Why Are Democrats Promising to Raise Prices?

My new column is up at Forbes, and is on the Democratic push to raise the prices of Chinese goods (either through currency policy or tariffs).  This has to be one of the craziest campaign themes of all time -- please, let us raise your prices.

We should be thrilled that the Chinese government and its people see fit to spend their own money to subsidize lower prices for American businesses and consumers.  Last week, President Obama put substantial pressure on the Chinese prime minister to revalue Chinese currency, a revaluation that would have the effect of raising prices of all Chinese goods in the United States.  What possible sense does such a move make, particularly in a recession?

Christian Broda and John Romalis, a pair of University of Chicago economists, have been doing work on income distribution.  A couple of years ago they published a paper that showed how our measures of income inequality may be exaggerated because the metrics assume that both rich and poor experience the same rate of inflation.  In fact, the researches found, over the last decade or so the poor have seen much lower rates of inflation than the rich, in large part due to goods of the type imported by China and sold at Wal-Mart (another institution Democrats like to demagogue against).

Sadly, prices for low-income Americans could be even lower were it not for past protectionist measures.  When one looks at the goods that have the highest import tariffs, one sees the very same goods that typically make up a disproportionate share of the poor's purchases:  Tobacco, clothing, tires, auto parts, fruits and vegetables.  All of these have their prices raised 20-350 percent by import tariffs.

This means that at the same time Democrats have again raised issues of rising income inequality, they are trying to stop some of the most powerful forces at work mitigating these income differences.  There is no question that if Democrats are successful in changing China's currency policy and/or imposing new tariffs (taxes) on Chinese goods, prices will rise for all Americans, but particularly so for the lower income brackets that are supposedly the Democrats' constituency.

The most frustrating part of this whole effort is that it is aimed at a myth: the declining American manufacturing base.  In fact, American manufacturing output continues to hit new all-time highs "” despite the current recession, American manufacturing output today is still 40% higher than it was in 1990.

  • Mesa Econoguy

    Why do they want to raise prices?

    Because these are the same idiots who brought you Obamalinicare (see: Italian Rail), cap-&-tax (raise prices), and much of 20th century price inflation.

    Raising prices is all they know how to do. If it moves, tax it. If it's "socially harmful," tax it, and restrict it. If it's a public good, drive up costs thru subsidization and government crowding out, and then restrict market participants, or eliminate market altogether.

    Seriously, name any Democrat policy change/movement/platform in the past 50 years, and I will show how it resulted in some price increase somewhere.

    [Yes, yes, Republicans do this too, but not to this degree, and not with this historical consistency].

    Another good column, too, btw.

  • me

    I don't think anyone understands. All I can say is that if I were advising a republican presidential candidate, I'd suggest strongly that they campaign on civil rights issues (Obamas record here is worse than Bushes, and it's the one issue the democratic base is most likely upset about) and economic fundamentals (abolish tariffs, lower taxes)

  • Vitaeus

    Could you share some of your sources for the 40% increase in US manufacturing, I tend to not see any evidence that we are increasing in that area.

  • CB

    could you be more specific about what comprises the 'manufacturing base' you mention and where you got your data to support your assertion?

  • Don Lloyd

    But, the Democrats have no monopoly on Congressional stupidity, as 99 of the 178 Republicans in the House
    joined the Democrats in passing the relevant bill this week. Of course, this is just an indication that the electorate as a whole has a depth of economic analysis that has trouble penetrating surface dirt.

    Regards, Don

  • Micah

    I'm also interested in a source for the 40% number.

  • MikeN

    How does changing the unit of measurement, the exchange rate, change what people buy and sell?

  • richard

    Warren,

    The link is not good. You point to Mark Perry's blog, but not to the paper. The same in the Forbes article.

  • Ignoramus

    Is one angle to this that the Chinese can then buy more US debt for a given amount of yuan?

    We're going to need buyers for at least a trillion in excess US debt every year until the end of time, on current trajectory. I expect the Fed can carry us for a year or two by inflating its balance sheet. Then what?

  • Eric Hammer

    Mike: In the short term, it changes how many dollars you have to spend to get the same goods. Say X$ = Y pounds, each of which trades fairly independently within their own countries. When the rate goes to X$ = 2Y pounds, suddenly you can buy twice the amount of British goods for the same number of dollars. Now, it is possible that over time inflation or other things bring the difference back into line, but for a while it means owning dollars gets you more stuff than before.

    Now, if all countries used a free floating currency, or a gold standard, it would react differently, but as it is now that's pretty close.

  • caseyboy

    The push against China is being driven by certain US businesses and the major trade unions. Personally, I don't believe Obama is pressing the issue on behalf of US business, but I could be wrong. More likely its political payback to the unions that supported him and other democrats.

  • David W

    I'll admit, I would like a source for the 40% increase as well; I knew that manufacturing was increasing, but have been unable to back up my assertion in arguments.

  • Ryan

    A 10 second google search gave me the following on the manufacturing output:

    http://www.uschina.org/public/documents/2006/09/us-manufacturing.pdf

    It appears Warren may have understated the increase at 40% unless the reversal in the recession was quite dramatic. From 1990 to 2005 it looks like about a 65% increase.
    Just remember that this is output, not jobs. High tech methods increase productivity and decrease labor.

  • caseyboy

    I wonder if they might be counting the production of frozen Pizzas? What classification would breweries fall under? I wonder if a 6-pack is output of one or six units?

  • donK

    Food production is manufacturing when the goes in a package. Beverage manufacturer applies to Coke and Coors. Total units would be number of unique SKUs but volume and capacity would be measured in non packaged units (gallons or tons).

