Bedlam hits the states
Federal agencies are required by federal statute to provide 60-day notice of workforce reductions to offset potential strains on state systems and mitigate harms to workers in affected regions. The agencies also reveal to state boards if terminations were performance based or part of a workforce reduction.
As we all know, the new administration has fired workers in the hundreds and thousands without following procedures, perhaps most importantly without notifying the states involved. Apparently, some agencies are citing restructuring, others performance issues, as the reason for terminations, and state agencies have to look carefully at each claim, a process likely to become overwhelming time consuming as purges continue. Until verifications are completed, employees cannot be “released,” meaning that in addition to having no job, they have no benefits. (Lawsuit here.)
It will be a long time before we know the details but, for example, MSN reports that in March 2024, 189 federal workers applied for UI in Maryland. So far this month, offices are receiving 30 to 60 filings a day, which would ratchet up to a 630 to 1,260 total by the end of the month. In the highly unlikely event the current rate remains steady, that is.
federal workers by state
“Economic pain is contagious,” said Michele Evermore, senior fellow at the National Academy of Social Insurance, in a recent interview, so let’s take a look at state concentrations.
Nationally, federal workers make up under 2% of total nonfarm employment, about the same as “insurance carriers and related activities.” A fifth work in DC and environs, constituting 5.8% of total nonfarm employment there. Many states are working to bring federal workers into their own offices, yet some states may not be able to accommodate willfully terminated employees in either private or public sectors. States with largest shares of federal workers, over 2.5%, include Alaska, Hawaii, and New Mexico. In Oklahoma, Wyoming, and West Virginia shares run from 2.0% to 2.5%, followed by 1.5–2.0% in Alabama, Georgia, Mississippi, Maine, Montana, Puerto Rico, and Washington. In the rest of the country, the rates are lower than the national average, with South Dakota’s <0.5% the smallest share. To us, that’s a worrisome mix.
Tariffs over time—in words and pictures
As we were wrapping up this issue, the president-elect announced the creation of an “External Revenue Service” (ERS). It will, as he put it, demonstrating his idiosyncratic understanding of trade, “collect our Tariffs, Duties, and all Revenue that come from Foreign sources. We will begin charging those that make money off of us with Trade….” Almost no one aside from him and his circle of advisers thinks that foreigners, rather than US consumers, pay tariffs, but let’s set that aside for now.
Instead, let’s look at tariffs over the long sweep of history. According to a useful factsheet from the Congressional Research Service, tariffs were an easy way to collect revenues in the early history of the country, which didn’t have a developed administrative structure. There were only so many ships sailing to unload goods in so many harbors, so taxing those goods was not much of a technical challenge. The government was small and didn’t need that much revenue anyway.
The tariff and revenue histories are illustrated in a quartet of graphs below. From 1792 to 1930, federal revenue averaged less than 3% of GDP. (Obviously those old GDP figures are guesses, but let’s take them as a decent approximation of reality.) From 1792 to the eve of the Civil War, 1860, tariffs provided an average of 86% of total federal revenue. (There were some bumps before the Civil War, notably the War of 1812, which juiced expenditures and savaged imports.) Besides borrowing heavily, the federal government increased excise taxes, reducing dependence on tariffs and leaving them accounting for just over half of federal revenues in the last third of the 19th century. With the introduction of the personal income tax (PIT) in 1913, tariffs receded in importance; since 1945, the PIT has accounted for 45% of federal revenues.
(Speaking of federal revenues, the popular notion that taxation has been growing like Topsy can’t survive fact-checking. As the graph shows, federal revenue as a share of GDP has been nearly flat for the last seven decades; in fact, the 2024 share, 17.1%, is below the 1951 share, 18.4%.)
With the growth of the PIT, and federal revenues generally, tariffs (or customs duties, to use the technical term) have largely disappeared as source of federal revenue. (In the graph on the lower left, you can see a spike around 1930, the time of the infamous Smoot-Hawley Tariff, which many, though not all, economists believe contributed to the Great Depression.) Customs receipts barely cracked 1% of total revenue in the 1990s and 2000s. With the tariffs imposed during the first Trump administration, and preserved by Biden, that share doubled to 2% in 2019–2022, but they’ve eased back to 1.6% in 2024. That looks poised to change
Since Trump has floated the idea of replacing the PIT with tariffs—switching from “taxing our Great People using the Internal Revenue Service,” as he said in the Truth Social announcement of the ERS—it’s interesting to experiment with how large those tariffs would have to be to plug the revenue gap. In the first three quarters of 2024, goods imports were $3.3 trillion at an annual rate, and the PIT brought in $2.5 trillion. Matching that would require a tariff rate of 70%. The effective tariff rate last year—revenues divided by the value of goods imports—was under 3%. Obviously a 70% tariff would decimate imports, but we’re not even considering that.
It all seems like a stretch.