Unconstitutional

The Tariff Lawsuits

“The president has upended the constitutional order and brought chaos to the American economy,” says a lawsuit challenging the Trump tariff regime.

Filed by Democratic attorneys general in 12 states — mostly “blue” states like Illinois and New York — the suit asks the U.S. Court of International Trade to halt the tariff policy.

A separate suit was filed by California Gov. Gavin Newsom — who says his state is the biggest importer in the country and could lose billions of dollars in revenue from the tariffs.

The Democrats’ lawsuits can be written off as partisan hackery. The lawsuits from small businesses, not so much.

The first one was filed last month by the nonprofit New Civil Liberties Alliance. In the past, the NCLA has — among other things — sued the Biden administration on behalf of plaintiffs who’d been censored by Big Tech for posting alleged “misinformation” about COVID (Unfortunately, they lost.)

Liberals they are not.

The NCLA is representing Emily Ley, owner of a company in Pensacola, Florida called Simplified — maker of high-end planning calendars and other products marketed to women. 

Emily Ley, a small-business success story — but for how much longer?
[as seen on her Substack site]

She relies on imported materials from China not available domestically. Those materials were already subject to a 25% tariff before Donald Trump’s “Liberation Day” announcement — which jacked them up to 150%.

“Since 2017, my company has paid $1.17 million in tariffs to the United States government,” Ley writes on her Substack page.

“I share this number publicly because the misinformation and confusion surrounding who actually pays these tariffs must be made clear. I have signed the checks. We have raised prices as much as possible. The rest we have sadly taken out of salaries, growth opportunities and philanthropic efforts.”

“It's bad for the world, for the country, for you and for all companies, but particularly small ones,” adds entrepreneur Rebecca Melsky. "Big businesses will have an easier time absorbing the extra costs and passing them on to the consumer."

Melsky runs Princess Awesome, a Maryland-based shop selling “nerdy” clothing for both kids and adults. She’s a plaintiff in a separate lawsuit filed by the Pacific Legal Foundation — along with five sellers of board games, an art studio and a kitchen supply outfit.

Asked on Facebook why she doesn’t use American suppliers, she said she did when she launched her business a decade ago. But it was impossible to continue doing so as she scaled up. Ditto for trying to bring it all back home with a snap of the fingers.

“To find adequate replacement fabric in the U.S. and sample all the patterns and sizes before starting actual production, I estimate would take, at a minimum, nine–12 months,” she writes on her company’s website. “And let me just tell you, it would not be cheap.”

So… do these lawsuits stand a chance of success? Read on…

Unconstitutional

In justifying the tariff regime, the Trump administration cites a law called the International Economic Emergency Powers Act of 1977.

“This law permitted the president to impose tariffs on goods emanating from outside the U.S. in the case of an economic emergency,” writes Judge Andrew Napolitano in his syndicated column. “The statute defined an emergency as a sudden and unexpected event that adversely affects U.S. national security or economic prosperity.”

Team Trump says America’s imbalance of trade with other countries constitutes an emergency.

But Trump’s executive order signed on “Liberation Day” last month says this imbalance has existed since 1934. “Thus, by definition, it is not a sudden or unexpected event,” says Napolitano, “and thus, it is not an emergency as defined in the statute.”

There’s an even more fundamental issue cited in the small-business suits: Tariffs are taxes. And as we learned in school, taxes must originate in the House of Representatives.

In other words, Congress punted on its basic responsibilities when passing the 1977 law. There is “no constitutional basis for the statute,” Napolitano goes on.

“Congress cannot give away any of its core functions — among which is the power to tax. James Madison, who was the scrivener at the Constitutional Convention in 1787 and, during his lifetime, its most authentic interpreter of what the Framers’ original understanding of the document was, argued that the separation of powers — the Congress sets taxes, the president collects them — was written to preserve personal freedom by preventing the accumulation of too much power in any one of the three branches…

“Congress can no more allow the president to impose taxes than he can allow the judiciary to command troops in wartime.”

That could prove to be a persuasive argument to the Supreme Court’s conservative majority.

“If this were to get to the Supreme Court and the case were to be decided on the merits, as opposed to some technical procedural issue, I think we have a good chance of getting the five votes that we need,” George Mason University law prof Ilya Somin tells Politico. Somin is representing still another group of small-business plaintiffs.