  • http://dullgeek.blogspot.com dullgeek

    I think the mystery here is solved by recognizing that the purpose of politicians (not just democrats) is not to produce good policy. Rather it's to produce policy that returns votes.

    I tend to be very confident in the wisdom of crowds, when the individuals in the crowd are spending their own money. But I tend to throw out that wisdom when crowd is allowed to spend other people's money. Politicians are trading spending other people's money for votes. A congress person running for office doesn't care about the long term impact of the policy. He/she cares about getting votes. The people voting for that person don't care about the long term policy. They care about getting every other district to bring money into their district while at the same time sending as little money out of their district as possible.

    The policy proposed by the Democrats is an appeal to the manufacturing votes. The manufacturing voters will happily charge everyone else higher prices so that they get paid. It could very well have been a Republican proposing a DOD factory.

    This is just not surprising to me.

  • DensityDuck

    I dunno. Having a domestic manufacturing industry means that there's somewhere for dumb kids to go instead of school. With no domestic manufacturing, the dumb kids are forced to stay in school and make life hell for the smart ones.

    I haven't seen anyone tell me why "cheap underpants and everyone's on the dole" is a desirable societal state, preferable to "expensive underpants and everyone has a job". Everyone just acts like "cheap underpants" trumps every other concern. I guess it's easy to think that way when you're in the tourism industry, which cannot be shipped overseas.

  • Not Sure

    "I haven’t seen anyone tell me why “cheap underpants and everyone’s on the dole” is a desirable societal state, preferable to “expensive underpants and everyone has a job”." - DensityDuck

    So buying underpants from a company located in the US is better than buying them from a company located elsewhere?

    Check.

    But what if that US company is in New Jersey, and I'm in California? Wouldn't the above logic dictate that it would be better to buy from a California company?

    Now, suppose that California company is in San Francisco and I'm in LA. Shouldn't I (according, once again, to the above logic) be buying from an LA company instead?

    Where does it end?

    BTW, DensityDuck, do you make your own soap?

  • Ignoramus

    I don't make my own soap ... but if I'm legally obligated to pay for the housing and healthcare of some other guy's elderly parents it'd be nice if he has a paying job so he can kick in too.

  • Progressive

    It doesn't matter how cheap the crap at wal-mart is if you don't have a job.
    http://www.halfsigma.com/2006/06/liberals_smarte.html
    http://www.time.com/time/health/article/0,8599,1968042,00.html

  • Peter

    You guys are arguing about cheap prices vs local jobs when we could have both. Just get rid of the minimum wage and all of the government regulations that so dramatically drive up costs and we could make cheap products at home. In the construction industry in has come down to deciding if you want to sell products at a price people are willing to pay and therefore remain in business or do you try (i don't believe it possible to succeed) to be 100% compliant with all the government regulations which drives your costs so high that you no longer have customers an go out of business. Most of us try to find a happy medium. OSHA citations for last year were over $100 million. Don't tell me that didn't get passed on to the customer.

  • Dr. T

    The claim that manufacturing output in the USA is much higher now than in the past is exaggerated because the outputs were not corrected for population. One set of data shows that the manufacturing index in 2008 was 6.2 times greater than in 1950. However, after correcting for the doubled population (152 million in 1950 vs. 305 million in 2008), the manufacturing index was only 3.1 times greater in 2008 than in 1950. That's still a solid increase in the manufacturing index, but not a massive one.

    However, all of these comparisons miss the boat, because they look at the dollar costs of manufacturing while ignoring the increased values of our manufactured goods. Example: I bought my first Macintosh computer in 1984 for $1440. That computer had an 8 MHz processor, a 9" black-and-white screen, a 3.5" floppy drive, 512kB of RAM, a typewriter-style keyboard (no number pad and no function, arrow, or navigation keys), and a mouse. Adjusted for inflation, $1440 in 1984 is equivalent to $2935 today. That will buy a Mac Pro with a 2.66 GHz Quad Core dual CPU processor, 3 GB of RAM, a 640 GB hard drive, a CD/DVD reader & burner, an extended keyboard, a mouse, and a 24" widescreen color LCD monitor. The same manufacturing cost provides a product that is as far ahead of its predecessor as an advanced stereo system is to a 1965 portable transistor radio. These vast improvements mean that we can't really compare manufacturing output of today vs. decades ago by looking only at costs, costs per person, or manufacturing percentage of Gross Domestic Product. We need some way to adjust for the values of manufactured goods. If that could be done, it would show that manufacturing today is orders of magnitude ahead of the 1950s.

  • http://nooilforpacifists.blogspot.com/ No Oil for Pacifists

    As I understand it, Broda and Romalis still say inequality is exaggerated among lower income quintiles:

    http://faculty.chicagobooth.edu/christian.broda/website/research/unrestricted/BrodaRomalis%20-%20July%202009.pdf

    However, they appear to have withdrawn temporarily claims of a link to U.S.-China trade:

    http://faculty.chicagobooth.edu/christian.broda/website/research/unrestricted/Clarification.pdf

  • http://www.cms1500form.org cms 1500

    Wow! I am very amazed to know that despite the current recession, American manufacturing output today is still 40% higher than it was in 1990. As much I know not only American Govt but also many other countries Govt are imposing taxes on the Chinese goods to develop and support their local Small companies and businesses.

  • DensityDuck

    @Not Sure:

    So buying underpants from a company located in the US is better than buying them from a company located elsewhere?

    Check.

    But what if that US company is in New Jersey, and I’m in California? Wouldn’t the above logic dictate that it would be better to buy from a California company?"

    Yes, if there is one. But at least with the New Jersey factory the money stays onshore.

    "BTW, DensityDuck, do you make your own soap?"

    Ho, ho, ho. No, I don't make my own soap, but I *do* in fact buy soap from a local lady who makes it herself.