May 26, 2025 • 52 mins
In pursuit of economic understanding, we speak with Jason Furman, the Harvard economist who co-teaches the university’s core course in the discipline, “Principles of Economics,” Harvard’s most popular course.
The conversation tackles President Donald Trump's "Liberation Day" tariff announcement that sent markets nosediving, that is, until the president hit the pause button. The Harvard economist methodically dismantles the logic behind targeting countries with bilateral trade deficits, using unexpected examples like Madagascar’s vanilla bean exports and Lesotho's diamond exports to illustrate why the approach is fundamentally flawed. "We could eliminate our trade deficits with them," he explains, "and what would that mean? That would mean less vanilla beans and fewer diamonds."
Our wide-ranging discussion touched on Trump’s big, beautiful budget bill and Moody’s downgrade of its U.S. debt rating while, along the way, exploring the linkages between global trade, clean energy, and artificial intelligence. Jason, an economic adviser to President Barack Obama, offers a refreshingly clear-eyed assessment of both the Trump and Biden administration approaches to trade and manufacturing. Despite their different methods (tariffs versus subsidies), both administrations share a nostalgic vision of American manufacturing that doesn't align with today's economic reality.
Listeners are reminded of our guest's Foreign Affairs magazine article "The Post-Neoliberal Delusion" that critiqued Biden's signature economic legislation (see link below). Looking forward, his greatest economic worry is that "the tariffs come back with a vengeance," while his greatest hope lies in the potential of artificial intelligence to "raise productivity growth, raise wages, help with our deficit problems" if implemented thoughtfully.
Speakers:
J. Alex Tarquinio (host) is a resident correspondent at the United Nations in New York and co-founder of The Delegates Lounge podcast. @alextarquinio of @delegateslounge on X.
Jason Furman (guest) is the Aetna Professor of the Practice of Economic Policy jointly at Harvard Kennedy School and the Department of Economics at Harvard University. He is also nonresident senior fellow at the Peterson Institute for International Economics and a past U.S. presidential adviser. @jasonfurman of @Harvard and @PIIE on X.
References:
We mention a recent article by the guest in Foreign Affairs magazine so we’re providing the link below.
https://www.foreignaffairs.com/united-states/post-neoliberal-delusion
Credits:
Music: Adobe Stock
Illustration: Adobe Stock/UraiwanT
Headshot (in some formats): Jason Furman, Harvard University
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
Welcome to the Delegates Lounge.
Pull up a chair.
I'm Alex Tarquinio, ajournalist based at the United
Nations here in New York Cityand your emcee for this podcast
featuring some of the mostinfluential minds in the world
today.
Settle in for some rivetingtete-a-tete, available wherever
you listen to podcasts.
Welcome back.
(00:37):
We have a fascinatingconversation for you today with
Jason Furman, the Harvardeconomist who co-teaches the
university's core course in thediscipline Principles of
Economics, harvard's mostpopular course.
He is also a non-residentsenior fellow at the Peterson
Institute for InternationalEconomics and a former
presidential advisor.
Our wide-ranging discussiontouched on President Donald
(00:59):
Trump's big, beautiful budgetbill and Moody's downgrade of
its US debt rating, while alongthe way, exploring the linkages
between global trade, cleanenergy and artificial
intelligence.
Naturally, much of our chatfocused on Trump's tariff blitz,
brought into stark public viewon April 2nd, his so-called
Liberation Day, when, standingin the White House Rose Garden,
(01:23):
he held up a placard displayingunprecedented tariffs on
countries both large and barelyknown.
After the markets nosedived,trump walked back the sky-high
tariffs on many countries for 90days to allow them time to try
to negotiate better deals.
Jason has been activelyexplaining in his Harvard
classes and online what hethinks about the Trump approach
(01:44):
to trade.
His views are mirrored in USpublic opinion polls, showing
widespread skepticism.
Jason served eight years in theObama administration, including
as chairman of the Council onEconomic Advisers, acting as
both the president's chiefeconomist and a cabinet member.
But as an economist, jasoncritiques not just this
administration.
After playing a key roleshaping the Obama
(02:07):
administration's economicpolicies, which centered on free
trade agreements the preferredpolicy of presidents from Bill
Clinton to Barack Obama hewatched Joe Biden take a
different tack.
In the March issue of ForeignAffairs magazine, jason argued
that, for all the lofty talkbehind policies that
collectively became known asBidenomics, they had contributed
(02:29):
significantly to inflation.
In some matters, such asnational security or the
environment, he asserted thatcertain gains might be worth
some economic pain.
With his article in mind, wediscussed two signature
legislative acts of the Bidenadministration the Chips and
Science Act, aimed atincentivizing domestic
semiconductor chip manufacture,and the Inflation Reduction Act,
(02:52):
which, among other things,subsidized clean energy
technology.
As always whenever we mentionan article in this podcast,
we'll add that link to the shownotes.
We spoke about Trump's big,beautiful bill the day before
the House of Representativesburned the midnight oil to
approve the federal budget billby the narrowest of margins.
This mammoth budget packagechampioned by the president
(03:14):
includes permanent extensions ofhis 2017 tax cuts, new tax
breaks on tips and overtime,significant cuts to Medicaid and
food stamps, and increasedfunding for border security and
defense.
Now it heads to the Senate,where it could face tougher
Republican scrutiny over thetrillions of dollars that it's
expected to add to the federaldebt.
(03:35):
House Speaker Mike Johnson,ever the optimist, is hoping to
have it on Trump's desk to signby July 4th.
Meanwhile, the 90-day pause onthe Trump Liberation Day tariffs
is set to expire after theAmerican Independence holiday,
so lawmakers will be drafting abudget without knowing what
revenues from tariffs thefederal government may come to
depend on.
(03:55):
Stay tuned to find out whatJason and I both learned from
the Rose Garden speech.
Here's our conversation.
Here's our conversation, jasonFurman.
Welcome to the Delegates Lounge.
Speaker 2 (04:13):
Great to be with you.
Speaker 1 (04:15):
What struck me about your recent article for Foreign
Affairs that I thought was kindof a different take is that,
while the approach may have beenvery different in the Biden and
Trump administrations, therewas some commonality of goals in
(04:35):
that both wanted to revivemanufacturing in the United
States.
Obviously, biden was pursuingit more with sweeteners,
subsidies, tax credits, whereasTrump is more focused on tariffs
.
But is that how you saw it,that there was a similar goal
between the two administrations?
Speaker 2 (04:52):
Yeah, I mean there are some very big differences in
terms of magnitudes between theTrump and Biden administration.
There are very big differenceson fiscal policy.
Do you want to raise taxes onthe rich or cut taxes on the
rich?
Do you want to expand healthcoverage or contract health
coverage?
Skepticism about the way thatthe market allocates things?
(05:15):
Yes, on all of that thereactually is a certain amount of
continuity between the two.
Speaker 1 (05:32):
Well, in fact, it feels almost as if both have a
nostalgic vision of Americanmanufacturing.
Let's go back to the 1950s,when American workers made more
things with their hands, ratherthan the preponderance of
workers working in services now.
And is that a reasonable goal?
(05:53):
Should Americans, you know,produce more of what they
consume?
Or is there a logic to say thatwe've moved up the value chain
and we should be doing moreservices?
I mean, in other words, wheredo you fall in that argument?
Speaker 2 (06:06):
I think, unless you have a well-defined reason, the
market's going to figure outbetter what it is you're good at
making.
It's going to direct productiontowards things that have higher
productivity, higher wages,that the United States has
comparative advantage in, andfor the most part, that is not
(06:28):
manufacturing.
There are lots of openmanufacturing jobs in the United
States today.
There's not a lot of peoplethat want to take those jobs,
and that's because those jobs,first of all, don't really pay
any more than other jobs.
In fact, they pay less than alot of other jobs in our economy
and they can be ratherunpleasant.
(06:49):
Now, I did have that caveat atthe beginning that in general,
unless there's a well-definedreason, the market knows where
best to make jobs.
So the well-defined reason fordeparting from that in my mind
the most justifiable one isnational security.
So if you feel, for nationalsecurity reasons, you need to do
something in the United States,then we should do it here.
(07:11):
We should be willing to paymore for it here and we
shouldn't kid ourselves intothinking that in the process
we're creating better middleclass jobs.
In fact, if anything, we mightactually be creating worse jobs
at a higher cost, but that mightbe worth it in order to achieve
a different goal.
Speaker 1 (07:30):
Is that how you saw, say, the CHIPS Act trying to get
more chip production in theUnited States?
Speaker 2 (07:35):
Yes, I do not think the end result of the CHIPS Act
is going to be better jobs inAmerica.
In fact, those factories arelargely going to employ people
with advanced degrees.
That we're going to have noproblem getting jobs, with or
without.
On the chips app, I don't thinkwe're going to be making the
best microchips in the world.
They're still going to makebetter ones in Taiwan.
(07:57):
But I'm going to sleep a littlebit better knowing that we have
more of a domestic supply ofmicrochips, even if they're a
bit more expensive and not quiteas good as the ones from Taiwan
, because getting 90% of youradvanced microchips all from one
dangerous place is just notsomething we should be fully
(08:20):
content with.
Speaker 1 (08:21):
I mean a little bit about myself.
I actually grew up in SiliconValley, when Silicon Valley was
growing up, so to speak, and Iremember when many chips were
made either in California orColorado.
I mean, how did we get to thispoint where Taiwan made most of
the chips, and are there reasonswhy they're better, or they've
(08:42):
just invested it and they havethe know-how, the expertise now?
Speaker 2 (08:48):
I mean, making chips is not a super high value added
activity.
Memory chips are basically acommodity, which is to say
they're sort of identical toeach other, so they don't
command a very high price andthe companies that make them
don't make a particularly largemargin from them, and the
companies that make them don'tmake a particularly large margin
from them.
Logic chips are less of acommodity, but still, you know
(09:09):
Apple and Nvidia are, you know,much, much, much more valuable
companies than TSMC.
Or you know Foxconn, whichassembles the phone, doesn't
make the chips.
So we're in the place in thedivision of labor that's just
gotten much, much more divided.
That labor and the separationof the design from the
(09:32):
fabrication, All the differentpieces that go into the
fabrication are made around theworld.
The Netherlands, for example,makes a very key part of all of
it, and so I think we're just ina world where it's division of
labor and the more routine, youknow, in some ways simpler, even
though it's still incredibly,incredibly, incredibly
(09:52):
complicated thing is happeningoverseas.
Speaker 1 (09:56):
So it's the intellectual property, the
designers, the chips, the basictechnology that is more high
value.
We don't know what's actuallygoing to happen with the tariffs
, as he talks about them bothfront and forward, taking
advantage of the US.
Some of this rhetoric seems togo beyond the goal of
eliminating the US tradeimbalance overall, but it
(10:17):
actually seems aimed ateliminating a trade deficit on a
bilateral basis and even goesafter friends where we have a
trade surplus, like the UnitedKingdom, achieving a zero trade
deficit with each and everycountry.
Is that a realistic goal and isit a desirable goal, or is this
more of a psychological talkingpoint?
(10:38):
It's not a realistic goal interms of we can't accomplishment
.
Speaker 2 (10:39):
It's not a realistic goal.
In terms of we can'taccomplishment.
It's not a reasonable goal interms of we don't really want to
accomplish it and you know,almost none of it makes any
sense.
So, first of all, bilateraltrade deficits and trade
surpluses often just reflectwhich country needs what from
(11:02):
whom.
