On Lincoln, Wrestling & Tariffs

Abraham Lincoln was known for a bunch of great and amazing things: serving as the 16th President of the United States, preserving the Union through the Civil War, paving the way for the abolition of slavery and, of course, a great beard!

But did you know he was also a great wrestler?

When Lincoln was 22 years old he moved to a new town and quickly developed a reputation as a formidable grappler. It didn't take long to find himself in match with Jack Armstrong, the leader of a local gang called the Clary's Grove Boys and pretty much the neighborhood bully. Ronald White, the author of the best Lincoln biography by far in our opinion, A. Lincoln: A Biography, called the match this way:

Five years older than Lincoln, but ten inches shorter, Armstrong had a reputation for using trickery to win his matches. The accounts of the match vary, offered long after it took place. The two men did not, as the legend has suggested, circle each other with arms free, looking for an opening to dart in and throw the opponent. Rather, they began with prescribed holds, agreed upon in advance, in which strength, leverage, and agility were the primary assets. This custom, passed down from Northern England, favored Lincoln, with his greater height and therefore leverage. Lincoln and Armstrong pushed and pulled until — and here many witnesses are in agreement — Armstrong, in frustration, broke his hold or lost his contact with Lincoln. Under the loose rules of wrestling on the frontier, Lincoln at this point might have been declared the winner, but instead he and Armstrong shook hands and agreed to call the wrestling match a draw.

Besides Armstrong, Lincoln also had to wrestle with one of the many hotly debated political issues of his time: protectionist trade tariffs.

Before income tax became a thing in 1913, tariffs on imported goods were the primary form of government revenue. From a political standpoint, you were either for or against import tariffs. There was no free-trade movement yet because the economic principles of "gains from free trade" and "comparative advantage" developed by Adam Smith and David Ricardo were only a few decades old and were not widely read at that time.

When an American paid $20 for steel rails to an English manufacturer, America had the steel and England had the $20. But when he paid $20 for steel to an American manufacturer, America had both the steel and the $20.

But what Lincoln failed to realize in his thinking is that it was possible to pay England $20 for double the amount of steel because the English could produce it much more efficiently. As a result, the U.S. products that used steel as an input would be priced a lot less as well, saving U.S. consumers more than the $10 difference. Without import tariffs in the U.S., England would be less inclined to put their own retaliatory import tariffs on American cotton. This also would add economic value overall by allowing the U.S. to export more cotton than otherwise would be allowed under the England's retaliatory import tariff regime.

The global economic system did not come around to Smith and Ricardo's clear thinking, free-trade principles until President Roosevelt laid the groundwork for the era of trade liberalization in the post-WWII era.

This brings us to President Trump's comments last week: he wants to apply a 25% tariff on steel imports and a 10% tariff on aluminum imports. In our opinion, his position is misguided and economically indefensible. But don't take it from us, take it from someone who knows a thing or two about these things, Adam Posen, an economist who is currently President of the Peterson Institute and a member of the panel of economists advising the Congressional Budget Office:

Steel is just a tiny input in the U.S. gross domestic product (GDP) — which is why it’s so crazy. You mess up your entire trading system for an industry that has a total of 140,000 jobs. By comparison, steel-consuming industries, which experts believe will be hardest hit by the tariffs, employ 6.5 million Americans and add about $1 trillion to U.S. GDP, according to the census.

Say nothing about the retaliatory tariffs that our current trading partners may enforce. The whole thing is ridiculous and the primary reason why the U.S. equity market lost a quick $350 billion in market capitalization immediately after the announcement, according to Bloomberg.

If President Trump's import tariff plan goes through, it ultimately may increase the prices for goods that use steel and aluminum as an input, hitting us where it counts — think cars and beer!

Ultimately, higher prices may result in higher inflation, which is the Federal Reserve Bank's number one worry right now. As a result, the risk of the Fed making a monetary policy mistake — increasing short-term interest rates too much, too fast or both and killing the business cycle expansion — may have just gone up as well.

Contact Russell Moenich to learn more about this topic.
330.255.4330 | rmoenich@sequoia-financial.com

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