As the tariff debate heats up again, a new ideological group has emerged: defenders of retaliatory tariffs who still claim to support free markets.

Their stance differs from the old protectionist arguments about “saving jobs” or shielding domestic industry from foreign competition. Instead, they say: “We don’t like tariffs. But since real free trade doesn’t exist — and countries like China already distort trade with subsidies and tariffs — we have to retaliate to level the playing field.”

The argument sounds pragmatic. But beneath the surface, it rests on the same fundamental misunderstanding as any other form of protectionism.

Static Models, Dynamic Reality

The core illusion of protectionism is the belief that nations are the true actors in trade. It imagines trade as a geopolitical chessboard, with each government moving its pawns — imposing tariffs, retaliating, conceding — in pursuit of “fairness.” The goal becomes symmetry, as if harmony can be achieved by matching protectionism with protectionism.

But this is a flawed concept. As Mises explained, “It is not nations that trade, but individuals.” When we speak of “China” or “America” taking trade actions, we obscure the reality: millions of entrepreneurs and consumers making voluntary exchanges. Trade wars aren’t battles between coherent nations — they’re government policies that often end up hurting their own citizens the most.

So why do even some free-market thinkers fall into this nationalist framing? Often, it stems from a static view of the economy — one that sees markets as machines for efficiently allocating known resources to known ends. Within this framework, tariffs are harmful only because they distort this allocation. But if another country distorts trade first, retaliatory tariffs seem justified to “restore balance.”

Though it may appear consistent with free-market logic, this belief still rests on what Hayek called the fatal conceit — the illusion that policymakers can steer markets or outthink the spontaneous order of individual choices and decentralized discovery.

As Israel Kirzner emphasized, the core function of markets is not optimization but discovery. Markets are not machines for distribution — they are dynamic processes of entrepreneurial alertness. They allow individuals to uncover new uses for resources, detect overlooked opportunities, and adapt to unforeseen shocks in spontaneous, decentralized ways.

This is the true engine of progress. Thousands of years ago, humans had access to many of the same physical materials we do today. What changed wasn’t doing the same old thing more efficiently — it was the knowledge. Prosperity emerged not from given inputs, but from the continuous discovery of new, better ways to use them.

In other words, the knowledge needed for human flourishing has never been a given. It has always lived in darkness — unknown, unseen, and waiting to be discovered. That’s why markets matter: they are our method for feeling our way through that darkness.

But this process depends entirely on the freedom of market signals. Prices, profits, and losses form a kind of social sensory system — a network of lamps that guide us through the unknown. These lamps are our only source of direction, the only tools for communicating all our individual, entrepreneurial knowledge that no central planner can access — because that knowledge is dispersed, tacit, and ever-changing.

Tariffs — whether imposed first or in retaliation —  are like blindfolds. They block the signals that entrepreneurs rely on to adapt, discover, and solve problems, leaving society blind to the possible solutions and opportunities.

The Irreversibility of Lost Discovery

Some argue, “We don’t like tariffs. We’re just using them temporarily to pressure others to drop theirs.” This stance also suffers from the same static blind spot: it treats short-term distortion as an acceptable price to pay for long-term balance, and fails to understand that the damage is not just the visible cost of more expensive imports. It is the unseen loss of all the innovations, adaptations, and discoveries that could have happened — but won’t.

Huerta de Soto takes this further by emphasizing that entrepreneurial knowledge is not only dispersed — it is exclusive, subjective, and unrepeatable. Each insight, each profit opportunity, belongs to a particular time, person, and context. If that opportunity is lost — if someone misses the “entrepreneurial train” — it may be gone forever. Not only might they never board it again, but no one else may ever discover the same insight under the same conditions.

This means the cost of tariffs is not just “temporary misallocation.” It is the permanent burial of paths not taken. Retaliatory tariffs are not a pause button — they are a gate slamming shut on unrealized futures. The opportunity cost is not just a cheaper import, but the better world that could have been built through competitive discovery and creative destruction.

The Light We Have Left

If a foreign country has already disrupted market signals by imposing trade barriers, then the flow of knowledge has already been dimmed. But retaliatory tariffs don’t restore clarity — they just put out more lamps. In such a situation, the solution is not to mimic their mistakes. It’s to do the opposite: to open the flow of market signals wherever we still can, so that entrepreneurs can work around the distortions imposed by others.

Just as a doctor doesn’t respond to a broken leg by breaking the other one for symmetry, a free society doesn’t respond to blocked trade by blocking more of it. We respond by preserving whatever space remains for creativity, competition, and adaptation.

Consider Hong Kong. Throughout the twentieth century, it faced an uneven playing field. The US, Britain, and most major economies imposed tariffs, subsidies, and restrictions. But Hong Kong refused to retaliate. It chose unilateral free trade — even in the face of foreign protectionism.

The result? One of the richest and most dynamic economies in the world. Its port boomed, its industries adapted, and its people rose from poverty to prosperity — not because it “negotiated better deals,” but because it kept the lights of discovery on while others turned theirs off.

This is the counterintuitive truth that defenders of retaliatory tariffs miss: even when others close doors, keeping your own open creates the conditions for innovation, adaptation, and growth. It is precisely in the presence of global distortion that preserving your own market process becomes most important.

Unilateral free trade isn’t utopian. It’s realistic — because it trusts the only system that has ever delivered peace, prosperity, and innovation: entrepreneurial freedom, guided by open signals, not state commands.

There are plenty of memorable scenes in Star Wars, but one of the most vivid comes in Revenge of the Sith as viewers watch the fall of the Old Republic.

Chancellor Palpatine, disfigured following his battle with Mace Windu and other Jedi, rises in the Imperial Senate to speak. With the bureaucracy in control and the scattered Jedi crushed following Order 66, the Sith Lord tightens his fist around the galaxy.   