We run a trade deficit withMadagascar and Lesotho, why?
Because Madagascar makesvanilla beans, lesotho makes
diamonds, and they're bothreally poor countries, so they
can't afford to buy very muchfrom the United States.
We could eliminate our tradedeficits with them, and what
would that mean?
That would mean less vanillabeans and fewer diamonds, and
(11:25):
you know, one of the two I'mpersonally completely fine with,
but I'm not going to impose myown prejudices on everyone else.
So you know there's no tariffthat's going to solve this
problem.
Speaker 1 (11:38):
Or coffee.
I mean there's some things we Imean we have a little bit of
Kona coffee in Hawaii, but wecan't grow much coffee here.
Lesotho had the highest quoteunquote reciprocal tariff on
that famous chart that Trumpheld up.
Speaker 2 (11:53):
Yeah, it had the highest because and that
illustrated what was wrong withthat whole concept we have a
trade deficit with Lesothobecause they sell us diamonds.
We want their diamonds.
Do I want their diamonds?
No, but you know it's a freecountry.
If people want to buy diamonds,they should be able to buy
diamonds, including buy diamondsfrom Lesotho.
Anyway, they buy a bunch ofdiamonds from Lesotho and all of
(12:14):
a sudden Trump says they'retaking advantage of us.
We're going to do a 50% tariffand, by the way, even after that
we're still going to have atrade deficit with Lesotho.
It'll just mean the diamondsare more expensive.
We're not going to be a richercountry because we've tariffed
some tiny little poor country onthe other side of the world.
We're not going to start makingdiamonds in the United States
(12:36):
because of this tariff onLesotho.
I mean, no aspect of it makessense and I'm not just picking,
you know, I'm picking this onebecause it's a really clear case
.
But then you can reproduce itover and over and over again.
You know we have surplus withBrazil.
We have a deficit with France.
Why is that?
You know it has nothing to dowith trade policy.
(12:57):
Brazil actually is moreprotectionist than France is.
We pay more tariffs to get intoBrazil than into France, but we
have things like natural gasthat they really want and good
ways of exporting that naturalgas to them.
France, we don't have as muchcapacity for the exports there.
So there's some reason to worryabout your trade balance
(13:19):
overall, because it gets to thesustainability of can you afford
, year after year, to run atrade deficit, but for any given
country you don't really carethat much.
Moreover, it is not caused bytheir tariffs.
Moreover, it is not solvable bytariffs.
Speaker 1 (13:38):
Now, that last point is very interesting because
we've been talking about Lesothoand I mean, I'm not even
certain if some Americans wouldhave known of the country
Lesotho or been able to find iton a map before it.
You know the Rose Garden speechlast month.
On the other hand, there hasbeen a long running structural
trade deficit with China andmany Americans feel that China
(14:01):
has unfair trade practices.
Does the tariff approach makesense when addressing the trade
deficit with China?
Speaker 2 (14:09):
Yeah, I should say.
By the way, the one place inthe world I learned about when
we did the reciprocal tariffswas the Heard and McDonald
Islands, which is the penguinislands that got a 10% tariff.
I confess I had never heard ofthem before but onto your more
serious and important country,china I had heard of before the
reciprocal tariff announcement.
(14:30):
Our trade deficit with China islarge.
In dollar terms it's not thatlarge relative to China's
economy.
They run a trade surplus.
Overall that's a few percent ofGDP.
That's a totally reasonable,normal-sized trade balance for a
country to run.
The causes of it are less aboutprotectionism.
(14:52):
China has tariffs of about 5%on the United States.
The United States has tariffsabout 2%.
Sorry, the numbers I gave youare before the first Trump
administration's tradeescalation, but prior to
everything those were thetariffs about 2-5%.
The reason for the trade balancebeing the way it is is largely
(15:13):
rooted in macroeconomics.
In China people save a lot anda lot of the saving they don't
even really choose to do.
They never get the money in thefirst place from the companies
which keep the money internally.
And in the United States we,you know, effectively borrow a
lot.
We run a big budget deficit,for example.
(15:33):
That requires us to get moneyfrom the rest of the world.
We can only get that if we runa trade deficit with the rest of
the world.
So I think we do have a tradedeficit with China.
You know that one might worry alittle bit about.
But trade, you know, tariffsand things like that aren't
going to do a whole lot.
What would do a whole lot isget it structurally.
(15:55):
And by the way, when I say notdo a whole lot, there'd be some
rearranging of the debt charts.
You know, something would comethrough Vietnam instead of
through China.
That's not that differenteconomically, not even really
very different geopolitically.
But you know the labeling ofthis stuff.
Hasn't that already begun?
Speaker 1 (16:14):
By the way, I'm one of those people that ran out and
bought a new MacBook Probecause I was afraid that a
price hike might be coming, andI think on the box it does say
that it was assembled in Vietnam.
I don't know if that would havebeen the case if I'd bought it,
you know, a few monthspreviously, in December.
It might have come from China.
So I think some of that deckchair factor is occurring.
(16:36):
Presumably Apple had productsitting around in warehouses.
Make the choices based on this90-day pause, but that can't go
on indefinitely.
That reminds me we're about, Ithink, almost exactly halfway
through the 90-day pause intariffs and we have been hearing
that there's a sharp drop inimport traffic at Long Beach,
california.
(16:56):
How soon might we see an impacton store shelves if they don't
do some big, beautiful tariffdeal?
Are we talking?
Could you start to see emptiershelves around the
back-to-school period?
Would it be Christmas?
Because obviously there's somedelay.
Speaker 2 (17:14):
Yeah, so it just is.
I mean, first of all, we don'tknow, because we haven't
observed this type of thinghappen before, and the stop
start nature of it a lot ofstuff is rushing into the
country right now.
Now it takes a while for shipto make its way across the ocean
.
You don't can't just turn theswitch on and off and expect
things to instantly change.
(17:35):
But yes, between the prestocking, people had already
done the additional amountthey're doing now.
I would expect it's sort of youknow, a fall winter type of
issue to see, you know,shortages and or higher prices.
Right now a lot of companiesreally are absorbing price
(17:56):
increases so far.
I was at a car dealershipearlier today and they had signs
get your car now, you know,before the tariffs start to show
up in the prices, and they wereexplicitly marketing it that
way and it, you know, made mefeel maybe I should hurry up a
bit to get my car.
Speaker 1 (18:13):
Yeah, that's a reaction I had with a laptop.
It's like, oh, you better actnow If tariffs do go into effect
in about six weeks time willinflation be in you?
Speaker 2 (18:38):
inflation be almost inevitable after that in China,
the higher on certain sectors,some additional sectors that are
coming with near certaintysemiconductors, pharmaceuticals
and the like.
In terms of whether theadditional so-called reciprocal
tariffs come back, it's so hardto tell.
I mean, we reached a deal withthe UK.
(18:58):
I mean that's a country thatyou know we have a trade surplus
with, that is a very closefriend and was willing to
basically go along withsomething where they gave
concessions to the United Statesin exchange for almost nothing.
They still have the 10% tariffon them.
That's just going to be a lotharder with other countries,
(19:21):
countries that have tradedeficits with the United States.
We have a less closerelationship with that
politically.
Their leaders can't be seen asgiving quite as much Europe.
For example, they basicallywant a deal where the United
States would lower tariffs fromthe pre-reciprocal in exchange
for Europe lowering them.
(19:42):
The idea that we're going tojust call off some additional
tariffs in exchange for concessthem, the idea that we're going
to just call off some additionaltariffs in exchange for
concessions from them and keepthe 10% tariff, is just
politically and economicallyvery unappealing to the
Europeans the Japanese also, Imean.
I was involved from thesidelines in the TPP negotiation
(20:03):
.
Speaker 1 (20:04):
This was during your time in the administration.
Yeah, during the sidelines inthe TPP negotiation.
Speaker 2 (20:06):
This is during your time in the administration, yeah
, during the Obamaadministration and politically,
you know, things likeagriculture are really, really,
really hard with Japan, becausetheir farmers can be really,
really, really powerful.
Speaker 1 (20:20):
Well, rice farming, I mean.
Obviously there's an economicand a food reason for it, but I
think it's also such a huge partof the culture.
I've heard that rice farmers inJapan are just very revered and
you know if they, if they havea concern, the government has to
listen.
Speaker 2 (20:36):
Yeah, Now, eventually we made some headway and got
more ability to export rice toJapan.
Export rice to Japan and I meanwe didn't didn't happen because
we pulled out of TPP, but wegot a deal that would have
enabled that.
But we also gave things inexchange for that and it took a
(20:58):
long, long time.
So the idea that this is goingto be settled quickly and
without any sort of ability tosave face or achieve other goals
on the part of the Japanesefrom the beginning struck me as
implausible, and that appears tobe how it's playing out.
Speaker 1 (21:13):
Yeah, I mean, obviously there were a lot of
differences from your time inthe Obama administration on the
National Economic Council andCouncil of Economic Advisors.
But what are some of the keydifferences in the messaging?
I mean, is that something thatthe Council of Economic Advisors
do?
You only talk as an economistor do you say, oh no, look, you
(21:36):
need to explain it this way tovoters so they understand the
economics of it.
Speaker 2 (21:41):
Yeah, so I mean I've worked at both the National
Economic Council and the Councilof Economic Advisors.
Speaker 3 (21:47):
In the Obama administration In the Obama
administration.
Speaker 2 (21:49):
Actually I worked for both of them at a lower level
in the Clinton administration aswell.
The National Economic Councilis more coordinating economic
policymaking, it's morestrategic and it definitely
incorporates much more messagepolitics.
Working with the differentunits in the White House, the
Council of Economic Advisorsit's not like some pure academic
(22:12):
think tank.
If you want to be a pureacademic you should stay in a
university.
It gets its hands a bit messyat times but is much, much
closer to saying you know,here's what economics thinks,
here's what is a credibleargument and serious argument.
You know, this is why you knowwe think that's a less than
credible and less than seriousargument.
Speaker 1 (22:35):
Now the goal of the tariffs.
Obviously this has beenshifting, as we said, trump
first floated the idea as theprimary goal was a
reindustrialization, as wetalked about, but he's also said
it's an alternative to theincome tax.
He talked about that in theRose Garden and then, when the
markets had an increasinglynegative reaction in the first
week, he announced the 90-daypause and since then he's been
(23:00):
talking about it as anegotiating strategy.
Obviously, both can't be true.
If it's a strategy and they'regoing to go away or be reduced,
then it can't be counted on as along-term revenue stream for
the government to eliminate theincome tax.
So how much of that shouldCongress be factoring into their
(23:20):
talks right now about thebudget?
Trump's quote unquote one big,beautiful bill.
Speaker 2 (23:26):
I think it's a real mistake to count on tariff
revenue to offset the so-calledone big beautiful bill.
First of all, even the existingtariff levels are not
sufficient to offset the cost ofthe tax cuts in that
legislation.
Moreover, that legislation is10-year legislation.
(23:47):
It's de facto permanentlegislation because it's setting
up a process that would make itvery hard to let those things
go away.
And these tariffs are hopefullynot permanent.
My hope is that Donald Trumpends them.
If he doesn't end them, Iexpect the next president to.
So the tariffs to me feelfragile and temporary.
(24:08):
The tax measures in that billare permanent.
You shouldn't use one to payfor the other and, by the way,
the numbers don't even add up,even if you ignore the concerns
that I just expressed.
Speaker 1 (24:21):
Tax measures, particularly big tax cuts, have
always been announced in, Ithink, 10-year increments and of
course that hides the actuallong-term cost and obviously
much of what we're talking aboutthat one big beautiful bill is
actually a continuation of theinitial tax cuts from Trump's
first term.
But in that case, well, he didhave tariffs in his first term,
(24:43):
not as big.
Speaker 2 (24:44):
Much smaller.
The tariffs this time aroundare much, much more extensive.
Speaker 1 (24:49):
I don't remember them being billed in the first term
as a way to offset the tax cuts.
Speaker 2 (24:53):
No, they weren't, because they didn't come close
to it.
And, by the way, I mean it'snot.
I don't mind using 10-yearbudget numbers, that's sort of
standard.
The issue here is a number ofthe different tax policies, like
tax-free tips, tax-freeovertime, tax-free social
security benefits.
They just last for four yearsin the law, and so if you look,
(25:16):
the cost of the law in thefourth year is really high and
then it goes down a lot.
Now if you think it goes down alot, great, you know, we didn't
raise the deficit over the longterm.
There's not a single personvoting for this legislation
today who's not going to beactively pushing to continue it
four years from now.
In fact, they're going to argueit's a tax increase if any of
(25:39):
that goes away, and so this isreally just a gimmick to
disguise the true tenure cost ofthis legislation by pretending
that some of it will actually goaway.
Of course it won't.
Speaker 1 (25:51):
So it camouflages the long-term cost of those tax
cuts, but when they come up forrenewal it's always billed as oh
my gosh, that would be a hugetax increase, making it very
difficult not to perpetuate them.
How much did this factor intoMoody's decision to downgrade US
(26:11):
debt?
Do you think the tariffs were afactor in that?
Were they also looking at thepotential for the one big
beautiful bill, or is that justlooking at current debt level
and deficit?
Speaker 2 (26:27):
And after the Moody's decision, I'm worried and not
panicked about our debt, and myworry level has not changed one
iota.
There's nothing I learned fromthem.
There's nothing they know aboutour fiscal situation that you
couldn't figure out for yourselfalready from looking at the
(26:48):
Congressional Budget Office.
But you know, these things canalways be a reminder and a focal
point for discussion.
Reminder and a focal point fordiscussion.
And what's notable is the twoprevious downgrades from S&P and
Fitch were, in part, about thedysfunction of divided
government.
The S&P one in 2011 was when wewent to the brink on the debt
(27:10):
limit and, while they warnedabout the magnitude of the debt,
they spent a lot of time reallytalking about political
dysfunction in Washington,causing some type of accident.
The Moody's downgrade is aboutunified Republican control doing
too much in the way of tax cutsand too much in the way of
(27:31):
deficit and debt increases.
And so when I was sitting inthe White House in 2011, an S&P
said you know, the problem isyour country is dysfunctional.
I didn't totally disagree Now,I wouldn't have lowered our
credit ratings for it but theywere sort of onto something.
Moreover, I didn't know what todo about it.
I mean, we were trying to befunctional, felt like the
(27:51):
Congress was the dysfunctionalone.
To us, here is a very simplething to do.
I mean, if the president wantsto veto this legislation or call
it off, we will have a smallerdeficit, we will have less of a
fiscal problem.
So this is very much a choicethat President Trump and the
Republican Party are making andMoody's is basically warning
(28:13):
about and rebuking.
Speaker 1 (28:15):
It sounds like what you're saying is Moody's was
maybe a little bit late to theparty in this downgrade.
Speaker 2 (28:20):
I mean, I still think of the United States as AAA.
I really do.
Speaker 1 (28:23):
Despite the debt.
Speaker 2 (28:25):
Yeah, we'll be good for the money.
We'll pay people back.
They can treat our debt.
It's super liquid.
It's super safe.
Speaker 1 (28:32):
And it is a comparison.
There are a few other countriesthat have the bond markets.
We do that have the confidenceof investors.
That being said, was thissomething in the S&P decision
when you were in theadministration?
Is this something that youwould have to go, I guess,
explain to the boss in the OvalOffice?
(28:52):
And do you think they're havingto do that now with the Moody's
decision?
Speaker 2 (28:56):
There's a big run up to the S&P decision.
I remember I did one meetingwith them to talk through our
fiscal situation where it stood,where we were going with it,
and a lot of our argument tothem was our credibility.
The people in the room makingthis argument many of them,
including myself, had worked inthe Clinton administration, had
been involved in balancing thebudget for the first time in a
(29:18):
generation and said you know, wecare about this stuff, We've
done it before, We'll.
You know we'll do it again.
We don't need to balance thebudget, by the way, but get the
debt down as a share of GDP, andthat is a problem with this
administration.
Now the Treasury Secretary talksa good game about cutting the
deficit to 3% of GDP.
That's a great goal to have forthe deficit, but most of the
(29:42):
actions go the other way.
They're hurting the economicgrowth that would bring the
deficit down.
They're raising the interestrates that are very important
for the dynamics of the debt,and they're raising the
so-called primary deficit, thedeficit excluding interest.
So all three of the thingsthey're doing are going in the
(30:05):
wrong direction on bringing thedebt down.
Speaker 1 (30:08):
Does this White House care more about the bond
markets than the stock markets?
I mean, they did react to thestock market a week after
Liberation Day by saying they'dhave a 90-day pause.
But of course there's thefamous Carville quote about
wanting to be reincarnated asthe bond markets.
Speaker 2 (30:24):
Yeah, I mean this administration sometimes seems
to care about bond markets,sometimes cares about stock
markets, sometimes doesn't careabout either.
There's not like an exactformula or reaction function
that seems to explain theirbehavior.
I tend to think that a lot ofit comes down to mortgage rates.
I mean the 10-year treasury isit 4.7 or 4.1?
(30:50):
That's pretty different interms of the dynamics of the
debt, but you still havemulti-trillion dollar deficits
either way.
But consumers are verysensitive to what mortgage rates
are.
They really do care, and sothat is an area where I could
see it being a pain point, butit will take some time for it to
(31:12):
build.
Speaker 1 (31:13):
Well, in fact I know Trump wants Powell to lower
interest rates.
I guess what president doesn'tthey always do?
He did give some reassurancethat he would not get rid of
Powell, but do you have anyconcerns about the Federal
Reserve or his treatment of theFed?
Speaker 2 (31:32):
Well, look, his treatment of the Fed is
appalling.
How consequential is it for theeconomy?
I'm not sure.
I mean it's a negative.
Is it a small negative or alarge negative?
Either way, why do it?
Why hurt the economy?
I think, ultimately he probablywill not try to fire Powell,
because what's the point?
His term ends in a year and, bythe way, you get to blame him
(31:56):
for all the economic problems.
I mean not fairly, but you canstill do it.
It's a free country.
You can blame whoever you wantand you know, whereas if he
picked his own person, he wouldown all of it himself.
Speaker 1 (32:12):
So Powell is his own person in a way, right, it's
just that he's distanced himself.
Speaker 2 (32:18):
Yes, he's distanced himself quite a lot from him.
Speaker 1 (32:22):
Now, of course, the Fed has to look at both
inflation and economic growth.
I mean, we did have acontraction in the first quarter
.
Do you think we might beentering a recession?
It's still obviously recession.
You look at that in hindsight,but do you feel that the economy
is moving that way now?
And also, if we have an uptickin inflation from tariffs, could
(32:44):
we be looking at stagflation?
Speaker 2 (32:47):
Yeah, so we had a reported decline in GDP in the
first quarter.
I'm not sure that those numberswere correct.
They're trying their hardest,I'm not.
It's not a conspiracy on thepart of the statistical agencies
, but when there's just massive,almost unprecedented shifts in
the data, it's a hard thing totrack.
And so they might havecorrectly counted all the
(33:08):
imports showing up in thecountry but then missed some of
the places.
They ended up going likeinventories and the like, so
they entered them in one part ofthe GDP accounts as a negative,
didn't do the correspondingpositive entry in another part
of the GDP accounts and ended upwith too low a number.
And so I'll be looking to othermeasures of growth in the first
(33:30):
quarter gross domestic incomewhen we get that, and I'll also
be looking to future revisions.
So if you look at the totalityof the data, the economy looked
quite robust in the firstquarter.
The current tariff levels thatwe have should not be enough to
tip you into recession, but younever know.
(33:51):
What would is a big increase inuncertainty and a big return to
a much larger and constantlychanging set of reciprocal
tariffs.
Speaker 1 (34:06):
So you don't believe we're in a recession and in fact
you think the economy may havegrown in the first quarter and
we should explain for listeners.
It's not a deep state theory.
Speaker 2 (34:36):
It's.
In fact they're often Are.
They almost always have data onmore than half of the economy,
so they're basically making aneducated guess about what was
going on in the half of theeconomy.
They don't measure.
Over time they get more andmore of those measures come in,
better measures come in, andoften the number changes by even
one or two percentage points.
(34:56):
That's why, to understand theeconomy in real time, you don't
want to just take one number,you want to look at lots of
different measures and sort ofaverage them in your head.
And almost every other measurewe have other than GDP was quite
strong in the first quarter ofthis year.
Speaker 1 (35:16):
That's a good point.
So you'll be looking foradjustments there, and those can
come three months later, sixmonths later.
Speaker 2 (35:23):
Three years later, six years later, they keep
changing.
Speaker 1 (35:26):
Way down yeah.
Speaker 2 (35:28):
And we saw this look in the first half of 2022, there
were two negative quarters.
One of them I think it was Q1,has since been revised to
positive, and so this thing thatpeople said was technically a
recession because of twonegative quarters well, it's not
technically a recession anymore.
Speaker 1 (35:44):
So one of our recessions is no longer
technically a recession becauseof these revisions.
Speaker 2 (35:49):
Almost all economists at the time said this isn't a
recession.
You know, this is in the firsthalf of 2022.
Oh, and almost every economistat the time said don't worry,
this is not a recession.
Here's like 20 different datapoints.
18 of them are going up.
These data get revised a lot,et cetera, et cetera, and you
know that view has beenvindicated by the revision since
(36:10):
then.
Speaker 1 (36:11):
Now, what is more important in determining a
recession?
Speaker 2 (36:15):
And the people who decide on recessions are looking
very carefully at actualeconomic activity.
How much is being produced, howmuch is being purchased, how
much income do people have?
They're not looking atfinancial markets and they sort
of take all that together andweigh the call.
But, by the way, we've nowtalked for a while about
recession.
(36:35):
Wouldn't it be too hung up on arecession?
If you lower growth from 2% to0.5, that's nota recession, but
that's still a pretty bad thingto do.
If you permanently lower thelevel of GDP by half a point,
even so, every year, it's half apoint lower than it used to be.
That's a really bad thing to doalso, and so there's a lot of
(36:57):
ways to harm the economy thatwon't show up as a recession,
let alone as a major crisis.
But are you know, takingthousands of dollars away from
people year in and year out?
Speaker 1 (37:08):
That's a bad thing to do, and it would also make the
federal debt appear larger as apercentage of the economy.
That is true, yeah, and alsothe strength of the dollar.
I mean obviously still verystrong now, but that's something
that China and other BRICScountries have.
I mean, I guess you could saythat's been one of their hopes
is that the dollar would be lessdominant.
(37:30):
De-dollarization.
We're not seeing that now, butif tariff barriers continue to
grow, could that potentiallyaffect the strength of the
dollar?
Speaker 2 (37:41):
It could.
I think the dollar is.
I'm pretty bullish about thedollar being used around the
world.
