It's bananas, cont. Or: They are not always "intelligent designs."

With respect to the impact of Biden's tariffs on lithium-ion batteries, critical minerals, and permanent magnets imported from China (which are used in EVs and wind turbines), Investor News reports:

Jack Lifton, Co-Chair of the Critical Minerals Institute?(CMI) and a key speaker at the upcoming Magnetic Metals Show?in Pasadena, CA, shared extensive insights into the economic implications of these tariff adjustments: “This allows American producers of these items to raise their prices and maintain those increased prices. All permanent magnets and magnet-enabled devices from China will now face a surcharge of 25% of the value of the contained magnets. This represents an opportunity for the mining industry as they can now increase the prices of their rare earths, rare earth metals, and alloys.” Lifton further elaborated, “The supply chain is significantly impacted here. However, I want to caution that this allows the maintenance of high prices for these items in the United States and encourages price increases because many in the rare earth sector, especially the junior miners, are not profitable. By adding 25% to the price, they can sell their rare earth elements for 25% more, based on the contained value in a magnet from the Shanghai metal market, for example. This could make them profitable. Therefore, this change is going to trickle down to the miners and will definitely have an impact. This is a significant shift because, interestingly, a 45% tariff on magnets implies that, since the prices of magnets and rare earths fluctuate daily, the tariff ensures that the price on the day of sale or purchase will be 25% above the stated Chinese price, likely from the Shanghai metal market. This is a substantial boost for the rare supply chain. I’m not sure it benefits the American consumer, as it certainly won’t lower prices at all.” [emphasis added]

In other words, Biden's action is the classic neomercantilist strategy of using tariffs to protect a nascent (or, in this case, re-nascent) American industry that is judged to be strategically important. Alexander Hamilton would applaud the move.

In his book The Neomercantilists, Eric Helleiner defines neomercantilism as an ideology and discusses Hamilton's pioneering role in promoting this ideology:

I define neomercantilist ideology in the pre-1939 period as a belief in the need for strategic trade protectionism and other forms of government economic activism to promote state wealth and power in the post-Smithian age. ... Of the thinkers discussed in this chapter, the best known among modern IPE [International Political Economy] scholars is US politician Alexander Hamilton. Indeed, some IPE textbooks identify Hamilton’s 1791 Report on Manufactures as a pioneering neomercantilist work alongside [Friedrich] List’s 1841 book [Das Nationale System der Politischen ?konomie]. ... To support the growth of manufacturers, Hamilton highlighted the role that moderate tariffs and targeted bans on imports could play. Helleiner, Eric; Helleiner, Eric. The Neomercantilists (pp. 2, 36, 39). Cornell University Press. Kindle Edition. Helleiner, Eric; Helleiner, Eric. The Neomercantilists (p. 4). Cornell University Press. Kindle Edition.

Hamilton's neomercantilism is rebranded as "concrete economics" by the economists Stephen S. Cohen and J. Bradford DeLong in their book Concrete Economics: The Hamilton Approach to Economic Policy and Growth. Of Hamilton, they write:

From its very beginning, the United States again and again enacted policies to shift its economy onto a new growth direction—toward a new economic space of opportunity. These redirections have been big. And they have been collective choices. They have not been the emergent outcomes of innumerable individual choices aimed at achieving other goals. They have not been the unguided results of mindless evolution. They have been intelligent designs. And they have been implemented by government, backed and pushed by powerful and often broad-based political forces, held together by a common vision of how the economy ought to change. They have then been brought to life, expanded, and transformed in extraordinary ways by entrepreneurial activity and energy. The new direction has always been selected pragmatically, not ideologically, and presented concretely. You could see it in advance—as in, “This is the kind of thing we are going to get.” ...?Alexander Hamilton set out to redesign the agrarian economy that Britain’s mercantilist policies had imposed on the North American colonies and for which America’s unlimited land and limited population density so well suited it. The colonies provided tobacco and grains from their farms, furs and wood from their forests, and cotton from their plantations, and Britain provided higher-value-added manufactured goods and services such as banking and shipping. The founding fathers set out to substitute their own vision of how the American economy should develop and, in the language of modern economics, deliberately change over time the structure of America’s comparative advantage. They set out to reshape the economy. Hamilton, the founding father of the American economy, led the way, intellectually and politically, pushing policies to promote industry, commerce, and banking. Central to his view on how to redesign the American economy was the necessity of protecting America’s infant industries from more competitive English producers. The playing field had to be tilted. So up went the tariff: about 25 percent in 1816. Given the huge costs of early nineteenth-century shipping, this was a formidable exercise in protectionism, as well as a major source of federal government revenues. And up it stayed—over the opposition of a nation of agriculturalists who were buyers, not producers, of manufactured goods—and to the extreme displeasure of the British. [emphasis added] Cohen, Stephen S.; DeLong, J. Bradford. Concrete Economics (pp. 1-8). Harvard Business Review Press. Kindle Edition.?

Biden's tariffs are the perfect illustration of the kind of "industrial strategy" that Helleiner, Cohen, and DeLong had in mind and that various members of the Biden administration have recently been?advocating for. For example, in a speech to the Economic Club of New York in April of 2022, Brian Deese, Biden's former Director of the National Economic Council, said:

Consider critical minerals.? Lithium, nickel, and cobalt are building blocks in everything from computers to appliances to electric vehicles and other clean-energy technologies—and demand is set to skyrocket.?Yet the United States depends heavily on foreign sources for many of these critical minerals.? China, for instance, is estimated to control 85 percent of refining capacity for rare earths.??So far, private investment has fallen short of our national needs.? But through strategic coordination, we can open channels for companies to invest.??That’s why President Biden invoked the Defense Production Act to support domestic production and address immediate security risks, consistent with our values.? That’s why the Defense Department contracted with a Nevada-based company to establish the first end-to-end domestic supply chain for “permanent magnets”—with capacity to power 500,000 electric vehicles per year.? And that’s why the Department of Energy is poised to invest nearly $7 billion to strengthen our end-to-end domestic battery supply chain. [emphasis added]

Deese's mention of the "Nevada-based company" is, of course, a reference to MP Materials, which is headquartered in Las Vegas, as referenced in my last "It's bananas" post.

Deese's remarks were echoed by Biden's National Security Advisor Jake Sullivan in his speech to the Brookings Institute in April of 2023:

The first step is laying a new foundation at home—with a modern American industrial strategy.?My friend and former colleague Brian Deese has spoken about this new industrial strategy at some length, and I commend his remarks to you, because they are better than any remarks I could give on the subject.? But in summary:?A modern American industrial strategy identifies specific sectors that are foundational to economic growth, strategic from a national security perspective, and where private industry on its own isn’t poised to make the investments needed to secure our national ambitions.?It deploys targeted public investments in these areas that unlock the power and ingenuity of private markets, capitalism, and competition to lay a foundation for long-term growth.?It helps enable American business to do what American business does best—innovate, scale, and compete.?This is about crowding in private investment—not replacing it.? It’s about making long-term investments in sectors vital to our national wellbeing—not picking winners and losers.?And it has a long tradition in this country.? In fact, even as the term “industrial policy” went out of fashion, in some form it remained quietly at work for America—from DARPA and the Internet to NASA and commercial satellites.?Now, looking over the course of the last couple of years, the initial results of this strategy are remarkable.?The Financial Times has reported that large-scale investments in semiconductor and clean-energy production have already surged 20-fold since 2019, and a third of the investments announced since August involve a foreign investor investing here in the United States.?We’ve estimated that the total public capital and private investment from President Biden’s agenda will amount to some $3.5 trillion over the next decade. ...?Or consider critical minerals—the backbone of the clean-energy future.? Today, the United States produces only 4 percent of the lithium, 13 percent of the cobalt, 0 percent of the nickel, and 0 percent of the graphite required to meet current demand for electric vehicles.? Meanwhile, more than 80 percent of critical minerals are processed by one country, China.?Clean-energy supply chains are at risk of being weaponized in the same way as oil in the 1970s, or natural gas in Europe in 2022.? So through the investments in the Inflation Reduction Act and Bipartisan Infrastructure Law, we’re taking action. [emphasis added]

In sum, yes, Biden's new round of tariffs will support the resurgence of the American lithium and rare earth industry. And there can be no question but that the tariffs will redound to the benefit of shareholders/stakeholders in the companies in this industry (such as MP; so much for Sullivan's claim that the government doesn't pick "winners and losers"). But, what remains to be seen is what financial costs these tariffs will impose on American consumers in general. This same question applies to?the spending unleashed by Biden's new "industrial strategy."?Sullivan proudly proclaims: "We’ve estimated that the total public capital and private investment from President Biden’s agenda will amount to some $3.5 trillion over the next decade." Again, there can be little doubt that the shareholders/stakeholders of the corporations who are on the receiving end of all this spending will benefit enormously. But, another way of looking at this spending is to observe that $3.5 trillion of?investment is also $3.5 trillion of cost. In other words,?Biden's new "industrial strategy" is an enormous bet that the investments being made by his industrial strategy will generate an adequate return on investment for America's citizens in general, one that will justify not only the cost of the investments themselves but also the cost of all the disruptions that will occur as a result of trying to decarbonize the entire economy within a limited period of time, for example, the cost of decommissioning and writing down all of America's fossil-fuel fired energy generating assets before the end of their useful lives.

Another way to look at all this spending is to note that the new tariffs and investments will also contribute to stubbornly persistent inflation (or "greenflation"). Even now, we are witnessing a war between the monetary policy of the Federal Reserve, which is seeking to extinguish inflation by keeping interest rates high, and the fiscal policy of the Biden administration,?which, through its massive investments in its new industrial?strategy, is pouring gasoline on the inflationary fire. One way of looking at the current situation, for example, is to observe that Biden's new industrial strategy is being paid for by young families, who are unable to buy a house because the?Fed must keep interest rates high to?tamp down the inflation that the Biden administration's spending is stoking.?

In sum, it is certainly possible for a national government to impose tariffs to support critical domestic industries. And, undeniably, such intervention benefits shareholders/stakeholders in these industries. But, these tariffs do not come without costs (at least over the short term) to the nation's citizens in?general,?who are denied cheaper foreign alternatives. Likewise, it is always possible for a national government to make "investments" to "shift the economy onto a new?growth direction," again benefitting shareholders/stakeholders in the targeted industries. But, a benefit to the citizenry in general will occur only if those investments generate an adequate return; spending without return is not investment, but pure cost. We must always keep in mind that governmental attempts to exercise large-scale influence on the American economy have not always worked out as planned in the past. For example, the well-intentioned attempts by the Clinton and Bush administrations to "increase home ownership in the United States through an intensive effort to reduce mortgage underwriting standards" were certainly a contributing factor in the financial crisis of 2008. In other words, the large-scale efforts?of the government?to influence the economy do not always and inevitably turn out to be "intelligent designs."