“In order to ensure the security and continuing stability, the Republic will be reorganized into the first Galactic Empire, for a safe and secure society,” Palpatine says, raising his arms in crescendo. 

As it turns out, the issues of political decadence, crisis-driven power-grabbing, and avarice are just as pervasive in the galaxy far, far away. Since first hitting theaters in 1977, Star Wars has become both a pop culture phenomenon and one of the most iconic franchises in cinema history, with spinoff movies, shows, books, and a global audience of upwards of a billion people. To George Lucas’s admission, Star Wars is, and always has been, a narrative deeply intertwined with political allegory that touches on some of the essential questions that pervade today’s society: What are the dangers of political subversion and despotism? How can fear and conflict be used to consolidate power? How do democracies fail? When is rebellion justified? How do individuals resist systemic evil?

As Star Wars fans celebrate May 4 on Sunday, revisiting the famous auditorium scene where Chancellor Palpatine announces the reorganization of the Galactic Republic into the first Galactic Empire and manipulates thousands of senators through an economists’ lens continues to serve as a poignant reminder of the dangers self-interested political actors using crisis-driven governance to suppress opposition and justify the centralization of power.

“And the Jedi rebellion has been foiled…”

To Palpatine’s credit, he knew never to let a good crisis go to waste – from the trade war on Naboo to the Separatist Crisis to the attempted Jedi “coup”, each served as a convenient pretext for Palpatine to expand his authority under the guise of promoting ‘security’ to a galaxy that had suffered from years of political decadence. Palpatine may rightly be considered a master liar and manipulator, but his actions in this scene are a classic example of a rational political entrepreneur acting within the constraints of the incentive structures embedded in the decaying republic around him. As public choice economist Obi-Wan Kenobi articulated, politicians, like all individuals, make decisions that are largely shaped by incentives to secure their self-interest.

Public officials do not become bleeding heart altruistic agents of the common good simply by stepping through the halls of Congress. Just as consumers respond to incentives in the market, political actors (including aspiring despots) respond to incentives in politics.

Like any savvy authoritarian seeking to consolidate power, Palpatine only needed the right justification—which he got when the Jedi Order confronted him and attempted to arrest him.

Mace Windu: In the name of the Galactic Senate of the Republic, you’re under arrest, Chancellor. 

Supreme Chancellor: Are you threatening me, Master Jedi? 

Mace Windu: The senate will decide your fate.

Palpatine doesn’t go quietly, of course. And when he survives the attack (thanks to Anakin Skywalker), he has his justification to seize control. After all, there are few crises more suitable to justify suppressing your political opposition than convincing your constituency that said opposition tried to assassinate you (which wasn’t entirely untrue). 

Following Palpatine’s declaration are some of the most visually striking sequences in the entire Star Wars trilogy: the aftermath of the Jedi Temple massacre and the slaughter of Separatist leaders on Mustafar by the newly anointed Darth Vader. By casting both the Jedi and the Separatists as enemies of the Republic and threats to democracy, Palpatine exploited public fear to eliminate the final barriers to his absolute power.

Palpatine is the poster child for a bad-faith but rational actor who knew how to manipulate institutional rules and intergalactic events to serve his goals: more control. 

Star Wars lays bare a fundamental insight into the nature of power: Power, especially centralized power, naturally attracts those who wish to exercise it, and crises give them the opportunity. 

‘All Who Gain Power…’

Even before announcing his plan to reorganize the Republic into the first Galactic Empire, Palpatine had exploited crises to accumulate power.

As Chancellor, he used the Separatist crisis to gain “temporary” emergency powers, which he used to unilaterally create a standing army through the Military Creation Act. He justified massive spending and borrowing to finance the engineering of five million additional clones to fight a war. As the Clone Wars raged on, he abrogated the principles of sound money by nationalizing the Intergalactic Banking Clan (IGBC), effectively granting himself total discretion over the Republic’s fiscal and monetary policy to finance the Republic’s war machine. 

It’s easy to overlook the fact that the Separatist threat was orchestrated by Palpatine himself. This was no accident. The Sith Lord understood that the power and control he sought required a nemesis, and his plan worked perfectly.  

By the time Revenge of the Sith begins, the senate and the courts, the police, the prisons, and the entire government had been turned over entirely to the military. Palpatine had effectively seized both the power of the sword and the purse and was given full discretion over their use with little to no oversight.

Over and again Palpatine used crises to claim more power. There’s an obvious reason for this. Political emergencies alter the incentive structures both for politicians and for the public at large. In stable conditions, citizens are more skeptical of state overreach, but when secession and civil war loom, people become more willing to trade liberty for the promise of security, empowering leaders who claim only they can restore order.

“Emergencies have always been the pretext on which the safeguards of individual liberty have been eroded,” the Nobel Prize-winning economist F.A. Hayek wrote in Law, Legislation, and Liberty.

Hayek was not wrong, history shows. The American historian and economist Robert Higgs wrote an entire book about the phenomenon Hayek described. Crisis and Leviathan examines the well-documented history that shows governments frequently expand their powers during emergencies and rarely relinquish them willingly afterwards. 

Palpatine promised that his extraordinary measures would be temporary, but he was merely playing the long game. Instead of seizing total authority outright, he did so by gradually expanding the powers of his office and playing each move as a necessary response to an emergency.

Higgs and others have referred to this phenomenon as the Ratchet Effect, a concept in economics and political science that describes how government power tends to expand during crises and rarely returns to pre-crisis levels once the emergency has passed.

The Nobel Prize-winning economist Milton Friedman once quipped that “there is nothing more permanent than a temporary government program,” but it was Palpatine who observed that “all who gain power are afraid to lose it.” 

