Stagflation

Presidential candidate and convicted felon Donald Trump promised to raise tariffs to pave the way for the elimination of all income taxes. The proposal was universally condemned by America’s most respected economists.

To be sure, eliminating income taxes will resonate with Trump’s populist base. But it will be a formula to lock the US economy in the grip of stagflation.

Trump could hardly be called economically literate. Nor could his first term in office be described as a fiscal success.

In his four years at the White House, Trump cut taxes for the rich. As a result, America’s debt rose by a staggering $8.4 trillion. The Trump presidency accounts for a quarter of total American debt.

Replacing income taxes with tariffs makes no sense at all. It will raise the prices of all goods with imported content for American consumers. It will force Americans to pay for costlier but inferior products produced at home.

The Trump plan will precipitate a trade war with all the other nations, causing the fragile supply and value chains to collapse. The spike in prices will exhaust domestic purchasing power. Because of this, it will not lead to the reinvigoration of American manufacturing.

Those who make the most income pay more taxes under the present scheme. If Trump replaces income taxes with tariffs, the richest Americans will benefit most. Middle class consumers will be harmed severely.

There is nothing that will convince us that revenue from tariffs will be enough to offset revenue from income taxes. A trade war, coming as a reaction to US protectionism, will definitely curtail the volume of trade. This means there will progressively be lesser imported goods on which higher tariffs could be imposed. The final result is lesser trade and lesser tariff revenue.

US manufacturers will not likely benefit from a tariff war. They will lose access to foreign markets retaliating against high US tariffs. Domestic consumers, burdened by higher tariff-driven prices at home, will not likely increase their consumption. The result is crippling stagflation – a condition where prices continue to rise while production remains stagnant.

Stagflation will increase poverty rates in the US. It will articulate in all sorts of social tensions such as blaming immigrants for everyone’s rising misery. If the MAGA base craves for a civil war, this policy will guarantee it.

Trump is not the statesman America needs at this time. He is a populist politician pandering to the reflex reactions of voters.

His proposal to replace income taxes with higher tariff rates might win him the elections. But it will lead the US down the road to ruin.

Rice tariffs

By contrast, our NEDA has proposed a schedule for lowering tariffs on rice and pork imports from about 30 percent to only 15 percent by 2028. The proposal, as expected, provoked intense economic debate.

The thinking behind this tariff-reduction proposal is easy to appreciate. Rice and pork posted the highest price spikes over the past months. They are the main drivers for inflation which ravages the lives of the poor.

A reduction in tariffs will moderate the prices of these two commodities. That will soften the inflation we all endure. A lower inflation rate will allow us to eventually reduce interest rates. That reduction will spur investments in our economy. With the faster expansion of the domestic economy, we will be better able to address poverty and unemployment.

If we ever want to make rice affordable, we will have to cut tariffs on our imports. Government might lose some revenue opportunities, but that will go to seeding domestic economic growth and poverty reduction.

There will be some pain, no doubt. Our rice imports tend to be cheaper than our domestically produced rice. This will be even more so with the looming tariff reductions.

The high tariff wall was meant to protect our inefficient rice sector. If tariffs are lowered, there will be pressure to lower farmgate prices for local rice. Farmers will suffer from lower rice incomes. Consumers, on the other hand, will be spared a rice price spiral.

There is no way we could make our rice farms more efficient and productive if they continue to be protected by high tariff barriers. In the present situation, however, many farmers will abandon the crop if it becomes a losing proposition.

We are already the world’s biggest rice importer. Lowering tariffs will make us even more so. There is, unfortunately, no win-win solution to our rice nightmare.

The original sin happened when we decided to break up our land into small, unsustainable “family-sized” plots. We did that in the name of social justice. But this is terrible economics.

Agrarian reform condemned our entire agriculture to subsistence-level farming. That cannot be the way to feed a growing population.

Our largely subsistence agriculture repels investment in industrializing our food production. It has made food comparatively more expensive. Much of our poverty derives from unproductive farms and high food prices.

The way our agriculture is configured is a curse on the nation. It condemns all of us to a high food price regime, poor rural productivity and immense rural poverty. For as long as our agriculture is trapped in subsistence level farm production, we are doomed to high rates of malnutrition.

Our backward farm system is aggravated by a pathetic logistics system that magnifies the high costs of food, especially in an archipelagic setting.