The first step comes next Tuesday — when several of the lawsuits will be heard at once in the U.S. Court of International Trade.

Judge Napolitano counts Trump as a friend. But he stands against the president in this instance. “This is not a pro-Trump or anti-Trump issue; nor is it a Republican or Democratic issue. It is one of fidelity to the supreme law of the land and to the laws written pursuant to it.”

Tariff Blowback

The big economic number of the day comes from overseas: One month doesn’t constitute a trend, but U.S. tariffs might not be having the intended effect of squeezing China.

Chinese exports in April leaped 8.1% year-over-year, according to the Chinese customs authorities — quadruple the consensus guess among economists polled by Reuters.

“The strong performance,” says the Financial Times, “came as Chinese companies diverted trade flows to south-east Asia, Europe and other destinations following the imposition of prohibitively high tit-for-tat tariffs between the world’s two largest economies.”

Gee, this sounds sorta familiar. Where have we heard it before?

Oh yeah — after Russia’s invasion of Ukraine in 2022. Western sanctions were intended to wreck the Russian economy. Joe Biden spoke of reducing the ruble to rubble.

But that’s not how it worked out: Chinese and Indians and others were more than happy to buy the Russian goods — especially oil — that Western leaders sought to sanction.

According to the World Bank, Russia’s economy grew 3.6% in 2023, compared with America’s 2.9%. (Both have slowed considerably since.)

Coincidentally or not, it wasn’t long after the release of China’s export figures that Donald Trump floated the idea of lowering Washington’s 145% tariffs on China to 80%.

His remark also comes a day before Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer will meet in Switzerland with Chinese negotiators.

If Trump’s musings were intended to goose the stock market — yesterday he said, “You better go out and buy stock now” — the impact so far is muted. At last check the S&P 500 is little changed from yesterday at 5,668. Likewise the Dow and the Nasdaq are within 0.1% of yesterday’s close.

Minor jitters returned to the bond market this week, with the yield on a 10-year Treasury note back to 4.37%.

Gold is on track to end the week comfortably above $3,300, but silver continues struggling to break the $33 barrier.

Crude is set to end the week over $60; just like last month, the break below $57 didn’t last long.

Bitcoin broke through $100,000 yesterday and as we check our screens it’s just under $103,000. The flagship crypto looks as if it wants to retest the double top of $106,000 set in December and January.

DJT Channels His Inner AOC

Go figure: Donald Trump wants to tax the rich.

Several news outlets report that the president is open to raising the top income tax rate on households earning $2.5 million a year or more.

It’s currently 37%; the idea is to return it to the Clinton- and Obama-era rates of 39.6%. As the theory goes, that would be one way to cover the cost of extending the 2017 Trump tax cuts for everyone else. (If Congress doesn’t act, the current rates will expire at year-end; if you’re in the 22% bracket now, you’d be back to 25%.)

The Wall Street Journal tries to sell this stance as precedent-breaking: “The top tax rate is the untouchable hot stove in the Republican Party, which has partly defined itself in opposition to any rate increases for more than three decades.”

And so perhaps Trump is channeling his inner Alexandria Ocasio-Cortez. Remember this from 2021?

That said, it’s not exactly new for Trump World: In our voluminous archives, we see Steve Bannon in 2017 proposing a 44% marginal rate on incomes over $5 million.

But the whole thing is Kabuki theater. “Taxing the rich” is just a clever diversion, no matter who proposes it.

It’s been several years since we’ve had occasion to cite an important passage from the 2009 book Endless Money, by the Maryland-based money manager Bill Baker. It’s worth a revisit today.

“Tycoons such as Soros and Buffett can call for higher taxation of income,” Baker wrote — and that emphasis on the word “income” makes all the difference.

“This is a very cynical and downright mendacious strategy, for they know full well this burden would fall primarily upon members of the upper middle class, who have not yet achieved the threshold that would permit them to shift income to tax-minimizing structures…

“Once a certain threshold of wealth is achieved, taxpayers have some latitude in structuring when and where income originates.”

Thus, Google founders Larry Page and Sergey Brin “pay themselves just $1 in W-2 income,” Baker wrote, “but each year, they may accrue millions or even billions of dollars of unrealized capital gain.”