‘This Is How Liberty Dies…’

Ultimately, the fall of the Galactic Republic tells the story of a political situation not dissimilar from our own. A struggling population tired of the ineptitude of its government and yearning for change looks to a charismatic leader claiming to stand against a broken establishment, making extravagant promises and the decisive action people crave. The leader oversees the erosion of safeguards against unchecked power under the pretext of protection, using emergencies, crises, and wars to consolidate their power further and silence their political opponents and anyone else who could pose a threat to their regime. By the time the people realize what they’ve lost, the government they once knew has already been overturned, and any institutions that existed to resist them have already been dismantled or absorbed.

What is perhaps most telling about this scene is that Palpatine did not seize power in secret–he did it with full transparency and widespread public approval. Authoritarian regimes, like many in today’s world, are not only imposed from above but are oftentimes welcomed from below. The senators and political institutions designed to prevent the emergence of a despot became the very means by which one came into fruition, and the public, conditioned by crisis and rhetoric, offered little resistance. Palpatine’s rise to power, embodied by his famous speech before the senate, offers a telling commentary on the warnings of political economists across generations: a politician’s first duty is to themselves, crises breed opportunism, and despotism frequently comes from the fear-driven compliance of its citizens.

Liberty is hardly lost overnight, nor is it always through external coercion or evil mustache-twirling villains tricking their foolish populations into giving them a power mandate. The road to tyranny is paved with apathy, corruption, and a public too willing to trade its freedoms for the false promise of security. To quote Ahsoka Tano, “The deadliest enemies of a society dwell within its borders.”

May the Fourth be with you.

Anyone who has dealt with customers, especially in a service industry, knows that they can be difficult and demanding at times. Ironically, this is a feature not a bug. Consider for a moment what dealing with customers means for workers, managers, and owners. Having to serve customers in a competitive market makes us better human beings. 

We must learn sympathy and exercise our imagination. We must develop virtues like patience, humility, and service. And we are held to high standards which push us towards achieving excellence. Early advocates of commercial society knew this. Adam Smith and his contemporaries saw business and commerce having beneficial effects on society. Part of what drove this assessment was their belief that human beings were social creatures whose moral judgment was formed and refined through interaction and sympathy with other people.

Many critics wrongly conflate business with selfishness. After all, we have the famous statement from Adam Smith about how the butcher, the brewer, and the baker serve their customers, not from altruism, but from a regard to their own self-interest. Smith’s example explains why property rights matter and how people should be rewarded in the market for creating value. He does not suggest that the butcher, brewer, or baker are self-centered greedy businessmen who only grudgingly interact with customers. Perhaps we might find such curmudgeonly folks here and there, but successful businesspeople know they have to focus on their customers.

To serve customers well, you have to understand something about them. What separates a good house from a bad one? Or a good restaurant from a mediocre one? What features matter when it comes to a fitness app or a vehicle or a coat? What do people value most about their accommodations when they take a vacation? Or when they travel for work?

These are the kinds of questions those in business need to answer well in order to succeed. You must put yourself in other people’s shoes – think about their situation, identify with their problems. And then you must exercise imagination and ingenuity to create products and services that help people pursue their goals and enjoy their lives. You don’t get these things sitting at home playing video games or watching Netflix. Vibrant business draws us out of our narrow self-centered worlds into the broader play of human society with all its attendant joys, sorrows, disappointments, and successes.

And within that play we learn to discipline and control ourselves better. If you want to have customers, you must serve them even when you don’t feel like it. That means exercising patience when dealing with their questions or issues. It means developing fortitude in the face of criticism. It requires humility to listen to customers and to value their feedback. Serving customers in business is an excellent crucible for refining our character – which makes us better spouses, better parents, better friends, and better human beings. 

Besides improving our character, serving customers well makes us better at our craft. Customers expect certain quality and service standards. This requires quality control. It requires innovating and improving our products. We must train our employees. We must be intentional about our habits and systems if we want to serve our customers well. Success comes through discipline and intentionality.

In doing all this, we become better brewers and better bakers. We become more creative artisans. We become more capable coaches and accountants and instructors. And we become more beautiful – for all virtue and character and excellence is a kind of approach to the good, the true, and the beautiful.

Whatever the role, our work can and should refine us. Our culture today tends to prize some work over others. Media puts entrepreneurs, venture capitalists, and influencers on a pedestal. The New Right puts blue collar manufacturing workers on a pedestal. The service economy, on the other hand, is often derided as being full of low-paying jobs with little dignity that lead to a “dead-end.”

Such views are mistaken. 

Front-line jobs, even menial ones, have dignity and provide opportunities for improvement. Employees in even the most mundane jobs in retail or food service, have to learn responsibility. They must show up. That requires planning and discipline. It requires personal responsibility and moral agency as well as humility and empathy to serve customers well. 

Employees also have to do something. And by doing something, they have opportunity to develop skills; skills to communicate and listen, skills to plan, skills to execute goals and projects. This, by the way, is what makes minimum wage laws so pernicious. They deny people with few skills and little or no experience access to one of the most edifying and beneficial activities they could participate in: work.

Work serves, blesses even, our fellow men and women. Employees participate in this, whatever their level or pay. So do managers and executives. They must exercise prudence as they steward resources. And when it comes to managing people, they must exercise justice and compassion to do their work well. People in management also face opportunities for exercising courage when making decisions that involve risk – launching new projects, restructuring departments, discounting products, etc.

Then there are lenders and investors: capital allocators. Though those with capital are sometimes called idle or unproductive, they are not. They are critical to successful business enterprises. Nearly every business requires capital – and some require immense amounts of it. This can take the form of loans for buildings, for land, for machinery. Sometimes businesses take out loans for payroll or to bridge dry spells or delays in sales.

