An Unforced Error?

Last week I was listening to a radio guest on the Sirius POTUS station speak on the subject of the president's fixation with trade balances instead of trade barriers; both of which occur in the world of international trade.   As I explained a week ago they are quite different from one another - and the president has fixated-upon the former instead of the latter.  Trade barriers are bad because currency manipulation, digital services taxes, value-added taxes and actual tariffs are obstacles to free trade.  Traded imbalances happen all day long in the normal course of commerce.  I spend money weekly at my chosen grocer who has never purchased anything from me.  We have a trade imbalance.  

This blog post was composed last Friday, April 12, 2025 and was in the can for publication at 6:30 PM today.  And then this fell into my in-box early yesterday morning.   Somewhat perfect timing by Peter Zeihan yet technically a week late as I'm not a paid subscriber.  But I digress.  

Anyway, getting back to the satellite radio broadcast the guest shared with the program host that what the president was exhibiting in his policy of reciprocal tariffs is known in economic circles as a Fallacy of Composition.

Whoa!  I'm no economist but as a recovering financial guy I happen to have a deeper  understanding of economic principles than the average bear.  I suspect I've never heard this precise terminology before; and if I had learned about it in an earlier life it has been long forgotten as a consequence of disuse.  

Anyway, it is during difficult economic times that economists actually talk about the Fallacy of Composition; a concept that is a principle of logic.  So I looked it up and it goes something like this.

The Fallacy of Composition is committed when someone concludes that what is true of the parts of a whole must apply to the entirety of the whole without there being adequate justification for the claim in the first place.

For instance, in mathematics one and three are odd numbers; consequently four is an odd number because 1 + 3 = 4.  Naturally, this is untrue because four is an even number.

In the economic realm the fallacy occurs when the economy is treated as if it were a family or a business.  Namely, that a policy that will work for a business will work for the economy as a whole.  When someone concludes that what is good for a family or a business is good for something as large as a nation's economy then the fallacy of composition has occurred.  

This is because a theory that might apply to family finances or a business may not be relevant to an economy as complicated as that of the United States.  Economies play by rules that are far more dynamic than rules that apply to a business.  When a decision-maker concludes that a country is being raped and ripped-off as a consequence of a trade imbalances then the outcome for the entirety of the economy may be completely other than intended.  Such as a soft 3-year treasury note auction or currency markets that punish the US dollar as a consequence of a lack of confidence in the United States.  The fallacy becomes worse than simple irrelevance when the world begins to lose faith in your country's diminishing reservoir of economic goodwill.  There can be serious consequences.  

The application of tariffs on a selective basis can reduce imports thereby providing protection for a specific economic sector; which is a good thing.  Conversely, if all nations impose trade barriers in a global trade war then world trade will decline resulting in everyone being worse-off.  

Similarly, if everyone stopped spending during a recession in order to be thrifty and to save money then aggregate demand may fall and aggravate the downturn.  In this example thrift may very well be good for an individual situation; yet if extended to an entire economy it may lead to a reversal of economic growth.  Thus the fallacy of composition.  

So, just like when you are at a Packer game and stand-up it is a fact that you can better see the play unfold; until everyone else stands to do the same.  Decisions based-upon the fallacy of composition can lead to bad policy recommendations, flawed economic predictions and ineffective solutions.  Understanding this is crucial to avoiding errors of logic in economic reasoning and avoiding faulty outcomes.

Now that the president has paused many of the reciprocal tariffs originally proposed on Liberation Day there is less uncertainty and cratering investment markets have paused as well.  The administration has since exempted smartphones, computers and additional electronic devices from these tariffs providing relief to tech manufacturers; allowing business to catch their breath.  Nevertheless, the messaging coming from White House spokesmen on Sunday was inconsistent.  The game of Red Light, Green Light with on-again, off-again tariffs continues.  Are they permanent or temporary?  Is the White House going to continue to proffer carve-outs for specific products and industries?  Wisconsin CEO Peter Ensch of SaniMatic said it best:  Initiating a trade war with our closest allies and business partners is simply bad business.  

Inconsistency and moving of goal posts continues to raise doubts in American boardrooms and in the minds of American investors and retirees; all of whom could use a measured dose of predictability and policy certitude.

I'm not seeing much yet that will improve your and my prosperity and general lot in life.  And maybe make the world a safer place.  But I'm a patient sort.  Time will tell.....