The ongoing commotion surrounding tariffs calls to mind an old joke about two neighbors—we’ll call them Bob and Gene. Gene’s wife brings home a painting but one it turns out he really despises. So while she’s gone, he heads out to put it in the trash. Bob sees him and offers to buy the painting for $5. Gene happily sells.
But when Gene’s wife comes home, she’s furious and demands he get the painting back. He offers Bob $10 to return it. Bob accepts the offer, and the painting returns to Gene’s house.
The next day, Bob shows up, telling Gene that now he is in trouble, because his wife fell in love with the painting while it was at their house. He offers Gene $20 to get it back, which Gene accepts.
The scenario repeats for a number of days, with the painting fetching higher and higher prices. Finally, Gene one day shows up at Bob’s house to purchase back the painting, and Bob says, “I got sick of this, and I just burned it.”
Gene looks at him and says, “Are you crazy? We were both getting rich!”
The joke here turns on the fact that the wealth of the two households combined did not go up at all through this process. Collectively, we cannot make ourselves wealthier simply by exchanging the same assets at higher and higher prices. Increasing our wealth means having more assets, or higher quality assets, than previously—not simply paying higher prices for the same assets.
Conversely, if we are exchanging the same assets as before, but at lower prices, we are not thereby poorer. Imagine Americans come to embrace the idea that “small is beautiful,” and thus owning “McMansions” seems less desirable than it previously did. Naturally, we would see a decline in the price of larger houses. But this would not signal that “wealth is being destroyed”: America’s housing stock is the same as before the change in tastes occurred. When it comes to the wealth of Americans overall, there is an enormous difference between a tenth of the houses being destroyed by fire versus the average price of a house falling by ten percent. Of course, people who owned large houses and were planning on selling in the near future will be disappointed if real estate prices plummet. But on the flip side, people who had planned on buying a home in the near future will be pleasantly surprised by the development, especially if—as in our thought experiment here—the reason is a genuine change in tastes rather than a general calamity.
The point is clearer when we think of commodities rather than assets. If the price of crude oil shoots up, most Americans view that as a bad thing. But of course, it’s a good thing for the American owners of oil fields (and perhaps Tesla stock). And rising food prices are bad for the average household, but they’re good for farmers. It seems Americans dislike “inflation” except when it comes to a particular subset of asset prices, in which case “rising prices” are treated synonymously with “general prosperity.”
This habit is best exemplified when stock indices fall, and people—including economists—claim that “wealth is being wiped out.” On the surface, this seems too obvious to argue. With the NASDAQ plunging from over 20,000 to around 15,000, the total capitalization of the index has shrunk by roughly $7 trillion. It looks as though this wealth has simply vanished into thin air.
Yet, as seen above, this view is the result of confusion between the money prices of goods and the amount of wealth in the economy. The stock market decline has not leveled any buildings or rendered any machines inoperable. America is just as full of farms, warehouses, railroads, and oil wells as it was when the stock market was at its peak.
To be sure, it could be the case that the market decline is correctly predicting that in the future international trade will collapse as the global economy descends into trade wars and the U.S. will be less wealthy than it could have been because of these tariffs. But in this scenario, the stock market decline is not a “destruction of wealth” but a prediction of less wealth in the future, relative to the original expectation.
On the other hand, market participants, even savvy stock investors, are not always correct about the future: otherwise we would never see market bubbles or crashes. Perhaps President Trump really is playing “4-D chess,” and there is a plan behind the apparent chaos caused by the prospect of these high tariffs. For instance, Mary Harrington wonders whether Trump is finally making good on the repeated promises by many politicians to stop favoring Wall Street at the expense of Main Street. (Other analysts reject this idea, holding that the tariffs will hurt small businesses the most.) If that were the case, the declining stock markets would be a feature, rather than a bug, in his program. And many free-traders in Trump’s camp hold out hope that he has simply been playing hardball in an attempt to achieve lower tariffs across the board.
The Trump tariffs, should they ever go into full effect, may indeed be as bad as his critics claim—or the president may again defy the odds and pull victory from the jaws of defeat. Indeed, the authors of this piece themselves have different opinions on that issue. Where we agree is that the past week’s fall in stock prices quoted in U.S. dollars is not in itself the destruction of wealth.
