1, May 2025

Two recent books start from different places but come to a similar conclusion about the factors leading up to the US tariffs.

The Economic argument.

Michael Lind, in his book “The New Class War” starts the story with World War 1 that led to greater role of the state for economic and social security. This larger role for the state continued during the Great Depression and expanded during Worlds War 2. In particular, the need to avoid strikes and labour disruptions led to tripartite – business, labour, and government – negotiation of wages. In the US companies were granted exemption from anti-trust laws to negotiate industry wide wage agreements. By 1945 more than 35% of the US non-agricultural workforce was unionized. After the war, these arrangements persisted in one form or another until the early 1970’s, including heavy regulation of industries such as aviation, trucking, and telecommunications.

These changes resulted in a steady decline in income inequality in the US from World War 1 to the 1970’s, as shown by the share of income by the top 1% below. A similar trend was shown by most countries in western Europe, and in Canada. Lind explains this as what he calls a class compromise between the “managerial overclass” and the “working class.” He sees the “managerial overclass” as mostly people with university degrees.

However, a reaction set in led by people like Friedrich Hayek and Milton Friedman who concluded that the state had too much role in the economy. They saw the state as an obstacle to both economic progress and individual freedom. This was the neoliberal revolution. Initially this led to de-regulation of industries like aviation, rail, trucking, telecommunications and busing. By the mid 1980’s a consensus emerged that the state had too large a role in the economy, and that need to be reduced. For the next four decades there was a series of actions that resulted in a smaller role for the state in the economy. This trend existed in many countries but was strongest in the US. This trend weakened organized labour and by 2024 the percentage of the US workforce that was unionized had fallen to 10%. One strategy used heavily in the US was global arbitrage, the strategy of taking advantage of differences in wages, regulations, or taxes in different countries. This led to the offshoring of as many as five million jobs from the US and major multinational companies having locations in tax havens, resulting in much lower US tax payments. It also led to a big increase in low skilled immigration to the US which depressed wages, as a kind of labour arbitrage.

Lind points out this trend resulted in a mass of grievances among the working class that accumulated over the decades, including lower wages, a lack of influence, a feeling of being left behind and general alienation. As shown in the diagram above it also greatly increased wage inequality in the US. This was fertile ground for election of populist politicians with simplistic solutions to complex problems, as has happened in the US, and other countries.

The Technology argument.

In their book “Power and Progress” Daron Acemoglu and Simon Johnson    describe the role of technology including the impact of technologies such as mass production, automation, and artificial intelligence. They take a very long view and look at technological trends over the last 1,000 years. One of their conclusions is that the benefits of any new technology go to the entrepreneurs, investors, and executives in the new technology unless there are strong forces to counterbalance it. “There is nothing in the past thousand years of history to suggest the presence of an automatic mechanism that ensures gains for ordinary working people when technology improves.”  On the contrary, they provide many examples of cases where the benefits of new technology go to lucky entrepreneurs, investors, and executives.

With the start of the fourth industrial revolution many new technologies are being developed, and this is causing a large increase in inequality in the US in particular. The richest people in the US are the entrepreneurs who developed the new technologies. (Elon Musk, Jeff Bezos, Mark Zuckerberg, Larry Ellison, Larry Page, and Sergey Brin). They point out the dangers of these technology leaders being able to impose their messianic visions on society.

The end point of the economic and technology argument.

Both the economic and technical argument end up at the same place, described by Lind as “long smoldering rage by non-college educated workers against damage done to their economic bargaining power, political influence, and cultural dignity during the half-century revolution from above of technocratic neoliberalism. “

The authors of both books state that this situation is fertile ground for election of a populist demagogue.

The US experienced both the economic and technological trends much more strongly than other western countries, and as a result has a much higher level of income and wealth inequality. Canada, for example, as a resource base economy, has very limited opportunity to engage in global arbitrage.

A third perspective.

In an article published five years ago in Foreign Affairs, Michael Beckley makes the point that for most of its history the US was an isolationist country. As he put it: “Trump’s ‘America first’ approach to foreign policy has deep roots in U.S. history. Before 1945, the United States defined its interests narrowly, mostly in terms of money and physical security, and pursued them aggressively, with little regard for the effects on the rest of the world… Its tariffs ranked among the highest in the world. It shunned international institutions… The era of liberal U.S. hegemony is an artifact of the Cold War’s immediate afterglow. Trump’s transactional approach to foreign policy, by contrast, has been the norm for most of U.S. history. As a result, Trump’s imprint could endure long after Trump himself is gone.”

Conclusion

The economic and technology perspectives both end up describing a dismal social situation in the US where a disillusioned and alienated segment of the US population chose to elect a populist demagogue, who chose to impose tariffs.

Looking at this from a historical perspective, the US is returning to a foreign policy approach it used for most of its history up to the Second World War, and it is possible that the mindset that produced these tariffs could persist for a very long time. However, the situation is very unpredictable and only time will tell what happens.

Peter Josty