Equity investors bring capital to a business in exchange for a share of the ownership, including sharing the risks and profits that come with it. These shareholders have a real stake in the company. They want to see it succeed. They venture part of their limited capital on companies they believe create value for society.

Besides calculating risk and return, capital allocators must also exercise certain character traits. Investors of all stripes have to practice sacrifice. They literally give up the use of their resources so that someone else can use them. And they also sacrifice some opportunities in order to pursue others since they have limited capital. They must exercise wisdom and prudence as well when judging where to invest.

Investors must also have another quality: hope. Hope that the economy will grow in the future; hope that their investments will pay off; hope that they have made good decisions. And along with this hope, they must take courage. Investing, by and large, is not a safe game. Risk is inevitable. There are many more ways to lose money than to make money. Investors are often the first to lose money when ventures go sideways.

Business drives the economic engine of material prosperity by creating new value and allocating and reallocating resources towards higher valued uses. Within a competitive market system, business drives innovation, efficiency, and productivity. These, in turn, raise our standard of living: cheaper and better food and transportation, better medicine, greater leisure, and more education.

But business can also be good for the souls of those who participate in it. Sure, greed and materialism can be temptations as the Marxists and academics constantly remind us. But as Samuel Johnson noted: “There are few ways in which a man can be more innocently employed than in getting money.” And business, as I have been arguing, entails far more than making money.

In fact, business is fundamentally about people cooperating with, trading with, and serving one another. Balance sheets and profit-loss statements provide discipline and accountability. They “keep score” but they are not the game itself. The fact that participation in business can inculcate virtue serves as a major pillar supporting the case for free enterprise and free markets.

No notion in economics is responsible for more misunderstanding and misguided government policies than that of the “balance of trade” (or “balance of payments”). 

Rightly ridiculed in 1776 by Adam Smith as “absurd,” the so-called “trade balance” supplies protectionists with cheap yet convenient cover for their destructive interventions. The main reason is language: Saying that a country’s trade is “imbalanced” – especially if that country has a “trade deficit” – suggests to the economically uninformed that something is amiss. Who, pray tell, is comfortable with being out of balance?! All talk of “trade deficits” conveys the impression that the home economy is malfunctioning, or that foreigners are cheating at trade, or both.

But as I and others have explained repeatedly, this impression is not only false, it’s backwards. While hypothetical examples can be conjured in which a country’s trade deficit is a signal of domestic economic trouble, in reality U.S. trade deficits are overwhelmingly evidence of America’s economic vigor, at least relative to other economies. The reason is that U.S. trade deficits – or, more precisely, current-account deficits – arise whenever foreigners, during some period (say, some month), invest more in America than Americans invest abroad. Not only does this net inflow of global capital add to America’s capital stock, it’s also solid evidence that global investors are especially keen on the U.S. economy. Why Americans should be bothered by these realities is mysterious.

Nevertheless, if someone is intent on making the best case possible for being concerned about U.S. trade deficits, that case would point to the connection between U.S. trade deficits and U.S. government budget deficits – the so-called “twin deficits.” 

Unlike trade deficits, which do not necessarily increase Americans’ indebtedness, U.S. government budget deficits do necessarily push American citizens further into debt: When the government borrows money to cover its current spending, future Americans are put on the hook to repay this debt. They’ll do so by paying higher taxes, by taking government-spending cuts, or by losing wealth through inflation.

So what’s the connection between U.S. trade deficits and U.S. government budget deficits? It’s the following: One of the countless ways for foreigners to invest dollars that they don’t spend on American exports is to lend those dollars to the U.S. government. These foreign investments in the U.S. both raise U.S. trade deficits and represent increased American indebtedness.

Is this a problem? Yes and no.

It’s a problem for what it signals, namely, government’s fiscal irresponsibility. It’s not a problem for what it does, namely, bringing more capital to the U.S. to help Americans shoulder the burden of Washington’s unsavory mix of gluttony (for spending) and cowardice (to raise taxes).

The U.S. Government’s Fiscal Incontinence

To the extent that U.S. trade deficits rise because the government sells more U.S. Treasuries – that is, borrows more dollars by issuing bonds – that part of the increase in U.S. trade deficits does in fact reflect a real problem in the U.S. That problem, again, is irresponsible government spending. But it’s vital to note that irresponsible government spending is caused exclusively by the fiscal recklessness of Congress and the White House; it’s not caused by foreigners making attractive offers of imported goods to Americans, or by Americans choosing to accept these offers. Regardless of how many or few imports Americans buy from foreigners, if the U.S. government lived within its means, there would be no new U.S. Treasuries for foreigners (or for Americans) to buy.

Someone might respond that foreigners’ eagerness to invest in safe U.S. Treasuries encourages Congress and the White House to spend irresponsibly. Such a causal connection between foreigners’ investment preferences and U.S. government budget deficits is logically possible, but it’s practically implausible, and highly so.

First, more than 60 percent of all federal spending today is non-discretionary; it’s on entitlements and debt service. These expenditures are obligatory. They are at today’s levels because of irresponsible commitments made by the government in the past.

It’s farfetched to think that Congress through the years arranged for entitlement spending and debt-service expenses to increase as much as they have (without being covered by increased taxes) because members of Congress were convinced that foreigners would eagerly lend to the government to cover these outlays. What happened instead is that politicians bought votes in the upcoming elections while giving little or no thought to just how these promises would be paid for. “Vote for me! I arranged for grandma today, and you tomorrow, to have more Social Security and government-funded medical care. And I didn’t raise your taxes to do it!” 

Because the benefits to politicians of making such fiscal deals are reaped by those office holders immediately (in the form of greater electoral support), while the costs of these deals come due only in the future (when many of those same officials will be long gone from office), politicians who vote for increased entitlement and debt-service spending that isn’t covered by corresponding increases in taxes simply give no thought to how this spending will be paid for.

Second, discretionary government spending is driven overwhelmingly by similar political considerations. Politicians who vote for, say, agricultural subsidies without corresponding tax increases don’t do so because foreigners’ willingness to buy U.S. Treasuries keeps the government’s borrowing costs lower than otherwise. No. Even if the Almighty announced to Congress just before such a vote was to take place that only Americans and not foreigners can purchase U.S. Treasuries, the politicians who support these boondoggles wouldn’t in the least be deterred from voting for them. All that matters to these politicians is that the costs of today’s promises will be paid for tomorrow, largely by people who aren’t among today’s voters. And today’s politicians give absolutely no thought to the nationalities of the creditors to whom those future U.S. taxpayers will be obliged to pay.

Third, foreigners today own only about 23 percent of U.S. government debt. The bulk of this debt, in other words, is owned by Americans. If, therefore (and contrary to fact), the U.S. government’s fiscal incontinence is rightly to be blamed on people’s willingness to buy U.S. Treasuries, most of this blame would fall on Americans. Yet I’ve never heard any protectionist demand that the government obstruct Americans’ commerce with each other in order to reduce the profitability of that commerce and, in turn, diminish Americans’ willingness to lend to the U.S. government.

Before moving on, it’s worthwhile to make one further observation about protectionists who point to foreign purchases of U.S. Treasuries as evidence that U.S. trade deficits are a problem. In doing so, these protectionists portray the U.S. government as mindlessly borrowing money from foreigners that it shouldn’t borrow and spend. Yet to prevent this reckless borrowing and spending, protectionists propose giving that very same government more power to obstruct Americans’ freedom to trade. What miracle do protectionists have in mind that would transform a government that can’t be trusted to make sound decisions about how to spend its citizens’ tax dollars into a government that can be trusted to make sound decisions about how to obstruct those citizens’ decisions about how to spend their own dollars?

Foreigners Help Americans Share that Burden

Foreigners’ purchases of U.S. Treasuries push real interest rates in the U.S. lower than these rates would be absent such purchases. These purchases, therefore, help to encourage more productive investment in the private economy even if the projects on which the government spends the borrowed funds are wasteful or destructive. If foreigners were to stop lending money to the U.S. government, interest rates would rise and that part of the budget deficit once financed with funds borrowed from abroad would be financed instead with funds borrowed from Americans. In turn, Americans would devote fewer funds to private investment projects. The growth rate of the American economy would be made slower.

There’s no question that the government’s grotesque fiscal irresponsibility and resulting budget deficits pose a real threat to America’s economy. It’s a threat that should be taken much more seriously. If saner heads somehow manage to prevail and restore a measure of fiscal restraint, U.S. trade deficits might indeed fall, as foreigners buy fewer U.S. Treasuries. But, perhaps counterintuitively, U.S. trade deficits might instead rise. Greater fiscal responsibility in the U.S. would improve the future prospects of America’s economy. Attracted by these improved future prospects, foreigners might well increase their investments in the U.S. private sector by more than they decrease their lending to the government.

Either way, however, pointing to U.S. trade deficits as an excuse to have politicians – who are today incapable of fiscal responsibility – restrain Americans’ freedom to trade is, to use the most scientifically precise term, totally bonkers.

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In an April 27 post on Truth Social, President Trump floated a politically ambitious idea: replacing federal income taxes — at least for Americans earning under $200,000 per year — with revenue raised from tariffs. 

No more IRS filings for the middle class, no more paycheck deductions. Instead, foreign producers would foot the bill through duties imposed on goods sold into the United States. It is a vision designed to appeal to taxpayers weary of complex, costly filings and mounting fiscal burdens. But appealing ideas are not always economically feasible. Even with generous assumptions, basic analysis shows that the plan is impractical and would be deeply damaging. A straightforward, back-of-envelope exercise reveals why.

First, consider the gap that would need to be filled. In fiscal year 2023, the federal government collected approximately $2.2 trillion in individual income taxes, according to the Congressional Budget Office (CBO). Meanwhile, total imports of goods and services into the United States totaled about $3.9 trillion, per the Bureau of Economic Analysis (BEA). If the goal is to eliminate the $2.2 trillion raised by income taxes and replace it entirely with tariffs, the simple calculation is:

Tariff Rate Needed = $2.2T / $3.9T = approx 56 percent

At first glance, it seems that a 56 percent across-the-board tariff on all imports could theoretically generate the necessary revenue. But this first approximation ignores how individuals, businesses, and trading partners would actually respond to such a shock.

The real economy is dynamic, not static. If tariffs were raised to 56 percent, several predictable consequences would quickly unfold. Imports would decline sharply, as US consumers and firms, facing vastly higher prices, would reduce purchases of foreign goods. While Penn Wharton projects large trade declines from tariffs, import price elasticities — typically between -1.5 and -2.0 — suggest that tariffs of 50 percent to 100 percent would shrink import volumes by 60 percent to 80 percent. For illustration, if imports shrank by 40 percent, the new import base would fall to about $2.34 trillion.

To still raise $2.2 trillion in revenue from a much smaller volume of imports would require recalculating:

Tariff rate needed = $2.2T / $2.34T = approx 95 percent

In short, a 95 percent tariff — nearly doubling the cost of every imported good — would be necessary to generate the same revenue after accounting for reduced imports. And this estimate still assumes that tariff evasion, product mislabeling, and black-market smuggling would not further erode the tax base — an unrealistic assumption.

