Let's take a look at the last piece of legislation under Warren G Harding's presidency, which was from 1921 to 1923. And the last piece is the Fording McCumber tariff of 1922, which increased tariff rates on of course, foreign goods. So to increase the rate at which we tax imports, and the reasoning behind this is in the 1920's after World War One, most of society did not want to get involved in the rest of the world with their politics. So the war kind of changed a lot of United States citizens eyes. And that's how in the 1920's Republicans came to power. Because during World War One, don't forget a Democrat, Woodrow Wilson was the President. And so Harding says, okay, it's time to move away from world schemes and focus on the United States. Let's make the United States better. And so with a Fording McCumber tariff, the key is to make the United States less reliant on the rest of the world. And the twenties is a period of isolationism. The 1930's is also a period of isolationism too, because of the Great Depression and you know Americans were pretty much looking at problems, how to fix problems in the United States for what was going on with us. So to get started, we need an economic model to show us how to deal with tariffs. And this model comes from appendix five on international trade. And it's specifically appendix 5.3. And it's only a slight variation of what we've done earlier during the Civil War with the Anaconda Plan. The same model. It's just a slight variation of that. So it won't be too hard to do. Let's go ahead and draw quantity and price. We have demand and we have supply. And this is domestic supply and demand. So this is only supply and demand for the United States, no other country. Now recall that if the world price is lower than what the domestic price here would be without international trade, we are going to import. So that would be imports. And at this world price, the quantity supplied or domestic production is relatively lower with free trade compared to no trade. But the consumers like this because consumers, the quantity demanded is up here. So domestic consumption is relatively higher. This amount we can assume that we produce locally or domestically. And this amount we can assume that we buy from the rest of the world. So we've done that already with the welfare economics. What is a tariff going to do? If we have a tariff now, which is going to do the same thing as increasing tariff rates if they already exist. We're going to just increase this world price curve by the amount of tariff. Some numbers might help out intuitively with us. If we're importing the good at $1 each and now we have a brand new $1 tariff on each and every unit, that difference is the tariff. Then the ultimate price we have to pay now for buying it is two bucks. So we just shift that, what we call world supply curve upward. This results in higher domestic production because when the price rises from $1 to $2, now local producers within the United States aren't going to charge a dollar anymore because consumers have to pay $2 from the rest of the world. So domestic producers are going to charge the $2 as well. So as the domestic price rises, the quantity supply or domestic production rises. I'll write that here. This causes the quantity demanded to fall, meaning domestic consumption falls. Of course, I said that the price rises, but I'm going to write that the domestic price rises explicitly here. The amount of imports is this difference here. So imports shrink. That makes sense. We use m for imports in economics all the time. Imports will decrease -- if you tax imports you're discouraging the imports. But are we better off or are we worse off because of this tariff? There are winners and they're losers. And then I'll show you something very interesting. So we have recent politicians who are promoting, say, a 40% tariff on Chinese goods. So it's the same kind of idea. Is this better for America or worse. Let's go ahead and find out here. a, b, c, d, e, f, g, h, i, j. Almost forgot the j, but don't want to forget that letter. Now I'm going to have with free world trade, that would be at the world price. And I'm going to compare it to with the tariff -- that's going to be, of course, this world price plus the tariff here. I'll start with consumer surplus. Consumers are the buyers of this good, whatever this good is with free world trade, here's the willingness to pay, and you just subtract out this original $1 world price. And you get a b c d e f g h i. So a b c d e f g h i. Lots of letters. With the tariff the consumers have to pay a higher price. So here's the new willingness to pay for all these units, less are bought and you subtract out the higher $2 price, you get a b c d. This means that consumer surplus -- I'll write it over here -- this means consumer surplus falls with the tariff or with a higher tariff, and consumers are worse off. Consumers lose from this. Producer surplus is the producers of the goods that are competing against, of course, the foreign competition. Producer surplus before is here $1 for these units that are produced minus the marginal cost, just j. That's why the j was so important to write. With a tariff, producers get to charge $2 for each and everyone now. They produce more, we subtract out the marginal cost, we get e + j. Notice that producer surplus rises by area e, producer surplus is higher. And so US firms don't like competing against foreign competition, and they are better off if we restrict foreign competition with a higher tariff. So you will have some winners and losers here. The government is going to gain some revenue and the amount of imports here that are being taxed with the tariffs, because the tariff is only a tax on imports, times the tax per import, the tariff per import, is going to give us g h, which previously was consumer surplus, but now the government gets in welfare as government revenue. So the government, compared to not having a tariff, is better off with the tariff because it makes revenue. Just to mention on the side here, if you keep increasing this tariff enough, notice that imports will go to 0 and the government will make no revenue. So we have another, in a sense, a Laffer curve here, where the government, if it doesn't tax imports, makes no revenue. Taxes some amount makes some revenue, can tax too much and make no revenue. So increasing tariff rates, we don't know what happens to tariff revenue. But starting from no tariff, going to some positive tariff here that's not too high will increase the revenue. I gotta scoot this up, here we go. Okay, The last part is deadweight loss. Deadweight loss is f and i. In other words, f and i were part of total surplus. Total surplus, is consumer producer surplus, and government revenue. This falls with tariff because taxes are distortionary. f and i is lost to total surplus. Nobody gets it anymore. So it's just like deadweight loss from an excise tax way back in chapter one or appendix four that we looked at, so the tariff is economically inefficient. So let's put this all together. In the 1920's the intent of the Fording McCumber Tariff Act was to help US businesses and make the United States less dependent on the rest of the world. We want to go into a period of isolationism because the First World War stunk, you know nobody liked it. Did it achieve its goal or not? Well, there were winners and losers. Yeah, US businesses ended up winning that no longer had to compete against foreigners. But the cost was ultimately of doing this higher deadweight loss. So less overall welfare to the United States as a whole. And that loss is ultimately coming from consumers who don't like paying the higher price for the imports. Imagine putting a 40% tariff on all goods coming from China today, especially being a student going to Walmart, pretty much everything you buy there is from China. So imagine the price is rising close to 40% for all those things that you buy, or your expenditures rising close to 40%, that would be pretty rough, wouldn't it? So consumers do lose from this policy. And as a whole, welfare to society is lower. So the cost to the consumers is greater than the gain to the government from the revenue and the producers with the producer surplus. I do want to show one more thing with this in terms of aggregate supply and aggregate demand. This is where tariffs get a little bit counter-intuitive If we look at back from the Civil War, we looked at appendix ten, which was aggregate supply and aggregate demand. I will use the short one because this doesn't apply in the long run. So short run means we want to use short run aggregate supply and we want to use aggregate demand here. So what's a higher tariff rate going to do on goods and services? If you increase tariffs, that stimulates aggregate demand. Because what customers do is they're going to substitute away from the more expensive foreign goods into the relatively cheaper domestically produced goods. But that then drives the price up of the domestically produced goods anyway, so higher tariffs cause the willingness to pay for US production to rise. And in the short run, what the effect of that is, is it's going to cause inflationary pressure because the prices are going to be higher with the tariff for everything or for all the imported goods so that raises the average level of all the prices. But in the short run, we are going to -- so price level is higher -- in the short run, we're going to have higher real GDP. So isn't that good? We have higher production. I mean, why is that a bad thing? Shouldn't we just put higher tariffs on everything? Well, we gotta think about this a little bit more. I'm going to use some, I'm going to use the expenditures approach of GDP to illustrate what's going on here. And the expenditure's approach, recall is that real GDP = consumption + investment + government spending + exports - imports. And here's the key. Putting the higher tariff on the goods is going to reduce the imports, but consumers are buying the imports. So here, let me start over here. Let's say that the tariff reduces the amount we import from other countries by $20 worth of goods. Because those $20 of goods also fall under consumption because we're going to say they're consumer goods, consumption falls by $20 as well. If we had positive numbers, if we had 20 minus the 20, you have 0 over here. Because remember, imports don't fall into GDP because they're not produced within the United States. So what we've done is we've reduced consumption, but consumers will substitute away from some of those more expensive imports into domestically produced goods, which will increase consumption by some smaller amount, by, say, half that, just as an example, by ten bucks. So if we're producing ten more dollars of the goods ourselves then ultimately, production is rising here in the United States by ten bucks. But are we better off? No because we're producing ten bucks more ourselves because we're relatively not as good at doing it as the rest of the world, and therefore forsaking $20 of consumption from the imports. So consumption is ultimately falling by $10. Here's a different example of this. Let's say that you buy all your food from, I don't know, Kroger or some grocery store. And we say, OK, well you can, we want to promote your productivity and we don't want you to be reliant on Kroger (another country). So let's make it so you can't even shop for your own food. What's going to happen to your consumption? It's going to fall. You are now going to substitute into producing your own food. You'll have to have your own little farm and you will produce more food, but ultimately you will be consuming less. And that's exactly what tariffs do. So on the surface, it looks like they're good in the sense that they stimulate US business, but they're promoting production in industries that we do not have comparative advantages in. And by doing that, we are consuming less. So you're working more and you are enjoying fewer goods and services. So they're not as good as some politicians would make you think that they are there. There are certainly a lot of cost to other individuals, other than the benefits that the firms are gaining. Thank you for listening.