Word. Under most circumstances, if you’re bringing home $2.5 million or more in taxable income during any given year… you’re doing it wrong.

Hard telling whether this proposal for a 39.6% rate on incomes over $2.5 million will fly. But whatever the outcome, it will make little difference either to “the rich” or to Uncle Sam’s revenue stream.

Why Did the Lights Go out In Texas?

It seems a couple of readers were triggered by yesterday’s mailbag — in which a correspondent attributed the Texas blackout of 2021 to the state’s growing reliance on renewable energy sources.

“I live in Texas, and the reason we had a power grid failure in 2021 was 100% due to natural gas problems, not renewables,” says the counterpoint. “It's easy to blame solar and wind, but it's not at all the reality of what we suffered through.

“Realistically, the state regulators are at fault. There was a freezing incident during the 2011 Super Bowl in Dallas, after which the state legislature promised us to be serious about winterizing the infrastructure.

“Unfortunately, it was all talk. The ‘regulations’ they put into place had no enforcement whatsoever. Why would anyone spend the money winterizing with no repercussions if they opt not to?

“So yes, the balance of power generation is worth covering. But your reader who chimed in was basing all of their commentary on false premises.”

“Your reader’s portrayal of the winter shutdown of the power system in Texas was misleading — and you know it!” adds another.

“You ignored the official findings of the cause of the catastrophic breakdown, and instead, you blame snow on solar panels and too much reliance on wind power. In fact, solar and wind were the power sources that worked to plan: It was the fossil fuel power stations that failed.

“To double down on your blatant untruth, you add some left-field comment from a NJ resident who claims offshore wind turbines are killing whales. You don't give evidence of this (because there isn't any!), but you put it in print to mislead your readers.

“Is that the true purpose of your Paradigm Press: to deliberately mislead readers? Perhaps you intend to lead them down some suspect investment path?

“P.S. Are you brave enough to allow your readers to see this message?”

Dave responds: Ooh, it’s been way too long since we’ve had an “I dare you to print this!” email. Thank you for reviving the tradition!

“The blackouts were the result of several interconnected factors and failures,” wrote the Austin-based energy journalist Robert Bryce a few months after the incident.

But renewables were a central factor, as he laid out in the Dallas Morning News:

Since 2006, about $66 billion was spent building wind and solar capacity in Texas. Over that same time period, according to a recent report by Bill Peacock of The Energy Alliance, Big Wind and Big Solar collected roughly $22 billion in subsidies of one kind or another, including state tax breaks and federal tax credits. But when the ERCOT grid was on the brink of collapse on Feb. 15, that $66 billion was worth next to nothing. There was no solar production, and of the 31,000 megawatts of wind capacity installed in ERCOT, only about 5,400 megawatts, or roughly 17% of that capacity, was available when the grid operator was shedding load to prevent the state’s grid from going dark.

The $66 billion spent on wind and solar resulted in big changes in the state’s generation capacity. Between 2006 and 2020, the amount of electricity generated with wind went up by about 20% and coal-fired generation fell by about the same amount. Meanwhile, thanks to booming population growth and increased electricity demand in the Permian Basin, electricity use was soaring.

In addition, Bryce faults Texas regulators for failure to treat the power grid and natural gas infrastructure as interdependent systems.

Result: “During the February blackouts, some gas infrastructure froze. Some gas processing plants and pipelines had their electricity cut off. That, in turn, reduced the amount of fuel available to produce power when electricity was needed the most.”

It was the coal and nuclear plants that proved most reliable — because they had on-site fuel.

Bryce’s caustic conclusion: “Over the past two decades, the generation capacity added to the grid wasn’t built for reliability or resilience, it was built to collect subsidies.”

I don’t want to overlook the second reader’s final point: As for “misleading readers” down a “suspect investment path”... uh, no.

We rely on readers’ subscription fees as the overwhelming source of our revenue.

That’s what affords us our independence — as opposed to mainstream outlets reliant on advertisers, or shady online outfits that take payments from publicly traded companies in exchange for issuing a buy recommendation.

Readers are the lifeblood of our business — not for a one-time sale but for a long-term relationship.

Our editors have every incentive to do right by them — by you — by exercising a rigorous paradigm and following the research wherever it might lead.

Thank you for giving us the opportunity to reinforce what sets us apart from the herd.

Have a good weekend,

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets