tax code’s bias against saving. That would be far more effective than tariffs (which completely failed to reduce the trade deficit during the first Trump administration.)

PPS. Everyone has assumed that Kamala Harris is done. But if we see high inflation and recession in 2025 (which is not at all certain, BTW), this clip will run 1000 times in 2028. She can also say, “The Republicans imposed the biggest tax increase in American history, which fell especially hard on working class people, while cutting taxes on billionaires.” And these videos are always fun. BTW, Matt Yglesias has been killing it on twitter—pretty close to peak internet. Marginal Revolution has also had great stuff.

PPPS. FWIW, I’d encourage Europe, Asia and Canada to stick together in negotiations. Hang together or hang separately. And why does the media refer to “tariffs on China”? The tariffs are not being imposed on China, they are imposed on Americans that buy Chinese goods (which is most of us.) And does Trump understand that the Chinese people are willing to accept 10 times more pain than the American public, which is not used to hardship?

PPPPS. Here’s Matt Yglesias’s subscription bump:

And mine:

Bloggers thrive on bad news. But he has 40 times more subscribers, and infinitely times more paid subscribers. :(