It's also not absolutelycritical that it's used around
the world.
You can have a fantasticeconomy without your currency
being the world's reservecurrency.
But you know, all else equal.
I'd rather keep it and I expectthat our country will still
keep it.
Speaker 1 (38:03):
With the Inflation Reduction Act.
It is science and technology,but it has to do with
decarbonization and also energysources of the future, or what
we hope will be future, whichhave been overwhelmingly made in
China.
Now I mean wind turbines, solarenergy.
There again, I remember whenthose industries were starting
(38:23):
out in Northern California tailend of the last century, and
we've gotten to the point wherenow they're mostly made in China
.
So is that another case wherewe are paying more for products
and we are subsidizing themthrough the Inflation Reduction
Act simply to get manufacturinghere?
Speaker 2 (38:40):
So I would distinguish between two aspects
of the Inflation Reduction Actthat are very different, two
aspects of the InflationReduction Act that are very
different.
One is how do you make yourelectricity, and the Inflation
Reduction Act gives yousubsidies if you want to make
your electricity using the sunor using wind or something like
(39:01):
that.
To me, that is unambiguously agood thing.
Now I wish we had a carbon taxthat penalized dirty energy, but
we don't have a carbon tax, andso we might as well have a
subsidy for clean energy.
There's a very clear what aneconomist would call externality
, related essentially to usingclean power, so that part of it
(39:25):
I'm 100% for, and it's verystraightforward the rationale
for it.
Speaker 1 (39:30):
Is that an easier sell given the political climate
here?
Obviously Europe.
Carbon taxes exist there andthey're more popular, I think,
with the populace, with thevoters.
At least, they haven't, to myknowledge, kicked politicians
out because they supportedcarbon taxes.
Speaker 2 (39:46):
Yeah, it's interesting.
In Europe they started with acarbon tax and they don't call
it a carbon taxes.
Yeah, it's interesting.
In Europe they started with acarbon tax and they don't call
it a carbon tax.
They call it the emissionstrading system, ets.
They originally started with itwith a de facto price of about
five or ten dollars a ton.
Now they're up to about 80 or90 dollars a ton, I mean.
(40:06):
So they scaled it quite a lot.
So they basically said we'regoing to start small, start sort
of pathetic.
So when it started it basicallydidn't matter at all, and then
it was like they boiled a frogby making it a little bit more
year after year and turning itinto something meaningful.
I wish we had done that in theUnited States.
I don't think politically itcould have been done.
So I do not at all fault theBiden administration for not
(40:30):
doing that, because they didwhat they could.
So they subsidize theproduction of electricity with
wind and solar Unambiguouslygood, pretty straight economics.
There's then a separate thing,which is subsidizing the
production of solar panels andthe production of wind turbines
(40:52):
the production of solar panelsand the production of wind
turbines.
Now, that's less clear becauseit's all of a sudden, just like
you know, any other piece ofequipment we have in the United
States.
You know why don't we want toimport, you know, whatever
factory equipment we use in theUnited States, from whoever
makes it cheapest and best,rather than trying to make it
ourselves it cheapest and best,rather than trying to make it
(41:12):
ourselves.
What's different aboutequipment in this sector versus
any other?
I tend to be in favor of justimporting the wind and solar
from anywhere in the world.
The argument for it which Idon't think is crazy, even
though it hasn't persuaded me,but it's possible is that China
has just such dominance that,once again, we have to worry
about the resilience, we have toworry about what happens in the
(41:35):
event of a conflict with China,and we need to build the
capacity to make that type oftechnology and equipment
ourselves.
Speaker 1 (41:46):
Well, in fact, in the event of a conflict with China
over Taiwan or in the SouthChina Sea, I mean, right now,
solar and wind are not a largepart of our grid, but if they
were a larger part, I mean youcould see where it might be
difficult getting replacementparts, for example from Chinese
companies.
Is that a concern?
(42:06):
And then does it become asecurity factor companies?
Is that a concern?
Speaker 2 (42:09):
And then does it become a security factor?
That's a theory and that's notat all a crazy theory.
You know it's different fromoil.
You know oil, especially backwhen we were big importers, when
we didn't make very much of it.
Every single day we needed tensof millions of barrels of oil,
and if it got shut off, yeah, wehad a bit in inventory, but
(42:36):
very quickly we'd run throughour inventories and we would
just everything would grind to ahalt.
With a solar panel.
It's not like China can shutoff the sun in the event of a
conflict, and so you still havethe solar panels.
Now they don't last forever.
They depreciate, but it's aslower process, one that gives
you more time to replace them,to figure out alternatives.
The other thing I'd say is thatapproaches like the Inflation
(42:59):
Reduction Act are about doing itin America, not about making
sure it's happening in one ofour friends one of our friends
and so that's very interesting,because the didn't the Europeans
object?
Speaker 1 (43:13):
I remember during Biden's first state visit with
French President Emmanuel Macron, some of his team were
complaining about the InflationReduction Act.
They were talking almost howAmericans talk about the Chinese
, sometimes with unfair tradepractices.
So did it concern some of ourfriends?
Speaker 2 (43:30):
Yes, exactly so that you saw that, especially in
areas like batteries, where allof a sudden we weren't giving
tax credits to cars that boughttheir batteries from Europe, and
you know, the Europeanbatteries would be cheaper.
By the way, the American carindustry is in better shape if
we can get parts from whereverthey're cheapest rather than
trying to make everythingthemselves.
(43:52):
And there's no nationalsecurity concern whatsoever when
it comes to French madebatteries.
And if anything from a nationalsecurity perspective, it
actually alienated a set ofcountries, of countries.
(44:14):
So the manufacturing in theUnited States is in some
well-defined places vis-a-visChina might make sense.
Outside of that, if we're tryingto move stuff from France to
the United States, we'recreating worse jobs, more
expensive cars, more carbonemissions, because there'll be
less of all of it, and we'reupsetting people in the process.
There's not a very good reasonto do that Now.
(44:35):
France, of course, has noobjection to us changing the way
we make our electricity.
We want to make electricityfrom wind instead of from coal.
That's totally fine with France.
In fact, they're happy aboutthat.
That's very much a domesticdecision.
But this we need to shiftthings from the entire world to
the United States is a much lesscompelling economic argument.
Speaker 1 (44:57):
Yeah, in fact, the French had a very typically
French reaction.
It was kind of like, well,we've been wanting the Americans
to do something about globalwarming, but not this.
Speaker 2 (45:08):
Yeah, oh, look, there's an issue.
I mean, much of the world isdealing with carbon by raising
the price of dirty energy.
The United States is dealingwith it by lowering the price of
clean energy, and those twosystems don't play super well
together, you know.
It gives the United States anexport advantage.
(45:29):
For example, it candisadvantage other countries in
terms of their competitivenessglobally, and other countries
are also a little bit jealous.
They don't feel they have theborrowing resources that the
United States has to just putthis huge amount of money into
the subsidy system.
(45:50):
So yeah, there was a certainirony.
Everyone was telling the UnitedStates do more, do more, do
more.
And then it was like, well,don't do exactly that that
you're doing.
And much of what we were doingI think we had no political
choice and up or down vote.
I'm in favor of it Some of whatwe were doing, some of the
bi-American aspects, probablywere a.
Some of what we were doing,some of the buy American aspects
probably were a mistake and, bythe way, I think the Biden
(46:12):
administration agrees with thatlast point.
I mean, they tried toreinterpret the legislative
language around things like thesource of batteries in a way
that would be more flexible interms of accommodating imports
from abroad.
Speaker 1 (46:30):
What's the biggest new unknown factor artificial
intelligence, agi that could ifit lives up to expectations that
could, really rewrite a lot ofthese economic rules.
Is that correct?
Speaker 2 (46:46):
Absolutely yes.
Ai is the biggest source ofuncertainty in the economy and,
to be clear, it's uncertaintythat's good.
I mean, uncertainty for aneconomist isn't the chance that
something bad happens.
It's the chance that somethingdifferent happens, and something
very different could happen, asa result of AI, and I'm I'm
pretty excited about it.
(47:07):
I think this government'sactually doing a perfectly
decent job of encouraging it,and it could mean great things
for all of us.
Speaker 1 (47:16):
Is the most important thing economically to have your
country a leader in AI, or isit just the benefits that AI can
bring?
I mean, because, of course, alot of our listeners are outside
of the United States Is it thebenefits they can bring to all
countries that have access to AIin terms of changes in medical
(47:38):
care, in how goods and servicesare delivered, and just
increasing productivity?
Speaker 2 (47:46):
I think the benefits are largely spillover to the
entire world.
I don't see this as a zero sum.
It's a technology that everyonecan use.
It's, by the way, technologywhere people can learn from each
other.
Deepseq was in China.
They published their papers.
We learned from that.
It's making our AI better.
Now, if you own stock in one ofthe companies that's successful
(48:08):
, it helps you.
But, by the way, that stock isowned by investors around the
world too.
So, yeah, I think you shouldthink of this less as a zero-sum
conflict and more as apositive-sum.
Speaker 1 (48:24):
you know, collective global exploration you know
collective global exploration,but aren't there also security
concerns around?
Some people working in AI,certainly in the US, would feel
that it was important to havethe strength of that industry
here.
When we talked about how we'reimporting wind turbines and
solar panels from China, I thinkthey want to keep the AI
(48:48):
focused here.
Is that right?
Speaker 2 (48:51):
Yeah, and you know, yes, I think there's security
issues, but I wouldn't massivelyoverstate them.
I mean, the foundational modelsare becoming more and more like
commodities.
We can have a six month headstart on China and the
foundational models, but youknow we're all converging to the
same place and we're doing itpretty quickly and pretty
(49:13):
synchronously.
There's issues of how you applyand use the AI and build it
into weapon systems and the like.
That very much we want to do onour own.
We don't want to share thatknowledge with others.
But a lot of the foundationalmodels, but a lot of the
foundational models yeah, wehave no ability to keep that to
ourselves.
Speaker 1 (49:33):
Okay, I guess, sort of to wrap it all up, tie it
with a bow.
I mean, do you have a biggesteconomic concern right now?
Speaker 2 (49:50):
Is there something that is big enough to keep you
awake at night?
I mean that the tariffs comeback and that they come back
with a vengeance, and that allof the happiness of the last few
months, or the last few weeks,turns out to have been a
mis-underestimation of DonaldTrump's resolve to impose very,
very large tariffs.
That, to me, is my biggest fear.
But my biggest hope is all theartificial intelligence we've
(50:13):
been talking about, and I'msuper excited about that and I
think it may outlast any of thechanges in this administration.
Speaker 1 (50:20):
Among the other improvements it could make to
medicine and communications, youthink it could actually improve
economic well-being overall.
Speaker 2 (50:27):
Yeah, it could raise productivity growth, raise wages
, help with our deficit problems, help with everything, if we do
it right.
Speaker 1 (50:37):
Do you think it'll be widely accessible, though?
I mean, obviously, Google justannounced this very high price
point for their new AI product.
Speaker 2 (50:46):
Oh, it's going to get cheaper and cheaper.
Ai product.
It's going to get cheaper andcheaper.
And you know, if you use thefree versions of all of this
right now, they're much betterthan anyone in the universe
could have paid for even a yearor two ago.
Speaker 1 (50:58):
That makes sense, right, right.
Well, thank you so much forjoining us in the Delegates
Lounge.
This has been an enlighteningconversation.
We've covered a lot of groundand I believe our listeners will
really benefit from it,especially those who are
struggling to make sense out ofsome of the tariff news and the
other news coming out ofWashington these days.
So thank you for making timefor us.
Speaker 2 (51:18):
Oh, thanks for the great discussion.
Speaker 3 (51:25):
And that's it from the Delegates Lounge.
We'd like to thank our esteemedguests, who've graciously
allowed us to share theirhard-earned insights into what
really matters.
And then there's you, ourlisteners, who we hope are
sufficiently edified to clamourfor more of the same.
Do drop in for a weekly episodeon Thursday, or from time to
time if we're on the road, forspecial events, in which case
there'll be a bonus episode.
Subscribe wherever you listento podcasts.
(51:47):
Bonus episode Subscribewherever you listen to podcasts.
And if you like what you'veheard, please take a moment to
rate or review the show, as ithelps others who share your
abiding interest in worldaffairs to find their way to the
Delegates Lounge.
You can connect with us on manypopular social media platforms
or reach out to us directly atinfothedelicatesloungecom.
We're a small team so we can'trespond to every message, but we
will read them.
Our show this week was writtenand produced by the host and by
(52:10):
yours truly executive producer,frank Radford.
Until next time, keep calm andcurious.
Welcome to the Delegates Lounge.
Pull up a chair.
I'm Alex Tarquinio, ajournalist based at the United
Nations here in New York Cityand your emcee for this podcast
featuring some of the mostinfluential minds in the world
today.
Settle in for some rivetingtete-a-tete, available wherever
you listen to podcasts.
Welcome back.
(00:37):
We have a fascinatingconversation for you today with
Jason Furman, the Harvardeconomist who co-teaches the
university's core course in thediscipline Principles of
Economics, harvard's mostpopular course.
He is also a non-residentsenior fellow at the Peterson
Institute for InternationalEconomics and a former
presidential advisor.
Our wide-ranging discussiontouched on President Donald
(00:59):
Trump's big, beautiful budgetbill and Moody's downgrade of
its US debt rating, while alongthe way, exploring the linkages
between global trade, cleanenergy and artificial
intelligence.
Naturally, much of our chatfocused on Trump's tariff blitz,
brought into stark public viewon April 2nd, his so-called
Liberation Day, when, standingin the White House Rose Garden,
(01:23):
he held up a placard displayingunprecedented tariffs on
countries both large and barelyknown.
After the markets nosedived,trump walked back the sky-high
tariffs on many countries for 90days to allow them time to try
to negotiate better deals.
Jason has been activelyexplaining in his Harvard
classes and online what hethinks about the Trump approach
(01:44):
to trade.
His views are mirrored in USpublic opinion polls, showing
widespread skepticism.
Jason served eight years in theObama administration, including
as chairman of the Council onEconomic Advisers, acting as
both the president's chiefeconomist and a cabinet member.
But as an economist, jasoncritiques not just this
administration.
After playing a key roleshaping the Obama
(02:07):
administration's economicpolicies, which centered on free
trade agreements the preferredpolicy of presidents from Bill
Clinton to Barack Obama hewatched Joe Biden take a
different tack.
In the March issue of ForeignAffairs magazine, jason argued
that, for all the lofty talkbehind policies that
collectively became known asBidenomics, they had contributed
(02:29):
significantly to inflation.
In some matters, such asnational security or the
environment, he asserted thatcertain gains might be worth
some economic pain.
With his article in mind, wediscussed two signature
legislative acts of the Bidenadministration the Chips and
Science Act, aimed atincentivizing domestic
semiconductor chip manufacture,and the Inflation Reduction Act,
(02:52):
which, among other things,subsidized clean energy
technology.
As always whenever we mentionan article in this podcast,
we'll add that link to the shownotes.
We spoke about Trump's big,beautiful bill the day before
the House of Representativesburned the midnight oil to
approve the federal budget billby the narrowest of margins.
This mammoth budget packagechampioned by the president
(03:14):
includes permanent extensions ofhis 2017 tax cuts, new tax
breaks on tips and overtime,significant cuts to Medicaid and
food stamps, and increasedfunding for border security and
defense.
Now it heads to the Senate,where it could face tougher
Republican scrutiny over thetrillions of dollars that it's
expected to add to the federaldebt.
(03:35):
House Speaker Mike Johnson,ever the optimist, is hoping to
have it on Trump's desk to signby July 4th.
Meanwhile, the 90-day pause onthe Trump Liberation Day tariffs
is set to expire after theAmerican Independence holiday,
so lawmakers will be drafting abudget without knowing what
revenues from tariffs thefederal government may come to
depend on.
(03:55):
Stay tuned to find out whatJason and I both learned from
the Rose Garden speech.
Here's our conversation.
Here's our conversation, jasonFurman.
Welcome to the Delegates Lounge.
Speaker 2 (04:13):
Great to be with you.
Speaker 1 (04:15):
What struck me about your recent article for Foreign
Affairs that I thought was kindof a different take is that,
while the approach may have beenvery different in the Biden and
Trump administrations, therewas some commonality of goals in
(04:35):
that both wanted to revivemanufacturing in the United
States.
Obviously, biden was pursuingit more with sweeteners,
subsidies, tax credits, whereasTrump is more focused on tariffs
.
But is that how you saw it,that there was a similar goal
between the two administrations?
Speaker 2 (04:52):
Yeah, I mean there are some very big differences in
terms of magnitudes between theTrump and Biden administration.
There are very big differenceson fiscal policy.
Do you want to raise taxes onthe rich or cut taxes on the
rich?
Do you want to expand healthcoverage or contract health
coverage?
Skepticism about the way thatthe market allocates things?
(05:15):
Yes, on all of that thereactually is a certain amount of
continuity between the two.
Speaker 1 (05:32):
Well, in fact, it feels almost as if both have a
nostalgic vision of Americanmanufacturing.
Let's go back to the 1950s,when American workers made more
things with their hands, ratherthan the preponderance of
workers working in services now.
And is that a reasonable goal?
(05:53):
Should Americans, you know,produce more of what they
consume?
Or is there a logic to say thatwe've moved up the value chain
and we should be doing moreservices?
I mean, in other words, wheredo you fall in that argument?
Speaker 2 (06:06):
I think, unless you have a well-defined reason, the
market's going to figure outbetter what it is you're good at
making.
It's going to direct productiontowards things that have higher
productivity, higher wages,that the United States has
comparative advantage in, andfor the most part, that is not
(06:28):
manufacturing.
There are lots of openmanufacturing jobs in the United
States today.
There's not a lot of peoplethat want to take those jobs,
and that's because those jobs,first of all, don't really pay
any more than other jobs.
In fact, they pay less than alot of other jobs in our economy
and they can be ratherunpleasant.
(06:49):
Now, I did have that caveat atthe beginning that in general,
unless there's a well-definedreason, the market knows where
best to make jobs.
So the well-defined reason fordeparting from that in my mind
the most justifiable one isnational security.
So if you feel, for nationalsecurity reasons, you need to do
something in the United States,then we should do it here.
(07:11):
We should be willing to paymore for it here and we
shouldn't kid ourselves intothinking that in the process
we're creating better middleclass jobs.
In fact, if anything, we mightactually be creating worse jobs
at a higher cost, but that mightbe worth it in order to achieve
a different goal.
Speaker 1 (07:30):
Is that how you saw, say, the CHIPS Act trying to get
more chip production in theUnited States?
Speaker 2 (07:35):
Yes, I do not think the end result of the CHIPS Act
is going to be better jobs inAmerica.
In fact, those factories arelargely going to employ people
with advanced degrees.
That we're going to have noproblem getting jobs, with or
without.
On the chips app, I don't thinkwe're going to be making the
best microchips in the world.
They're still going to makebetter ones in Taiwan.
(07:57):
But I'm going to sleep a littlebit better knowing that we have
more of a domestic supply ofmicrochips, even if they're a
bit more expensive and not quiteas good as the ones from Taiwan
, because getting 90% of youradvanced microchips all from one
dangerous place is just notsomething we should be fully
(08:20):
content with.
Speaker 1 (08:21):
I mean a little bit about myself.
I actually grew up in SiliconValley, when Silicon Valley was
growing up, so to speak, and Iremember when many chips were
made either in California orColorado.
I mean, how did we get to thispoint where Taiwan made most of
the chips, and are there reasonswhy they're better, or they've
(08:42):
just invested it and they havethe know-how, the expertise now?
Speaker 2 (08:48):
I mean, making chips is not a super high value added
activity.
Memory chips are basically acommodity, which is to say
they're sort of identical toeach other, so they don't
command a very high price andthe companies that make them
don't make a particularly largemargin from them, and the
companies that make them don'tmake a particularly large margin
from them.
Logic chips are less of acommodity, but still, you know
(09:09):
Apple and Nvidia are, you know,much, much, much more valuable
companies than TSMC.
Or you know Foxconn, whichassembles the phone, doesn't
make the chips.
So we're in the place in thedivision of labor that's just
gotten much, much more divided.
That labor and the separationof the design from the
(09:32):
fabrication, All the differentpieces that go into the
fabrication are made around theworld.
The Netherlands, for example,makes a very key part of all of
it, and so I think we're just ina world where it's division of
labor and the more routine, youknow, in some ways simpler, even
though it's still incredibly,incredibly, incredibly
(09:52):
complicated thing is happeningoverseas.
Speaker 1 (09:56):
So it's the intellectual property, the
designers, the chips, the basictechnology that is more high
value.
We don't know what's actuallygoing to happen with the tariffs
, as he talks about them bothfront and forward, taking
advantage of the US.
Some of this rhetoric seems togo beyond the goal of
eliminating the US tradeimbalance overall, but it
(10:17):
actually seems aimed ateliminating a trade deficit on a
bilateral basis and even goesafter friends where we have a
trade surplus, like the UnitedKingdom, achieving a zero trade
deficit with each and everycountry.
Is that a realistic goal and isit a desirable goal, or is this
more of a psychological talkingpoint?
(10:38):
It's not a realistic goal interms of we can't accomplishment
.
Speaker 2 (10:39):
It's not a realistic goal.
In terms of we can'taccomplishment.
It's not a reasonable goal interms of we don't really want to
accomplish it and you know,almost none of it makes any
sense.
So, first of all, bilateraltrade deficits and trade
surpluses often just reflectwhich country needs what from
(11:02):
whom.
We run a trade deficit withMadagascar and Lesotho, why?
Because Madagascar makesvanilla beans, lesotho makes
diamonds, and they're bothreally poor countries, so they
can't afford to buy very muchfrom the United States.
We could eliminate our tradedeficits with them, and what
would that mean?
That would mean less vanillabeans and fewer diamonds, and
(11:25):
you know, one of the two I'mpersonally completely fine with,
but I'm not going to impose myown prejudices on everyone else.
So you know there's no tariffthat's going to solve this
problem.
Speaker 1 (11:38):
Or coffee.
I mean there's some things we Imean we have a little bit of
Kona coffee in Hawaii, but wecan't grow much coffee here.
Lesotho had the highest quoteunquote reciprocal tariff on
that famous chart that Trumpheld up.
Speaker 2 (11:53):
Yeah, it had the highest because and that
illustrated what was wrong withthat whole concept we have a
trade deficit with Lesothobecause they sell us diamonds.
We want their diamonds.
Do I want their diamonds?
No, but you know it's a freecountry.
If people want to buy diamonds,they should be able to buy
diamonds, including buy diamondsfrom Lesotho.
Anyway, they buy a bunch ofdiamonds from Lesotho and all of
(12:14):
a sudden Trump says they'retaking advantage of us.
We're going to do a 50% tariffand, by the way, even after that
we're still going to have atrade deficit with Lesotho.
It'll just mean the diamondsare more expensive.
We're not going to be a richercountry because we've tariffed
some tiny little poor country onthe other side of the world.
We're not going to start makingdiamonds in the United States
(12:36):
because of this tariff onLesotho.
I mean, no aspect of it makessense and I'm not just picking,
you know, I'm picking this onebecause it's a really clear case
.
But then you can reproduce itover and over and over again.
You know we have surplus withBrazil.
We have a deficit with France.
Why is that?
You know it has nothing to dowith trade policy.
(12:57):
Brazil actually is moreprotectionist than France is.
We pay more tariffs to get intoBrazil than into France, but we
have things like natural gasthat they really want and good
ways of exporting that naturalgas to them.
France, we don't have as muchcapacity for the exports there.
So there's some reason to worryabout your trade balance
(13:19):
overall, because it gets to thesustainability of can you afford
, year after year, to run atrade deficit, but for any given
country you don't really carethat much.
Moreover, it is not caused bytheir tariffs.
Moreover, it is not solvable bytariffs.
Speaker 1 (13:38):
Now, that last point is very interesting because
we've been talking about Lesothoand I mean, I'm not even
certain if some Americans wouldhave known of the country
Lesotho or been able to find iton a map before it.
You know the Rose Garden speechlast month.
On the other hand, there hasbeen a long running structural
trade deficit with China andmany Americans feel that China
(14:01):
has unfair trade practices.
Does the tariff approach makesense when addressing the trade
deficit with China?
Speaker 2 (14:09):
Yeah, I should say.
By the way, the one place inthe world I learned about when
we did the reciprocal tariffswas the Heard and McDonald
Islands, which is the penguinislands that got a 10% tariff.
I confess I had never heard ofthem before but onto your more
serious and important country,china I had heard of before the
reciprocal tariff announcement.
(14:30):
Our trade deficit with China islarge.
In dollar terms it's not thatlarge relative to China's
economy.
They run a trade surplus.
Overall that's a few percent ofGDP.
That's a totally reasonable,normal-sized trade balance for a
country to run.
The causes of it are less aboutprotectionism.
(14:52):
China has tariffs of about 5%on the United States.
The United States has tariffsabout 2%.
Sorry, the numbers I gave youare before the first Trump
administration's tradeescalation, but prior to
everything those were thetariffs about 2-5%.
The reason for the trade balancebeing the way it is is largely
(15:13):
rooted in macroeconomics.
In China people save a lot anda lot of the saving they don't
even really choose to do.
They never get the money in thefirst place from the companies
which keep the money internally.
And in the United States we,you know, effectively borrow a
lot.
We run a big budget deficit,for example.
(15:33):
That requires us to get moneyfrom the rest of the world.
We can only get that if we runa trade deficit with the rest of
the world.
So I think we do have a tradedeficit with China.
You know that one might worry alittle bit about.
But trade, you know, tariffsand things like that aren't
going to do a whole lot.
What would do a whole lot isget it structurally.
(15:55):
And by the way, when I say notdo a whole lot, there'd be some
rearranging of the debt charts.
You know, something would comethrough Vietnam instead of
through China.
That's not that differenteconomically, not even really
very different geopolitically.
But you know the labeling ofthis stuff.
Hasn't that already begun?
Speaker 1 (16:14):
By the way, I'm one of those people that ran out and
bought a new MacBook Probecause I was afraid that a
price hike might be coming, andI think on the box it does say
that it was assembled in Vietnam.
I don't know if that would havebeen the case if I'd bought it,
you know, a few monthspreviously, in December.
It might have come from China.
So I think some of that deckchair factor is occurring.
(16:36):
Presumably Apple had productsitting around in warehouses.
Make the choices based on this90-day pause, but that can't go
on indefinitely.
That reminds me we're about, Ithink, almost exactly halfway
through the 90-day pause intariffs and we have been hearing
that there's a sharp drop inimport traffic at Long Beach,
california.
(16:56):
How soon might we see an impacton store shelves if they don't
do some big, beautiful tariffdeal?
Are we talking?
Could you start to see emptiershelves around the
back-to-school period?
Would it be Christmas?
Because obviously there's somedelay.
Speaker 2 (17:14):
Yeah, so it just is.
I mean, first of all, we don'tknow, because we haven't
observed this type of thinghappen before, and the stop
start nature of it a lot ofstuff is rushing into the
country right now.
Now it takes a while for shipto make its way across the ocean
.
You don't can't just turn theswitch on and off and expect
things to instantly change.
(17:35):
But yes, between the prestocking, people had already
done the additional amountthey're doing now.
I would expect it's sort of youknow, a fall winter type of
issue to see, you know,shortages and or higher prices.
Right now a lot of companiesreally are absorbing price
(17:56):
increases so far.
I was at a car dealershipearlier today and they had signs
get your car now, you know,before the tariffs start to show
up in the prices, and they wereexplicitly marketing it that
way and it, you know, made mefeel maybe I should hurry up a
bit to get my car.
Speaker 1 (18:13):
Yeah, that's a reaction I had with a laptop.
It's like, oh, you better actnow If tariffs do go into effect
in about six weeks time willinflation be in you?
Speaker 2 (18:38):
inflation be almost inevitable after that in China,
the higher on certain sectors,some additional sectors that are
coming with near certaintysemiconductors, pharmaceuticals
and the like.
In terms of whether theadditional so-called reciprocal
tariffs come back, it's so hardto tell.
I mean, we reached a deal withthe UK.
(18:58):
I mean that's a country thatyou know we have a trade surplus
with, that is a very closefriend and was willing to
basically go along withsomething where they gave
concessions to the United Statesin exchange for almost nothing.
They still have the 10% tariffon them.
That's just going to be a lotharder with other countries,
(19:21):
countries that have tradedeficits with the United States.
We have a less closerelationship with that
politically.
Their leaders can't be seen asgiving quite as much Europe.
For example, they basicallywant a deal where the United
States would lower tariffs fromthe pre-reciprocal in exchange
for Europe lowering them.
(19:42):
The idea that we're going tojust call off some additional
tariffs in exchange for concessthem, the idea that we're going
to just call off some additionaltariffs in exchange for
concessions from them and keepthe 10% tariff, is just
politically and economicallyvery unappealing to the
Europeans the Japanese also, Imean.
I was involved from thesidelines in the TPP negotiation
(20:03):
.
Speaker 1 (20:04):
This was during your time in the administration.
Yeah, during the sidelines inthe TPP negotiation.
Speaker 2 (20:06):
This is during your time in the administration, yeah
, during the Obamaadministration and politically,
you know, things likeagriculture are really, really,
really hard with Japan, becausetheir farmers can be really,
really, really powerful.
Speaker 1 (20:20):
Well, rice farming, I mean.
Obviously there's an economicand a food reason for it, but I
think it's also such a huge partof the culture.
I've heard that rice farmers inJapan are just very revered and
you know if they, if they havea concern, the government has to
listen.
Speaker 2 (20:36):
Yeah, Now, eventually we made some headway and got
more ability to export rice toJapan.
Export rice to Japan and I meanwe didn't didn't happen because
we pulled out of TPP, but wegot a deal that would have
enabled that.
But we also gave things inexchange for that and it took a
(20:58):
long, long time.
So the idea that this is goingto be settled quickly and
without any sort of ability tosave face or achieve other goals
on the part of the Japanesefrom the beginning struck me as
implausible, and that appears tobe how it's playing out.
Speaker 1 (21:13):
Yeah, I mean, obviously there were a lot of
differences from your time inthe Obama administration on the
National Economic Council andCouncil of Economic Advisors.
But what are some of the keydifferences in the messaging?
I mean, is that something thatthe Council of Economic Advisors
do?
You only talk as an economistor do you say, oh no, look, you
(21:36):
need to explain it this way tovoters so they understand the
economics of it.
Speaker 2 (21:41):
Yeah, so I mean I've worked at both the National
Economic Council and the Councilof Economic Advisors.
Speaker 3 (21:47):
In the Obama administration In the Obama
administration.
Speaker 2 (21:49):
Actually I worked for both of them at a lower level
in the Clinton administration aswell.
The National Economic Councilis more coordinating economic
policymaking, it's morestrategic and it definitely
incorporates much more messagepolitics.
Working with the differentunits in the White House, the
Council of Economic Advisorsit's not like some pure academic
(22:12):
think tank.
If you want to be a pureacademic you should stay in a
university.
It gets its hands a bit messyat times but is much, much
closer to saying you know,here's what economics thinks,
here's what is a credibleargument and serious argument.
You know, this is why you knowwe think that's a less than
credible and less than seriousargument.
Speaker 1 (22:35):
Now the goal of the tariffs.
Obviously this has beenshifting, as we said, trump
first floated the idea as theprimary goal was a
reindustrialization, as wetalked about, but he's also said
it's an alternative to theincome tax.
He talked about that in theRose Garden and then, when the
markets had an increasinglynegative reaction in the first
week, he announced the 90-daypause and since then he's been
(23:00):
talking about it as anegotiating strategy.
Obviously, both can't be true.
If it's a strategy and they'regoing to go away or be reduced,
then it can't be counted on as along-term revenue stream for
the government to eliminate theincome tax.
So how much of that shouldCongress be factoring into their
(23:20):
talks right now about thebudget?
Trump's quote unquote one big,beautiful bill.
Speaker 2 (23:26):
I think it's a real mistake to count on tariff
revenue to offset the so-calledone big beautiful bill.
First of all, even the existingtariff levels are not
sufficient to offset the cost ofthe tax cuts in that
legislation.
Moreover, that legislation is10-year legislation.
(23:47):
It's de facto permanentlegislation because it's setting
up a process that would make itvery hard to let those things
go away.
And these tariffs are hopefullynot permanent.
My hope is that Donald Trumpends them.
If he doesn't end them, Iexpect the next president to.
So the tariffs to me feelfragile and temporary.
(24:08):
The tax measures in that billare permanent.
You shouldn't use one to payfor the other and, by the way,
the numbers don't even add up,even if you ignore the concerns
that I just expressed.
Speaker 1 (24:21):
Tax measures, particularly big tax cuts, have
always been announced in, Ithink, 10-year increments and of
course that hides the actuallong-term cost and obviously
much of what we're talking aboutthat one big beautiful bill is
actually a continuation of theinitial tax cuts from Trump's
first term.
But in that case, well, he didhave tariffs in his first term,
(24:43):
not as big.
Speaker 2 (24:44):
Much smaller.
The tariffs this time aroundare much, much more extensive.
Speaker 1 (24:49):
I don't remember them being billed in the first term
as a way to offset the tax cuts.
Speaker 2 (24:53):
No, they weren't, because they didn't come close
to it.
And, by the way, I mean it'snot.
I don't mind using 10-yearbudget numbers, that's sort of
standard.
The issue here is a number ofthe different tax policies, like
tax-free tips, tax-freeovertime, tax-free social
security benefits.
They just last for four yearsin the law, and so if you look,
(25:16):
the cost of the law in thefourth year is really high and
then it goes down a lot.
Now if you think it goes down alot, great, you know, we didn't
raise the deficit over the longterm.
There's not a single personvoting for this legislation
today who's not going to beactively pushing to continue it
four years from now.
In fact, they're going to argueit's a tax increase if any of
(25:39):
that goes away, and so this isreally just a gimmick to
disguise the true tenure cost ofthis legislation by pretending
that some of it will actually goaway.
Of course it won't.
Speaker 1 (25:51):
So it camouflages the long-term cost of those tax
cuts, but when they come up forrenewal it's always billed as oh
my gosh, that would be a hugetax increase, making it very
difficult not to perpetuate them.
How much did this factor intoMoody's decision to downgrade US
(26:11):
debt?
Do you think the tariffs were afactor in that?
Were they also looking at thepotential for the one big
beautiful bill, or is that justlooking at current debt level
and deficit?
Speaker 2 (26:27):
And after the Moody's decision, I'm worried and not
panicked about our debt, and myworry level has not changed one
iota.
There's nothing I learned fromthem.
There's nothing they know aboutour fiscal situation that you
couldn't figure out for yourselfalready from looking at the
(26:48):
Congressional Budget Office.
But you know, these things canalways be a reminder and a focal
point for discussion.
Reminder and a focal point fordiscussion.
And what's notable is the twoprevious downgrades from S&P and
Fitch were, in part, about thedysfunction of divided
government.
The S&P one in 2011 was when wewent to the brink on the debt
(27:10):
limit and, while they warnedabout the magnitude of the debt,
they spent a lot of time reallytalking about political
dysfunction in Washington,causing some type of accident.
The Moody's downgrade is aboutunified Republican control doing
too much in the way of tax cutsand too much in the way of
(27:31):
deficit and debt increases.
And so when I was sitting inthe White House in 2011, an S&P
said you know, the problem isyour country is dysfunctional.
I didn't totally disagree Now,I wouldn't have lowered our
credit ratings for it but theywere sort of onto something.
Moreover, I didn't know what todo about it.
I mean, we were trying to befunctional, felt like the
(27:51):
Congress was the dysfunctionalone.
To us, here is a very simplething to do.
I mean, if the president wantsto veto this legislation or call
it off, we will have a smallerdeficit, we will have less of a
fiscal problem.
So this is very much a choicethat President Trump and the
Republican Party are making andMoody's is basically warning
(28:13):
about and rebuking.
Speaker 1 (28:15):
It sounds like what you're saying is Moody's was
maybe a little bit late to theparty in this downgrade.
Speaker 2 (28:20):
I mean, I still think of the United States as AAA.
I really do.
Speaker 1 (28:23):
Despite the debt.
Speaker 2 (28:25):
Yeah, we'll be good for the money.
We'll pay people back.
They can treat our debt.
It's super liquid.
It's super safe.
Speaker 1 (28:32):
And it is a comparison.
There are a few other countriesthat have the bond markets.
We do that have the confidenceof investors.
That being said, was thissomething in the S&P decision
when you were in theadministration?
Is this something that youwould have to go, I guess,
explain to the boss in the OvalOffice?
(28:52):
And do you think they're havingto do that now with the Moody's
decision?
Speaker 2 (28:56):
There's a big run up to the S&P decision.
I remember I did one meetingwith them to talk through our
fiscal situation where it stood,where we were going with it,
and a lot of our argument tothem was our credibility.
The people in the room makingthis argument many of them,
including myself, had worked inthe Clinton administration, had
been involved in balancing thebudget for the first time in a
(29:18):
generation and said you know, wecare about this stuff, We've
done it before, We'll.
You know we'll do it again.
We don't need to balance thebudget, by the way, but get the
debt down as a share of GDP, andthat is a problem with this
administration.
Now the Treasury Secretary talksa good game about cutting the
deficit to 3% of GDP.
That's a great goal to have forthe deficit, but most of the
(29:42):
actions go the other way.
They're hurting the economicgrowth that would bring the
deficit down.
They're raising the interestrates that are very important
for the dynamics of the debt,and they're raising the
so-called primary deficit, thedeficit excluding interest.
So all three of the thingsthey're doing are going in the
(30:05):
wrong direction on bringing thedebt down.
Speaker 1 (30:08):
Does this White House care more about the bond
markets than the stock markets?
I mean, they did react to thestock market a week after
Liberation Day by saying they'dhave a 90-day pause.
But of course there's thefamous Carville quote about
wanting to be reincarnated asthe bond markets.
Speaker 2 (30:24):
Yeah, I mean this administration sometimes seems
to care about bond markets,sometimes cares about stock
markets, sometimes doesn't careabout either.
There's not like an exactformula or reaction function
that seems to explain theirbehavior.
I tend to think that a lot ofit comes down to mortgage rates.
I mean the 10-year treasury isit 4.7 or 4.1?
(30:50):
That's pretty different interms of the dynamics of the
debt, but you still havemulti-trillion dollar deficits
either way.
But consumers are verysensitive to what mortgage rates
are.
They really do care, and sothat is an area where I could
see it being a pain point, butit will take some time for it to
(31:12):
build.
Speaker 1 (31:13):
Well, in fact I know Trump wants Powell to lower
interest rates.
I guess what president doesn'tthey always do?
He did give some reassurancethat he would not get rid of
Powell, but do you have anyconcerns about the Federal
Reserve or his treatment of theFed?
Speaker 2 (31:32):
Well, look, his treatment of the Fed is
appalling.
How consequential is it for theeconomy?
I'm not sure.
I mean it's a negative.
Is it a small negative or alarge negative?
Either way, why do it?
Why hurt the economy?
I think, ultimately he probablywill not try to fire Powell,
because what's the point?
His term ends in a year and, bythe way, you get to blame him
(31:56):
for all the economic problems.
I mean not fairly, but you canstill do it.
It's a free country.
You can blame whoever you wantand you know, whereas if he
picked his own person, he wouldown all of it himself.
Speaker 1 (32:12):
So Powell is his own person in a way, right, it's
just that he's distanced himself.
Speaker 2 (32:18):
Yes, he's distanced himself quite a lot from him.
Speaker 1 (32:22):
Now, of course, the Fed has to look at both
inflation and economic growth.
I mean, we did have acontraction in the first quarter
.
Do you think we might beentering a recession?
It's still obviously recession.
You look at that in hindsight,but do you feel that the economy
is moving that way now?
And also, if we have an uptickin inflation from tariffs, could
(32:44):
we be looking at stagflation?
Speaker 2 (32:47):
Yeah, so we had a reported decline in GDP in the
first quarter.
I'm not sure that those numberswere correct.
They're trying their hardest,I'm not.
It's not a conspiracy on thepart of the statistical agencies
, but when there's just massive,almost unprecedented shifts in
the data, it's a hard thing totrack.
And so they might havecorrectly counted all the
(33:08):
imports showing up in thecountry but then missed some of
the places.
They ended up going likeinventories and the like, so
they entered them in one part ofthe GDP accounts as a negative,
didn't do the correspondingpositive entry in another part
of the GDP accounts and ended upwith too low a number.
And so I'll be looking to othermeasures of growth in the first
(33:30):
quarter gross domestic incomewhen we get that, and I'll also
be looking to future revisions.
So if you look at the totalityof the data, the economy looked
quite robust in the firstquarter.
The current tariff levels thatwe have should not be enough to
tip you into recession, but younever know.
(33:51):
What would is a big increase inuncertainty and a big return to
a much larger and constantlychanging set of reciprocal
tariffs.
Speaker 1 (34:06):
So you don't believe we're in a recession and in fact
you think the economy may havegrown in the first quarter and
we should explain for listeners.
It's not a deep state theory.
Speaker 2 (34:36):
It's.
In fact they're often Are.
They almost always have data onmore than half of the economy,
so they're basically making aneducated guess about what was
going on in the half of theeconomy.
They don't measure.
Over time they get more andmore of those measures come in,
better measures come in, andoften the number changes by even
one or two percentage points.
(34:56):
That's why, to understand theeconomy in real time, you don't
want to just take one number,you want to look at lots of
different measures and sort ofaverage them in your head.
And almost every other measurewe have other than GDP was quite
strong in the first quarter ofthis year.
Speaker 1 (35:16):
That's a good point.
So you'll be looking foradjustments there, and those can
come three months later, sixmonths later.
Speaker 2 (35:23):
Three years later, six years later, they keep
changing.
Speaker 1 (35:26):
Way down yeah.
Speaker 2 (35:28):
And we saw this look in the first half of 2022, there
were two negative quarters.
One of them I think it was Q1,has since been revised to
positive, and so this thing thatpeople said was technically a
recession because of twonegative quarters well, it's not
technically a recession anymore.
Speaker 1 (35:44):
So one of our recessions is no longer
technically a recession becauseof these revisions.
Speaker 2 (35:49):
Almost all economists at the time said this isn't a
recession.
You know, this is in the firsthalf of 2022.
Oh, and almost every economistat the time said don't worry,
this is not a recession.
Here's like 20 different datapoints.
18 of them are going up.
These data get revised a lot,et cetera, et cetera, and you
know that view has beenvindicated by the revision since
(36:10):
then.
Speaker 1 (36:11):
Now, what is more important in determining a
recession?
Speaker 2 (36:15):
And the people who decide on recessions are looking
very carefully at actualeconomic activity.
How much is being produced, howmuch is being purchased, how
much income do people have?
They're not looking atfinancial markets and they sort
of take all that together andweigh the call.
But, by the way, we've nowtalked for a while about
recession.
(36:35):
Wouldn't it be too hung up on arecession?
If you lower growth from 2% to0.5, that's nota recession, but
that's still a pretty bad thingto do.
If you permanently lower thelevel of GDP by half a point,
even so, every year, it's half apoint lower than it used to be.
That's a really bad thing to doalso, and so there's a lot of
(36:57):
ways to harm the economy thatwon't show up as a recession,
let alone as a major crisis.
But are you know, takingthousands of dollars away from
people year in and year out?
Speaker 1 (37:08):
That's a bad thing to do, and it would also make the
federal debt appear larger as apercentage of the economy.
That is true, yeah, and alsothe strength of the dollar.
I mean obviously still verystrong now, but that's something
that China and other BRICScountries have.
I mean, I guess you could saythat's been one of their hopes
is that the dollar would be lessdominant.
(37:30):
De-dollarization.
We're not seeing that now, butif tariff barriers continue to
grow, could that potentiallyaffect the strength of the
dollar?
Speaker 2 (37:41):
It could.
I think the dollar is.
I'm pretty bullish about thedollar being used around the
world.
It's also not absolutelycritical that it's used around
the world.
You can have a fantasticeconomy without your currency
being the world's reservecurrency.
But you know, all else equal.
I'd rather keep it and I expectthat our country will still
keep it.
Speaker 1 (38:03):
With the Inflation Reduction Act.
It is science and technology,but it has to do with
decarbonization and also energysources of the future, or what
we hope will be future, whichhave been overwhelmingly made in
China.
Now I mean wind turbines, solarenergy.
There again, I remember whenthose industries were starting
(38:23):
out in Northern California tailend of the last century, and
we've gotten to the point wherenow they're mostly made in China
.
So is that another case wherewe are paying more for products
and we are subsidizing themthrough the Inflation Reduction
Act simply to get manufacturinghere?
Speaker 2 (38:40):
So I would distinguish between two aspects
of the Inflation Reduction Actthat are very different, two
aspects of the InflationReduction Act that are very
different.
One is how do you make yourelectricity, and the Inflation
Reduction Act gives yousubsidies if you want to make
your electricity using the sunor using wind or something like
(39:01):
that.
To me, that is unambiguously agood thing.
Now I wish we had a carbon taxthat penalized dirty energy, but
we don't have a carbon tax, andso we might as well have a
subsidy for clean energy.
There's a very clear what aneconomist would call externality
, related essentially to usingclean power, so that part of it
(39:25):
I'm 100% for, and it's verystraightforward the rationale
for it.
Speaker 1 (39:30):
Is that an easier sell given the political climate
here?
Obviously Europe.
Carbon taxes exist there andthey're more popular, I think,
with the populace, with thevoters.
At least, they haven't, to myknowledge, kicked politicians
out because they supportedcarbon taxes.
Speaker 2 (39:46):
Yeah, it's interesting.
In Europe they started with acarbon tax and they don't call
it a carbon taxes.
Yeah, it's interesting.
In Europe they started with acarbon tax and they don't call
it a carbon tax.
They call it the emissionstrading system, ets.
They originally started with itwith a de facto price of about
five or ten dollars a ton.
Now they're up to about 80 or90 dollars a ton, I mean.
(40:06):
So they scaled it quite a lot.
So they basically said we'regoing to start small, start sort
of pathetic.
So when it started it basicallydidn't matter at all, and then
it was like they boiled a frogby making it a little bit more
year after year and turning itinto something meaningful.
I wish we had done that in theUnited States.
I don't think politically itcould have been done.
So I do not at all fault theBiden administration for not
(40:30):
doing that, because they didwhat they could.
So they subsidize theproduction of electricity with
wind and solar Unambiguouslygood, pretty straight economics.
There's then a separate thing,which is subsidizing the
production of solar panels andthe production of wind turbines
(40:52):
the production of solar panelsand the production of wind
turbines.
Now, that's less clear becauseit's all of a sudden, just like
you know, any other piece ofequipment we have in the United
States.
You know why don't we want toimport, you know, whatever
factory equipment we use in theUnited States, from whoever
makes it cheapest and best,rather than trying to make it
ourselves it cheapest and best,rather than trying to make it
(41:12):
ourselves.
What's different aboutequipment in this sector versus
any other?
I tend to be in favor of justimporting the wind and solar
from anywhere in the world.
The argument for it which Idon't think is crazy, even
though it hasn't persuaded me,but it's possible is that China
has just such dominance that,once again, we have to worry
about the resilience, we have toworry about what happens in the
(41:35):
event of a conflict with China,and we need to build the
capacity to make that type oftechnology and equipment
ourselves.
Speaker 1 (41:46):
Well, in fact, in the event of a conflict with China
over Taiwan or in the SouthChina Sea, I mean, right now,
solar and wind are not a largepart of our grid, but if they
were a larger part, I mean youcould see where it might be
difficult getting replacementparts, for example from Chinese
companies.
Is that a concern?
(42:06):
And then does it become asecurity factor companies?
Is that a concern?
Speaker 2 (42:09):
And then does it become a security factor?
That's a theory and that's notat all a crazy theory.
You know it's different fromoil.
You know oil, especially backwhen we were big importers, when
we didn't make very much of it.
Every single day we needed tensof millions of barrels of oil,
and if it got shut off, yeah, wehad a bit in inventory, but
(42:36):
very quickly we'd run throughour inventories and we would
just everything would grind to ahalt.
With a solar panel.
It's not like China can shutoff the sun in the event of a
conflict, and so you still havethe solar panels.
Now they don't last forever.
They depreciate, but it's aslower process, one that gives
you more time to replace them,to figure out alternatives.
The other thing I'd say is thatapproaches like the Inflation
(42:59):
Reduction Act are about doing itin America, not about making
sure it's happening in one ofour friends one of our friends
and so that's very interesting,because the didn't the Europeans
object?
Speaker 1 (43:13):
I remember during Biden's first state visit with
French President Emmanuel Macron, some of his team were
complaining about the InflationReduction Act.
They were talking almost howAmericans talk about the Chinese
, sometimes with unfair tradepractices.
So did it concern some of ourfriends?
Speaker 2 (43:30):
Yes, exactly so that you saw that, especially in
areas like batteries, where allof a sudden we weren't giving
tax credits to cars that boughttheir batteries from Europe, and
you know, the Europeanbatteries would be cheaper.
By the way, the American carindustry is in better shape if
we can get parts from whereverthey're cheapest rather than
trying to make everythingthemselves.
(43:52):
And there's no nationalsecurity concern whatsoever when
it comes to French madebatteries.
And if anything from a nationalsecurity perspective, it
actually alienated a set ofcountries, of countries.
(44:14):
So the manufacturing in theUnited States is in some
well-defined places vis-a-visChina might make sense.
Outside of that, if we're tryingto move stuff from France to
the United States, we'recreating worse jobs, more
expensive cars, more carbonemissions, because there'll be
less of all of it, and we'reupsetting people in the process.
There's not a very good reasonto do that Now.
(44:35):
France, of course, has noobjection to us changing the way
we make our electricity.
We want to make electricityfrom wind instead of from coal.
That's totally fine with France.
In fact, they're happy aboutthat.
That's very much a domesticdecision.
But this we need to shiftthings from the entire world to
the United States is a much lesscompelling economic argument.
Speaker 1 (44:57):
Yeah, in fact, the French had a very typically
French reaction.
It was kind of like, well,we've been wanting the Americans
to do something about globalwarming, but not this.
Speaker 2 (45:08):
Yeah, oh, look, there's an issue.
I mean, much of the world isdealing with carbon by raising
the price of dirty energy.
The United States is dealingwith it by lowering the price of
clean energy, and those twosystems don't play super well
together, you know.
It gives the United States anexport advantage.
(45:29):
For example, it candisadvantage other countries in
terms of their competitivenessglobally, and other countries
are also a little bit jealous.
They don't feel they have theborrowing resources that the
United States has to just putthis huge amount of money into
the subsidy system.
(45:50):
So yeah, there was a certainirony.
Everyone was telling the UnitedStates do more, do more, do
more.
And then it was like, well,don't do exactly that that
you're doing.
And much of what we were doingI think we had no political
choice and up or down vote.
I'm in favor of it Some of whatwe were doing, some of the
bi-American aspects, probablywere a.
Some of what we were doing,some of the buy American aspects
probably were a mistake and, bythe way, I think the Biden
(46:12):
administration agrees with thatlast point.
I mean, they tried toreinterpret the legislative
language around things like thesource of batteries in a way
that would be more flexible interms of accommodating imports
from abroad.
Speaker 1 (46:30):
What's the biggest new unknown factor artificial
intelligence, agi that could ifit lives up to expectations that
could, really rewrite a lot ofthese economic rules.
Is that correct?
Speaker 2 (46:46):
Absolutely yes.
Ai is the biggest source ofuncertainty in the economy and,
to be clear, it's uncertaintythat's good.
I mean, uncertainty for aneconomist isn't the chance that
something bad happens.
It's the chance that somethingdifferent happens, and something
very different could happen, asa result of AI, and I'm I'm
pretty excited about it.
(47:07):
I think this government'sactually doing a perfectly
decent job of encouraging it,and it could mean great things
for all of us.
Speaker 1 (47:16):
Is the most important thing economically to have your
country a leader in AI, or isit just the benefits that AI can
bring?
I mean, because, of course, alot of our listeners are outside
of the United States Is it thebenefits they can bring to all
countries that have access to AIin terms of changes in medical
(47:38):
care, in how goods and servicesare delivered, and just
increasing productivity?
Speaker 2 (47:46):
I think the benefits are largely spillover to the
entire world.
I don't see this as a zero sum.
It's a technology that everyonecan use.
It's, by the way, technologywhere people can learn from each
other.
Deepseq was in China.
They published their papers.
We learned from that.
It's making our AI better.
Now, if you own stock in one ofthe companies that's successful
(48:08):
, it helps you.
But, by the way, that stock isowned by investors around the
world too.
So, yeah, I think you shouldthink of this less as a zero-sum
conflict and more as apositive-sum.
Speaker 1 (48:24):
you know, collective global exploration you know
collective global exploration,but aren't there also security
concerns around?
Some people working in AI,certainly in the US, would feel
that it was important to havethe strength of that industry
here.
When we talked about how we'reimporting wind turbines and
solar panels from China, I thinkthey want to keep the AI
(48:48):
focused here.
Is that right?
Speaker 2 (48:51):
Yeah, and you know, yes, I think there's security
issues, but I wouldn't massivelyoverstate them.
I mean, the foundational modelsare becoming more and more like
commodities.
We can have a six month headstart on China and the
foundational models, but youknow we're all converging to the
same place and we're doing itpretty quickly and pretty
(49:13):
synchronously.
There's issues of how you applyand use the AI and build it
into weapon systems and the like.
That very much we want to do onour own.
We don't want to share thatknowledge with others.
But a lot of the foundationalmodels, but a lot of the
foundational models yeah, wehave no ability to keep that to
ourselves.
Speaker 1 (49:33):
Okay, I guess, sort of to wrap it all up, tie it
with a bow.
I mean, do you have a biggesteconomic concern right now?
Speaker 2 (49:50):
Is there something that is big enough to keep you
awake at night?
I mean that the tariffs comeback and that they come back
with a vengeance, and that allof the happiness of the last few
months, or the last few weeks,turns out to have been a
mis-underestimation of DonaldTrump's resolve to impose very,
very large tariffs.
That, to me, is my biggest fear.
But my biggest hope is all theartificial intelligence we've
(50:13):
been talking about, and I'msuper excited about that and I
think it may outlast any of thechanges in this administration.
Speaker 1 (50:20):
Among the other improvements it could make to
medicine and communications, youthink it could actually improve
economic well-being overall.
Speaker 2 (50:27):
Yeah, it could raise productivity growth, raise wages
, help with our deficit problems, help with everything, if we do
it right.
Speaker 1 (50:37):
Do you think it'll be widely accessible, though?
I mean, obviously, Google justannounced this very high price
point for their new AI product.
Speaker 2 (50:46):
Oh, it's going to get cheaper and cheaper.
Ai product.
It's going to get cheaper andcheaper.
And you know, if you use thefree versions of all of this
right now, they're much betterthan anyone in the universe
could have paid for even a yearor two ago.
Speaker 1 (50:58):
That makes sense, right, right.
Well, thank you so much forjoining us in the Delegates
Lounge.
This has been an enlighteningconversation.
We've covered a lot of groundand I believe our listeners will
really benefit from it,especially those who are
struggling to make sense out ofsome of the tariff news and the
other news coming out ofWashington these days.
So thank you for making timefor us.
Speaker 2 (51:18):
Oh, thanks for the great discussion.
Speaker 3 (51:25):
And that's it from the Delegates Lounge.
We'd like to thank our esteemedguests, who've graciously
allowed us to share theirhard-earned insights into what
really matters.
And then there's you, ourlisteners, who we hope are
sufficiently edified to clamourfor more of the same.
Do drop in for a weekly episodeon Thursday, or from time to
time if we're on the road, forspecial events, in which case
there'll be a bonus episode.
Subscribe wherever you listento podcasts.
(51:47):
Bonus episode Subscribewherever you listen to podcasts.
And if you like what you'veheard, please take a moment to
rate or review the show, as ithelps others who share your
abiding interest in worldaffairs to find their way to the
Delegates Lounge.
You can connect with us on manypopular social media platforms
or reach out to us directly atinfothedelicatesloungecom.
We're a small team so we can'trespond to every message, but we
will read them.
Our show this week was writtenand produced by the host and by
(52:10):
yours truly executive producer,frank Radford.
Until next time, keep calm andcurious.
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