To be fair, Trump’s April 27 post appeared to suggest a somewhat narrower proposal: replacing income taxes only for individuals earning under $200,000 per year. That adjustment reduces the revenue gap. IRS data shows that individuals earning $200,000 or less account for about 54 percent of total federal income tax collections. Thus, approximately $1.19 trillion would need to be replaced. Using only goods imports (roughly $3.08 trillion in 2023, excluding services), the tariff required would be about 39 percent — if no behavioral change occurred. But if imports shrank by 50 percent under steep tariffs, the necessary tariff rate would rise to approximately 77 percent. Even this more modest goal would trigger severe economic disruptions: major inflation, deep recession, and widespread supply chain disorder.

Beyond the technical difficulty of collecting such revenues, the broader economic consequences would be devastating. Raising tariffs to 77 percent or 95 percent would effectively sever the United States from global supply chains, driving up the costs of not just imported goods, but also domestically manufactured products that rely on foreign components. Prices for automobiles, electronics, apparel, and machinery would soar. In many sectors, shortages would emerge as supply chains collapsed or failed to reorganize quickly enough.

History offers a sobering warning. During the early 1930s, the Smoot-Hawley Tariff Act raised average tariffs to about 20 percent, leading to a two-thirds collapse in world trade, a 50 percent drop in US exports, and a 30 percent contraction in US GDP. Compared to Smoot-Hawley, a 77 percent or 95 percent tariff regime would be catastrophic. Conservative estimates suggest GDP could fall between 8 percent and 15 percent, representing a $2.2 trillion to $4.0 trillion loss in economic output — equivalent to or worse than the Great Depression.

Inflation, meanwhile, would explode. Imports account for about 15 percent of direct US consumption, and when embedded in finished goods, contribute to roughly 25 percent to 30 percent of total consumer spending. Doubling or tripling the cost of imported goods would ignite a chain reaction. Analysts would reasonably expect consumer price index (CPI) inflation of between 20 percent and 40 percent in the first year alone — higher than anything seen since the 1970s, when inflation peaked at around 14 percent.

Wages, which tend to adjust slowly, would not keep pace. Households would experience a swift and painful decline in real purchasing power. For the very middle-class families the plan is meant to help, real incomes would fall sharply, and living standards would deteriorate.

It is important to note that these figures are necessarily estimates, and different assumptions about elasticity, retaliation, and substitution could shift these numbers. Yet even under favorable assumptions, the sheer scale of tariffs required to replace even part of the income tax — and the economic distortions those tariffs would unleash — make the idea untenable. The dream of painless taxation funded by foreign producers collapses under the weight of basic economic logic and analysis.

As appealing as it sounds to shift the tax burden away from American paychecks and onto foreign goods, the real-world consequences would be catastrophic: mass inflation, deep recession, supply chain breakdowns, falling real incomes, and a likely spiral into protectionist-created economic decline.

The surest way to ruin a bipartisan dinner party is to say the words “unitary executive.” Liberals are likely to respond: “To give a president (especially one as capricious as Trump) total control over the executive branch is a recipe for tyranny — for a king who rules by whim and will alone.” 

To which conservatives will respond by quoting Article II’s Vesting Clause:  “Article II is clear as day, ‘the executive power shall be vested in a President.’ The alternative is rule by bureaucrats (have you forgotten Biden’s aggressively partisan absentee presidency?), and that too is a recipe for tyranny — for an unaccountable oligarchy.”

This debate never seems to persuade anyone. Liberals have become convinced that a unitary executive is the end of the separation of powers. And conservatives have become convinced that liberals want unaccountable bureaucrats to rule the nation.

The reason nobody is ever persuaded is that neither side sees the debate clearly. The debate only appears to be over the claim that all executive power vests in the president when, in truth, the debate is over the appropriate remedy to the problem of legislative power vesting in the president.

The Constitution, of course, doesn’t give any legislative power to the president. Article I provides that “all legislative power herein granted shall be vested in a Congress of the United States,” and the Tenth Amendment reserves all remaining powers “to the States respectively, or to the people.” Yet the modern executive branch is legislative. It is, in fact, a more active legislature than Congress. While Congress creates a few hundred laws per year, the executive branch creates a few thousand. And while Congress tends to legislate only at a high level on major issues, the executive branch also legislates fastidiously on minute issues, from the dispersion of holes in Swiss cheese to the amount of water that flows through showerheads. Over this vast legislative apparatus sits the president who wields significant — but not total — control over the policies it sets and the laws it promulgates to realize them.

So when liberals hear conservatives say that the president should have total control over the executive branch, what they often hear is that the president should be a unitary lawmaker.  That explains why one New York Times journalist erroneously described unitary executive as “reject[ing] the idea that the government is composed of three separate branches.”  

Liberals are right to fear a unitary lawmaker. A unitary lawmaker is likely to be a tyrant, unless he’s an angel, and men never are. But even the best man would likely be a worse lawmaker than a group of men, because a group is likely to be more thoughtful and deliberative, and, by virtue of numerosity, less susceptible to capture by what James Madison called “faction” — groups eager to wield power for their own narrow benefit rather than for the common good.

Liberals who fear a unitary lawmaker can count the Founders on their side. The Founders knew that if factionalism infected government, no one could trust that the laws would give him justice, and politics would become what my colleague Paul Ray colorfully calls “a death-struggle for the controls of the Death Star.” The Founders knew, too, that factions would always exist. They did not expect men to be angels but aimed to control the effects of factionalism by pitting factions against each other both vertically (between the states and the federal government) and horizontally (among the states and among the three branches of the federal government).

Congress is especially designed to balance faction against faction. Its hundreds of members are elected by varied regional, cultural, economic, and religious coalitions, and no one member can wield legislative power alone. “Extend the sphere,” wrote Madison, and “you make it less probable that a majority of the whole will have a common motive to invade the rights of other citizens; or if such a common motive exists, it will be more difficult for all who feel it to discover their own strength, to act in unison with each other.”  

A unitary legislature, by contrast, shrinks the sphere and breaks the balance. A unitary legislature need not compromise or deliberate. No ambition checks its own ambition. It can legislate favors to whatever faction it likes and burdens to whatever faction it dislikes. President Biden’s repeated attempts to cancel college-educated voters’ loans are one example; President Trump’s suspension of the law forcing TikTok’s Chinese owner to divest is another.

If a unitary legislature also wields executive power, factionalism is likely to bleed over from one power to the other, so that a president who can legislate for the benefit or detriment of factions will also execute the laws for the benefit or detriment of factions. Biden’s selective enforcement of the FACE Act to punish pro-life protestors but not to punish vandals of churches and pro-life pregnancy centers is one example; Trump’s enforcement of civil rights laws against some universities but not others is another.

Mix factionalism in writing laws with factionalism in executing them, and you will have brewed the perfect poison to kill faith in impartial justice, which is the lifeblood of the rule of law. This is what liberals fear when they hear “unitary executive.”

But conservatives don’t support brewing that poison. Arguably, conservatives tend to be even more faithful defenders of the rule of law, given their keen sense of its fragility and their deep sense of gratitude to their forebearers who fought for and sustained it. By philosophy and temperament, they are less likely to be tempted to sacrifice principle for the promise of progress. Sure enough, one finds no end to conservative criticisms of unitary lawmaking. Many conservative criticisms of the administrative state sing in this key. And most (but not all) legislation aimed at retaking Congress’s lawmaking power from the executive branch comes from Republicans.

So when conservatives respond to liberals by pointing to Article II’s vesting clause, they’re saying that America already has a unitary lawmaker in the administrative state. Administrative agencies exhibit none of the benefits of Congressional lawmaking and all the detriments of a unitary lawmaker. They deliberate only with themselves, no ambition checks their own, and they are subject to capture by ideological factions (thus the criticism that bureaucrats are overwhelmingly progressive) and economic factions (thus the criticism of the revolving door between government and industry). On top of all that, the American people cannot elect or fire the bureaucrats or otherwise exert any meaningful control over the content of the laws they make.

The best solution to this problem would be to end administrative lawmaking. For that reason, conservatives want to revive the nondelegation doctrine, force Congress to oversee agency rulemaking, and make the president a true executive once again. Yet these seem like pipe dreams, and so conservatives settle on bureaucratic accountability through the president. Yes, it’s bad to have a unitary lawmaker, but given the choice between an unaccountable one and one that they can kick out of office every four years, they pick the latter. 

It should be clear by now that both the liberal solution — independent bureaucrats — and the conservative solution — presidential control of bureaucrats — are second-best solutions to the problem of unitary executive lawmaking. Yes, there are some liberals who follow Woodrow Wilson and believe that representative lawmaking should be largely replaced with bureaucratic rule, but most would probably be delighted if Congress retook its lawmaking primacy. After all, this would generate more stability, more compromise (and the legitimacy that compromise brings), and more room for the president, as a true executive, to “unite in himself the confidence of whole people” instead of just his most ardent supporters.  In short, if Congress reasserted itself, the fight over the unitary executive would largely melt away because the president would only enforce Congress’s laws. And he would be more likely to enforce those laws equally, neutrally, and for the common good. Most Americans would probably be happy with that.  

But both liberals and conservatives have written Congress off, settling instead on second-best solutions. Liberals argue that greater bureaucratic independence from politics is the second-best solution because they trust bureaucrats to be less-partisan than the president. Conservatives, on the other hand, argue that presidential control over bureaucracy is second-best because it creates some measure of representative government, some measure of political accountability.

Which side has the better argument is a question for another article, the point here is only that both sides agree on more than they think. Because both sides have concluded that the best solution is not feasible, they spend their time fighting over second-best solutions. Perhaps if they realized that they were, in fact, in broad agreement about the problem they were trying to address, they might find more success joining forces and fighting for the solution they agree is best: re-vesting the legislative power in Congress.   

In his 1933 lecture at the London School of Economics titled The Trend of Economic Thinking, Frederich Hayek identified a shift in economic thought toward planning and interventionism. He argued that the German Historical School and the institutionalists were major contributors to this trend. However, what actually laid the foundation for planning and interventionism in the following years was the formalism of neoclassical theory itself. Hayek and his mentor Ludwig von Mises in the 1910s and 1920s were part of the neoclassical tradition, and the idea that “formalism” itself initiated this shift in economic thinking is what Boettke calls, “Where Hayek went wrong.” Hayek was being left behind by his profession. Once among the most referenced economists in England, by the postwar era, some economists questioned whether his work even qualified as economics. The best example of this was when he submitted his Nobel lecture to Economica, and they asked him to revise it. What caused this departure from the market to the plan? The major intellectual forces of the time: scientism and statism, which always seem to co-exist. 

The followers of scientism — those who hold a dogmatic belief in the validity and certainty of their theories — tend to believe that the only obstacle to solving social ills is a problem of execution. Since they believe they already have all the answers, the temptation toward statism becomes irresistible.

The Man of Good Will

Paul Samuelson, in his famous 1948 textbook Economics — one of the best-selling books in the history of the discipline — criticized Hayek, writing: “No immutable ‘wave of the future’ washes us down ‘the road to serfdom,’ or to utopia. Where the complex economic conditions of life necessitate social coordination and planning, there can sensible men of good will be expected to invoke the authority and creative activity of government.” In his view, one day well-intentioned men who act solely in the public interest will enter politics, and economists should guide them in solving social ills like unemployment, inflation, recession, and poverty.

This dream is what Robert Nelson calls the “secular religion of scientific management” in his 2001 book Economics as Religion. The secular religion of scientific management is the idea that we can solve the problems of society in the same way we solve problems in science. This mindset assumes that the means and ends of a society are given, and in such a world, the only issue is a problem of “allocation,” not “coordination.” And what better tool to solve the allocation problem than applied mathematics — A field in which the means and ends are assumed to be known? Why tolerate the chaos of capitalism, with all its business cycles and monopolies, when we could achieve a world of “perfection”? At the same time, the so-called “news” from the Soviet Union seemed appealing — so much so that Samuelson wrote, “Russia with its communistic government appears to be on the march.”

The Scientific Management of Society

In this historical context, it seemed regressive for post-World War II America not to embrace the idea of scientific management of society.I. If the entire world was moving in that direction, and the numbers from the Soviet Union appeared to demonstrate success in postwar reconstruction, then the only question was: when should the United States begin the process of saying goodbye to the invisible hand of the market and welcome the man of good will, who will help us solve our societal problems? The dream was to manipulate the market mechanism to achieve desired social outcomes, as envisioned by the “planner,” presumed to act in society’s best interest.

When reading the texts of the Progressive Era, one finds a passion for discovery in the writings of its thinkers. A belief that they were uncovering something entirely new. A confidence that makes one exclaim: “Why has no one thought of this before!” These thinkers shunned the past and embraced science as the path forward. And while the reformers of the New Liberalism in the late 19th century shared a similar enthusiasm — though perhaps to a lesser extent — the Progressive Era was especially marked by its confidence in the power of scientific solutions..

Social Physics and Its Unintended Consequences

What’s interesting about Comte is that his starting point was similar to Hayek’s: the idea that society possesses a spontaneous order, not directed by a rational plan but emerging from countless individual plans. This is evident in his works like Social Statics, or Theory of Spontaneous Order of Human Society. But where Comte diverged from this vision is in his theory of positive philosophy. For Comte, spontaneous order was not the root of progress, nor should it be the foundation for a rational society. Instead, society should be guided by science and scientists. The relationship between man and nature — and between men — should be directed by science.

As the Stanford Encyclopedia of Philosophy describes Comte’s view: “The moral question, ‘What should I do?’ is no longer asked in the first person, and is transformed into an engineering problem: ‘What should be done to make men more ethical?’” The question that social scientists must answer thus becomes an engineering problem. In this literature, as emphasized by Comte, the dogma of liberty is seen as an obstacle to reorganization.

Comte’s vision of reorganization is tied to his theory of the three stages of history. The first is the Theological Stage, in which society and politics are primarily influenced by religion. The second is the Metaphysical and Abstract Stage, which one might argue is closest to Adam Smith’s grand plan of liberty. The third is the Scientific or Positive Stage, in which society is no longer directed by religion or liberty, but by science. This is the trajectory of history in Comte’s view, and any resistance to it is reactionary — an impediment to the development of civilization.As Comte famously put it, “The goal of every science is foresight.” He regarded the Positive Stage as “the highest accomplishment of the human mind.”

This idea, described by Frank Knight as “salvation by science,” is a recurring theme in the history of social thought. As shown in this article, the belief in scientific management of society stretches from Comte to Samuelson. It assumes that scientists have either found or will soon find the solutions to our social ills. The only remaining obstacles are those “reactionary” classical liberals who resist the execution of these plans and seek to limit state power. Even if the theorists of a positive science of human society try to remain apolitical, their assumptions inevitably lead to statism. They assume that we already possess all the knowledge and solutions to our problems, and yet those problems persist — therefore, the market must be inadequate, and we need the visible hand of the state.

The unintended consequence of this thinking is captured well by Hayek: “Once one understands this, it also becomes clear why methodological and political differences so frequently go together: those who believe that it is in the power of science to predict particular individual events, or the position of individuals, naturally also want to use that power to produce the particular results they desire.”

Then, What Is the Role of Economists?

In light of this, one may reasonably ask: What is the role of the social scientist? And more specifically, what is the role of the economist? This question has been answered in different ways by various thinkers, including Samuelson, as discussed earlier. One compelling answer comes from James Buchanan in his book What Should Economists Do? The role of economists is not social engineering but aiding in the process of social understanding. Economists have this role because of the subject matter they study: the inevitable ignorance of mankind and the fundamentally different nature of solutions to social problems — solutions that involve trade-offs, not final answers.

And when society faces trade-offs, it is better for individuals to be autonomous contractors — free to choose and free to preserve their liberty — rather than servants of a state, whether that state is theological or scientific.

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Washington, DC — Dr. Ryan Yonk, Director of Education and Senior Research Fellow at the American Institute for Economic Research (AIER), testified Wednesday before the House Committee on Science, Space, and Technology Subcommittee on Energy, offering critical analysis of the US Department of Energy’s Loan Programs Office (LPO).

Created under the 2005 Energy Policy Act, the LPO was intended to accelerate clean energy innovation through federal loan guarantees and direct loans. In his testimony, however, Dr. Yonk argued the program has fallen short of its mission.

“The hope in creating the office was to incentivize the development of new and more affordable clean energy, which was viewed as being underprovided in the market,” Yonk said. “In practice, it has largely benefited large, politically connected corporations while increasing the likelihood that high-risk projects receive taxpayer support.”

Among the LPO’s most notable failures was Solyndra, a solar panel manufacturer that received over $500 million in federal loan guarantees before filing for bankruptcy in 2011, leaving taxpayers on the hook and raising questions about the program’s due diligence.

Yonk said the Solyndra downfall, which he chronicled in the book Nature Unbound (2016), exemplifies the structural flaws in government-backed financing.

“Government loan initiatives, like the LPO, create a moral hazard problem since companies are more likely to participate in riskier endeavors knowing that they will be able to fund them through non-market alternatives,” Yonk said. 

Read Dr. Yonk’s full remarks: 

Watch Dr. Yonk’s testimony: