Trump’s Tariffs… or Bluffs?

Episode Transcript
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Speaker 1 (00:00):
Perhaps the biggest topic in the news right now is
tariffs and Trump's tariffs on every country, including the little
tiny ones. And the question is will tariffs actually do
what Trump says they'll do, and how will they affect
the average business owner and the average American? And with
us today, we have an economist, Adam Ozimic. Did I

(00:24):
get that right? Adam? All right? And Adam is an economist,
and I'll let Adam introduce himself, but an expert on
tariffs and how they affect businesses in particular and manufacturing,
which is kind of the one of the stated goals

(00:46):
of the Trump administration. So Adam, it's a pleasure to
have you to talk about what I think is probably
the single most important fiscal topic we've got right now.

Speaker 2 (00:56):
Glad to be here. I'm the chief economist of the
Economic Innovation Group. I work on all sorts of issues
from labor markets to monetary policy to teconomic geography. So
you know, I'm glad to be here to talk about this.
I certainly agree with you it's the number one economic
topic right now.

Speaker 1 (01:15):
So let's start with Let's start with some basics here,
what tariffs are and what they aren't Okay, So one
of the things that we hear all the time is, well,
tariffs are just gonna just going to cause inflation. When
I look at tariffs, I think terrists are attacked, and

(01:36):
nobody would say. Nobody is saying that when a state
or a city increases its sales tax that that's causing inflation.
They're saying, oh, that's another tax, We're gonna have to
pay that tax. How How are are terraffs really inflation
or are they attacks?

Speaker 2 (01:55):
A great question. So I think that you have to
look at short run versus long run. In the short run,
it is like a tax. It's like a sales tax
in its effect on prices, and so you would expect
that to show up as positive inflation in the short run.
To typically, you don't expect that to be the kind

(02:16):
of thing that affects inflation in the long run, for
the reason being that you said it is a tax,
raises revenues, and so it shouldn't impact inflation in the
long run. How long is the long run? That's a
good question. There's a really important nuance here, though, and
I think an easy way to think of it is this,
So imagine if we imported all axles from abroad. Okay,

(02:43):
every axle on every truck and every car, and you
placed a one thousand percent tariff on axles, well, imports
would crash to zero, right, and so what would happen
to auto production in this world? Crash zero? Right? And
so auto production goes to zero. That would the amount

(03:07):
of supply chain havoc that you could create there could
be inflationary, especially the FEDS trying to offset it by
lowering rates, because you know all these auto workers are unemployed.
You have this massive adjustment in the economy, but we're
not making any more cars. People are still buying cars.
Car prices are a substantial portion of the CPI. You

(03:28):
can cause these sort of economic shocks and via supply
chain issues. And I think a great place to look
for this is like, look at an oil price shock.
An oil price shock shouldn't be inflationary, right, it just
shouldn't be and for the same reason that a terror
from first principles wouldn't be inflationary. But if it causes
enough disruption to the economy, if it causes supply chains

(03:51):
to pull back faster than it causes demand to pull back,
you can get these sorts of medium term inflation there. Yeah.

Speaker 1 (03:57):
On the other hand, it sounds like it could also
be deflationary because if it causes if there's no cars,
there's no transportation, there's no work, that sounds deflationary to me,
not inflationary. So the point I was just trying to make, though,
is that I hear this all the time that to me,
inflation is always too much money chasing too few goods,

(04:19):
and terriffs by by definition or not that they are
in fact, it's like you get a tax once and
so your prices go up once, But do they go
up every year? Probably not. Now, granted, the disruption that
they could cause if you put a you know, like
you say one thousand percent tarrafy and you're down about
ten percent tariff, that's a little different than a thousand percent.

Speaker 2 (04:42):
It's not just ten percent tariff, so right, and so
you could What I'm trying to make the case is
to be a little bit humble about the inflationary impact
when you're talking about a kind of disruptions really off
the map potentially, right, if you're talking about a simple,
across the board, relatively low terraff. I agree, that's not

(05:04):
the sort of thing that's going to tend to be inflationary.
But when you're talking about very high industry specific, country
specific tariffs, those are the kind of things where you
have to say, yes, this could be deflationary, this could
be inflationary. We don't really know, because it is such
a large supply chain impact that you can really end
up kind of off the map in the same way
that an energy price shop can do. Got it.

Speaker 1 (05:26):
So, one of the arguments for the tariffs, of course,
that the Trump administration has made is we're trying to
force manufacturing back into the US because the fact is,
as I understand it, we have a lot of critical
components that aren't.

Speaker 2 (05:41):
Made in the US.

Speaker 1 (05:41):
I mean, whether it's I don't know if it's axles,
but for example, the magnet that goes into an electric
car battery, some of the components of our defense system.
I mean, there are other things that are they're just
not made here. We don't have the supply chain, for
example for rarer which are which are critical to so

(06:02):
much new technology. So do you think and why would
it or why would it not have an impact a
positive or negative impact on bringing manufacturing back to the US.

Speaker 2 (06:16):
Great question. I think it's very important to sort of
do to like sort of segment these arguments for tariffs,
that to talk about them ranging from most the least plausible.
If you're talking about a very very narrow set of
like highly defense specific inputs, say there's some computer chip,

(06:38):
we use it in all of our missiles. Uh China
is currently dominating it, and tariffs are part of a
package of goods to stimulate investment there. And I would say, again,
not just in our country, but this is the kind
of thing that's really important to coordinate. So when you're
talking about like de risking the chain from the risk

(07:02):
of major geopolitical turmoil, it's important to work with allies
on that right, whether it's Japan, South Korea, Canada, Mexico.
So the approach I would take is to focus on
our focus on what are the very specific goods that
we are concerned about. What is the best way to
ensure that we have a supply of them. There's a

(07:24):
lot of different ways there. You could stockpile them. You
could do a sort of thing where the government has
a guaranteed purchase agreement, so they say, look, we're gonna
buy this many of that chip every year for the
next twenty years, and we'll buy it from a domestic supplier,
right or an allied supplier, And and certainly tariffs could
be part of that part of that discussion. But it
has to be targeted, and it has to be a

(07:46):
holistic plan, right, a plan, and it has to be
a plan that incorporates our allies as well, because which
you don't want is this sort of race to the
bottom where US and Europe and Japan and South Korea
are doing increasing investments to try to stimulate production of
one memory chip, one rare earth thing, and then it's

(08:08):
just ramping up higher and higher terriffs, higher and higher subsidies.
You need coordination there, otherwise you're going to end up
with wasting money, a lot of fragility, right in the
sense that the parat gets pulled down one year, the
industry collapses, like you need to sort of robust supply chains,
on shoring, friend shoring, and yes, in that narrow circumstance,

(08:28):
I think you could make a case for terifs to
occasionally be a component. I don't think it's ever going
to be the centerpiece of any sort of strategy strategy
like that, but that's the space that you're talking about
where the strongest argument exists for it. There's a whole
lot else going on other than that.

Speaker 1 (08:42):
In policy, of course, well there is, And in fact,
it's interesting to me how the Trump administration, and I
kind of like this, I'll be honest, is combining their
tax policy with their tariff policy on manufacturing because they're
talking about bringing down the tax rate for US manufacturers

(09:05):
increasing tariffs, Therefore, does that not encourage and in some
cases actually almost require if they want if somebody wants
to take advantage, if a country wants to take advantage
of the US market, or a company wants to take
advantage of the US market, which is we are still
the largest market in the world, would that not encourage

(09:27):
or demand that they build in the US.

Speaker 2 (09:30):
I think the Tax Cut in Jobs Act, when they
cut corporate taxes was a good move in the right direction.
There other things, like high end income taxes that's not
really going to have an impact on I'm sure.

Speaker 1 (09:44):
Now I'm talking about I'm talking about Trump's talking about
specifically lowering the tax on US manufacturers to fifteen percent.

Speaker 2 (09:51):
Yeah, I would. I think you're the tax ext for
tom But I think attacking like depreciation, making depreciating R
and D investments rapidly, really depreciating capital investments. That's probably
the best place to do it versus lowering you know,
corporate tax rates further across across the board. There's also

(10:13):
you know, there's a industry specific tax rates you get into,
you get into a lot of difficult questions who's in manufacturer,
who's not. To me, it makes more sense to do
this on the depreciation basis, to focus on specific types
of capital. I don't know, what do you think?

Speaker 1 (10:29):
Well, so, so, prior to twenty seventeen, we actually had
the Domestic Production Activities Deduction that was an effective lowering
of the tax rate for manufacturers that was specifically targeted
to manufacturers, and it, by all accounts, seemed to work
to encourage manufacturing in the US. You know, I think

(10:50):
there's a different argument should we encourage manufacturing in the US.
To me, there's a lot of supply chain security. I mean,
we all got disrupted during COVID because of some play chains, right.
We saw how a disruption in one country had huge
impacts across the board for US. Just like you're talking
about all the integration, you know, it's not just one thing, right,

(11:10):
You disrupt one thing, that disrupts another thing, which disrupts
another thing. And so I think on manufacturing specifically, one
of the challenges is, and i'd kind of like to
get your thoughts on this, is, you know, stability is
the most important thing for business. It's actually the most part,
especially when you're talk about manufacturing, because you're trying to

(11:30):
bring in you're talking about building manufacturing plants. For example,
where Biden, I think the best thing that happened in
the Biden administration was bringing the Taiwan Semiconductor into the
US and actually getting them to build plants in the US.
And their biggest plant is just down the street from me. Okay,

(11:52):
so in Phoenix, and it's ginormous. It's taking it's going
to take years to build that. So you have to
have have some certainty that, hey, this is going to continue.
And for example, one of the things that happened when
in the first midterms, the twenty twenty the twenty eighteen midterms,

(12:12):
excuse me, was the Democrats right off them out and
said we're going to raise the corporate tax rate, which
caused instability, and then it delayed, it delayed. I think
people saying, well, I want to I want to locate
my manufacturing here, which is the hardest thing to locate
right in another country. Is the manufacturing distributions way easier
than manufacturing. And on top of that, not only does

(12:36):
it take a lot of time and a lot of effort,
but you've really got to be sure that, hey, the
next administration isn't going to change this, so it's got
to be a permanent thing. One of the challenges with
our tax law is that we keep extending up for
five years or eight years or ten years, and now
we're in the same place we were in twenty seventeen.

(12:56):
Now we got to go back, just like we did
with a Bush tax cuts. Now you got to keep
doing this. And it seems to me like making it
permanent might be a bigger deal. But I think that
at a fifteen percent tax rate, we're a tax haven,
and that is that actually is a big deal. Then
then people are locating here just for the tax rate.

(13:18):
It's not just for the tariffs or anything else. But
if you add in the tariffs, it seems to me
to be a coordination. What do you think about that?
Do you think Trump's a scattered as people say the yard,
do you think this is a coordinated effort?

Speaker 2 (13:31):
Well, you know, I'm not sure that that's where most
of the emphasis is going. And part of the part
of the making a tax code be sustainable is making
it fiscally sustainable, right and making it be sort of
defensible in the merits when you're talking about massive tax
cuts on tips, when you're talking about we're not talking

(13:53):
about that.

Speaker 1 (13:53):
Let let's stick with one thing if we can't at them.
I get that that's in and the bill, but that's
not what I want to talk about. I want to
talk about, specifically the idea of a lower tax rate
for manufacturing, specifically that part of the bill. I don't
want to talk to the tips I think. I think
not taxing tips, not taxing overtime, I think that's silly.

(14:16):
I think that's just.

Speaker 2 (14:20):
I'm talking about.

Speaker 1 (14:21):
I'm talking about the very specific You make a tax
haven for manufacturers in the US, do you not, when
combined with the tariffs, encourage manufacturing in the US.

Speaker 2 (14:32):
The problem is the TIFFs are don't have that certainty
to them. So you're making the case that, look, if
we do it on the tax code side, it brings
more certainty to the decision, but the tarriffs are they're
not even certain within the week alone.

Speaker 1 (14:46):
Well, let's say it played out. I mean, you know
where it is. It's a mess right now, but it's
not going to be a mess in six months. Hopefully
it will work its way out. Okay. And once it
works its way out and it becomes like, Okay, here's
what it's going to end up with, here's what we're

(15:06):
going to end up with. Do you think that the
teriffs will continue to go up and down, up and down,
up and down, or you think it's more likely the
next administration, even if it's the Democrats, will continue the tariffs,
just like Biden continued to trump tariffs on China.

Speaker 2 (15:24):
Well, let me answer your previous question first that I
think that focusing on taxes tax reform as a way
to stimulant manufacturing is a much smarter direction to go
than focus on tariffs. I'm not sure that lower corporate
taxes are the best bang for your buck. I think
that maybe depreciation is because it's about marginal assets. You know,
when you cut corporate taxes overall, you're cutting corporate taxes

(15:46):
for investments made a long time ago. Companies who aren't
really going to be expanding. I think it makes sense
to focus more on that margin through aggressive deduction. But
I agree directionally with you that we should think about
how do you make the tax code for advanced manufacturing better.
I don't know that we really gain much by bringing
back all manufacturing. You know, if I have to choose

(16:08):
between the marginal manufacturer and the marginal tech company, I'm
not sure that manufacturing is going to make us better off.
I don't see a very strong case for so I
would think, how do we how do we get more
advanced manufacturing, How do we get more of the manufacturing
that we that really makes us a healthier, more stable,
wealthy country. I think you can make the argument that

(16:28):
the tax code should be a part of that discussion.
So on that part, I agree with you, whether we
disagree in the details of what the best way to do,
but I agree that we should be thinking more about that.
On the teriffs, I think that one of the things
you're seeing happening is people are actually turning against tariff policy.
You're seeing it in polls that moderates, independence and Democrats

(16:50):
are really turning hard against the tariffs because for a
long time, both parties sort of promise this kind of
protectionism and now they're getting it, and people like, oh,
I don't like this, right, it's chaotic, it's you know,
it's really the well is being poisoned in a sense,
the political well. So I don't think that it's really

(17:11):
we should take of it as a politically sustainable kind
of policy. It's not the kind of we before when
you're talking about targeted tariffs, you know, say you do
something for the steel industry, right, which we know the
steel industry has a century of handouts, So that's the
kind of stuff that tends to be more sustainable.

Speaker 1 (17:28):
Right.

Speaker 2 (17:28):
I don't think it's a good policy, but you can
make the argument that it's sustainable broad based across the
board tariffs. I don't think so, especially when you're talking
about these geopolitical goals like isolating China. I think if
we are trying to isolate China, we're going to need
more collaboration, in cooperation with our allies, and that's going
to require getting rid of those kinds of across the

(17:50):
board and industry specific tariffs and put in place. So
I really don't think most of what we're seeing is
very sustainable.

Speaker 1 (17:58):
So so let me ask you about that with China.
Is how dependent is China's economy on exporting to the US.

Speaker 2 (18:08):
I mean, China runs a large trade surplus, and that
surplus is certainly plays a huge role in their industrialization.
They become more consumer oriented over time, so they do
have a lot of consumers. When you look at most
their industries, most of what they make is consumed domestically, right,
So like the average dollar of production is consumed in China.

(18:31):
So we shouldn't dismiss that entirely and think that this
is some tiny nation that look counter example, be like
Taiwan and semiconductors, right, they make for the world, Right,
they make it for the world. Most semiconductors made in
Taiwan are not used in Taiwan, but a lot of
industrial goods made in China are used in China. So
that is increasingly part of the story. I do think

(18:51):
that if you know, we shut off exports or imports
from them entirely, that's going to be a hard adjustment
for them, for sure. You know, we are stands a
portion of that surplus. Now they can get around that
by exporting the third countries. You know, when you're talking
about individual companies. Sometimes they'll even locate production in a
third country. So there's ways to dodge it. But if

(19:12):
we if we tried to turn that off as hard
as we could, very quickly, it would be extremely I think,
a big adjustment for them, as it would be for us.

Speaker 1 (19:21):
Let me ask you this, what what would it lead to?
A kinetic war? Trade wars historically have led to have
led to kinetic wars, have led to real wars.

Speaker 2 (19:31):
Right. You can look at the example of Japan, right
and cutting off oil exports to that and how that
you know, accelerated there.

Speaker 1 (19:39):
Look at the Boston tea party that was that was
that was a terrif issue, same thing.

Speaker 2 (19:45):
I really think it's a very hard question. I think
it's a very relevant question, and I think that people
should be a little bit more concerned about it because
you know, when we when we back up to the
very beginning, what is our motivation here? What are we
trying to do a lot of the motivation is exactly
to ensure ourselves against the war with China, Right, So
if we're trying to avoid that outcome, that bad outcome,

(20:09):
it doesn't really behoove us to take steps that then
make the outcome more likely. And I think, you know,
it's hard to imagine the counterfactual, but I think that
if we were if we had done this disconnection from China,
if we'd started doing it, you know, twenty years ago,
as many China Hawks wanted and still want, if we
had done this decoupling, what does China stand to lose

(20:31):
by invading Taiwan? We lose that economic spread, right, So
I agree with you. I think on balance, a hard
de couple would increase the risk of a real conflict
in Taiwan. Now that's outside my area of expertise, but
I you know, I think your instincts are correct.

Speaker 1 (20:48):
So let me ask you about another argument that has
been made for tariffs, and that is that they raise revenue.
In fact, there's been a there then an argument floated
by the administration that hey, this we could collect as
much as seven or fifty billion dollars a year, we

(21:09):
could eliminate income taxes for people under one hundred and
fifty thousand. What's your take on that argument.

Speaker 2 (21:16):
Yeah, the numbers, the numbers don't add up needed to
the arguments. So they try to argue that if we
impose these high tariffs is going to cause all this industrialization.
The US is going to bring back all these manufacturers. Well, okay,
what's that going to do to tariff revenue if that succeeds? Right?
If we put tariffs on all the auto imports such
that we stop importing automobiles, where does that revenue go?

(21:40):
So you can't have it both ways. Tariffs can't be
this maximum estimate, right, you have to adjust that and
you can't argue that we're going to onshore all this
stuff too. To the extent that terraffs raise revenue, that
reflects that it is a costly adjustment. It means that
businesses and consumers are continuing to import the goods but
pay that high price for them. So I think if

(22:01):
you want that revenue raiser. You know, it's funny because
you know, the Trump administration is arguing that Europe's that
is a tariff, right, and that is so much more
efficient than tariff. It's like, if you think of that
as a tariff, can we just have a vat instead, right?
Because now that now you're talking about a substantial revenue
raiser that that would be sustainable.

Speaker 1 (22:23):
So now you're talking about something that that I love
this topic. So let's say to take a couple of minutes,
because I can't resist, because I do think that of
that Europe's that, and in fact, every country has that
except the US. Okay, every country we trade with has
a BAT except almost every country that has a BAT
except the US. Canada has a VAT, they call it

(22:45):
a GST, China has a VAT, they all have that,
Mexico has a has has a big VAT. So the
argument that a that is not the same as a tariff,
so that if we export goods to France, that they

(23:05):
then have to turn around and export goods back to US.
But that is not how the world works. Okay, the
euro dollar. There are more euro dollars in the world.
This is dollars created outside the US than there are
dollars inside the US. That's that's a fact. And so
that it absolutely to me is an unfair trade practice.

(23:25):
And I get that they charge their own people the
same thing, but it's different because let's take air bus
as an example versus Boeing. Okay, Boeing sells a plane
to France, there's a vat twenty two percent. France sells
airbus to the to American airlines, there's no VAT. Okay,

(23:48):
so that's a twenty two percent on gross. That is
a huge number that you're talking about here. So I
would agree with you, actually, but I don't want a
VAT unless we eliminate the sixteenth Amendment because if you
add a that you're just adding another tax, and that
just that's a terrible idea to add another.

Speaker 2 (24:09):
Keep in mind, your argument coming into this was that
if we raise revenues for tariffs, then we can lower
other taxes.

Speaker 1 (24:15):
Right, So if you're saying, yes, that's what the administration is.

Speaker 2 (24:19):
If they're correct, then then a bad is the way
to go about it. But if you're saying you don't
believe that raising revenues will be used to cut taxes
and the terriff one.

Speaker 1 (24:29):
And I would say even with the tariff as an example,
is that well a little bit different because if you're
talking about people under one hundred and fifty thousand, remember
Biden had four hundred thousand dollars with his target number,
right that that they average person, right, one hundred somebody
making one hundred and fifty thousand is certainly not in

(24:50):
the top I don't think they're even in the top
ten percent. They're in that that middle middle group there,
So you're making a hundred fifty thousand dollars a year,
that's your voter, so your voters can want that.

Speaker 2 (25:01):
The voter is going to be be there.

Speaker 1 (25:03):
They're going to be thrilled with that. If you talk
about eliminating taxes, all you say, Hey, we're gonna we're
gonna use a vat and we're going to eliminate the
income tax entirely. Okay, it's going to come back and
it's going to come back to the progressive income tax
just like we have now. Okay, and it's just going
to get more progressive. Yes, you're going to exempt you know,

(25:23):
because a that also can be very regressive, right if
you're not careful. Sales tax is the most regressive, one
of the most regressive taxes we have unless you exempt
certain commodities that that that the poor and the middle
class have to have to buy. But it's just an
interesting argument. It's just Trump's actually the first person I've
heard talk about of that as an impediment to trade.

(25:46):
I actually I actually think it is. But let's let's
let's talk.

Speaker 2 (25:51):
About Oh can we can we talk more about that
though before we move on. Sure, So all right, so
the that doesn't affect if you're talking about Boeing or
air Bus selling in France, they're selling on equal terms, right,
Boeing and Airbus selling in the US, they're selling an
equal terms a terriff, that's not the same. The same

(26:11):
is not true for a tariff, right. A tariff creates
a difference in taxes depending on who is selling into
the country. Now, if you're talking about a difference in
taxes for Boeing selling into France versus Airbus selling the US, well,
they pay a whole range of different taxes in the US.

(26:33):
You have to pay the corporate tax, you there's incidence
of the payroll tax, you have property taxes.

Speaker 1 (26:38):
And you have all those in France too, right, But.

Speaker 2 (26:41):
I'm saying that you can't if you're going to make
this argument that it's unfair, we're unfair to manufactures in
the US because taxes are higher in France and lower here.
We have to talk about the whole tax package. And
now in the same this means that in the same
sense that of that if that counts as a tariff, well,

(27:01):
then the US property tax, if our property taxes are higher.
That counts as terrif you have to look at the
whole tax system and what I would say is a
relatively low tax.

Speaker 1 (27:11):
I'm going to completely disagree with you on that, because
if Air France does not pay property taxes in the
US because they sell the plane to the US, Boeing
does pay property taxes in the US, Air France does not, Okay,
So it's not the same, Okay. And if that is
not the same as an income tax, because an income tax,
the income tax rules don't work. That's effectively a sales tax.

(27:34):
I mean, that's effectively what it is. It's a gross
it's a gross income tax. Right, it's on the gross
sales price. But we're not going to agree on this,
That's okay. Not very many people agree with me on this. Actually,
the Trump administration is probably the only people in the
world that agree with me that I think of that
is similar to a tariff. Let me ask you the

(27:54):
other question I wanted to ask you about is the
trade deficits? Okay, because I find this aspect fascinating that
Trump decided to go after not just a reciprocal tariff,
but actually going after the trade deficit. Just your thoughts

(28:15):
on trade deficits. I've got an idea where you might
end up here. But tell, tell, tell our listeners. Trade
deficits good bad? Or does it depend on the situation? Uh?

Speaker 2 (28:28):
Yeah, it depends on the situation. I don't think trade
deficits are particularly important indicator, and I certainly don't think
it's an indicator of whether to two kinds of trade deficits. Right,
what's our overall trade deficit? Right? Where you can make
an argument that the level may be bad in the

(28:50):
sense of it represents sort of borrowing from the future.
Bilateral trade deficits much harder to make the argument there, Right,
we borrow we bought from some country, we selve to
other countries. You know, we have a trade surplus with Australia.
Is that a problem for Australia. I don't think so. Right,
So it's not a very the bilateral trade deficit, let's

(29:10):
start there. The bilateral trade deficit is not a good
policy target. It's certainly not a good policy target. We're
talking about one hundred and eighty countries. Now. If you're
focused on maybe one or two countries who have really
huge trade surpluses and you want them to sort of
like make changes in their industrial policy or rebalance their
economy or whatever. There's an argument to have there, But

(29:33):
let's take the bilateral trade deficits with the rest of
the world kind of off the table. Can we at
least agree that that's not a reasonable thing to focus on.
Go ahead, great, all right, So now you talk about
our overall trade deficit. Our overall trade deficit has much
more to do with, you know, domestic savings and investment.
And so I think that you're not You're going to

(29:54):
have a very hard time getting rid of that trade
deficit via tariffs. Right, Uh, so you need more domestic savings.
So and you okay, but.

Speaker 1 (30:09):
How do you get more domestic savings if if you're
constantly shipping your money offshore.

Speaker 2 (30:15):
By shipping your money off shore, you mean people are
buying our debt.

Speaker 1 (30:20):
Cheap that we're well, we're we're we're we're constantly buying
cheap disposable stuff. Uh, you know, cheap cheap stuff from China, Asia,
whatever our money, it goes off shore. And then then
the the transactions are off shore, they're not back to
the US.

Speaker 2 (30:40):
Well, there are there are other countries who buy many
cheap things from China too, and they have a trade,
they have trades maybe, so buying from China doesn't doesn't
necessitate the trade depth sit.

Speaker 1 (30:54):
So so Japan, as I understand that, of course they
have the largest UH debt to GDP in this in
in the industrialized world. But my understanding is that Japan,
maybe you can clarify this, Japan, most of their debt
is owned by Japanese, whereas a good portion of our

(31:17):
debt is owned by nine US people. So how does
how does that affect or does that have any impact
on our you know, on our abilities to continue to
to thrive.

Speaker 2 (31:32):
UH. Foreign demand for US debt certainly has an impact
on you know, capital flows and trade flows for sure,
But does that have any impact on our UH on
our well being? I don't. I don't think so. Essentially
that they're they're lowering our cost of our cost of debt.

(31:53):
They're lending us money. We can do things with that money.
What we choose to do with that money is far
more consequential than there's someone is lending that to us.
If the world stopped, for example, if the world suddenly
decided the US dollar is not valuable, the US debt
is risky. I don't want to invest in it. But

(32:14):
what happened is interest rates would go up, right, right,
And I don't think that in the situation where interest
rates go up on the US economy, I actually don't
think that's going to solve our address our savings crisis.
Our responsive responsiveness of our savings rate to those interest
rates is not strong enough. But we're still going to
be running debt a debt, it's just at a higher

(32:35):
interest rate, right, and so that's even more deficit spending.
So I don't. I don't even if we had a
way to do that, I don't. I don't think Americans
are gonna like that. The higher interest rate's going to
slow the economy. I think it is in general. I
think it is a privilege and positive for the economy
that people are willing to lend to us. The most
important thing is what do we do with that money?
Are we using that money to spand our education or

(32:58):
capital base, keep tax is low, or we're wasting it
on boon doggles. That's the much more important or silly
tax cuts that don't really do anything, those sorts of
that's much more important for a well being than than
the lending itself. What do you.

Speaker 1 (33:12):
Think, Oh, there's no question there's always going to be
boon dooggles because politicians will always be politicians. So don't
I don't think there's any end in sight to boon doggs.

Speaker 2 (33:21):
You need to keep our boondoggle to GDP ratio as
love as I'd love it.

Speaker 1 (33:25):
There's a there's a new term we need to get
out there at him. We're going to do the boon
dooggle to GDP ratio or I love that. I absolutely
love that. So final question, where do you think, uh,
six months down the road, where do you think tariffs
end up? Get out your crystal ball.

Speaker 2 (33:44):
You know, I wish I knew, I wish I knew.
You are starting to see more signs that the Trump
administration wants to wind this down, which is different than say,
two weeks ago, where it seemed like they had a
very high tolerance for econ pain. They were not flinching.
They were not flinching in the face of interest rates

(34:04):
going up alongside the stock market going down, which are
very worrying signals. And so if you had asked me
two weeks ago, I would have said, I, you know,
they're showing a high pain tolerance. They're gonna keep going
and they're gonna push through until we get a recession,
and then hopefully the recession is enough to push them
off of this plan and pull back. I'm getting a

(34:26):
sense and some signs of a little less pain tolerance lately.
I'm not sure exactly what's causing that. But you had
yesterday the other day of the Trump administration talking about a
deal with China. It's not gonna be a hard deal.
It's not gonna you know, we're gonna make an easy deal.
It's we're gonna bring down rates soon. That's coming. And
there's a more conciliatory tone now. Of course today, uh,

(34:49):
you know, back on the table talking about fence and
all again, attacking China. So it's my goodness, it's just
so hard. It's so hard to look like normally is.
In forecasting, you you have to have a model of
what the at least what the actors want. You know,
what the Federal Reserve wants, and so when you incorporate
their expectations of their behaviors, you can model scenarios. If

(35:11):
our unemployment goes up, they'll do this, If inflation goes up,
they'll do this. The administration has not really laid out
what is it exactly that they wish to accomplish. They've
laid out a variety of things, some of which are impossible.
You're not going to bring back all the lost manufacturing jobs.
Some of which are narrow and defensible about national security interests,

(35:33):
some of which are It's all over the place. It's
very hard to say. If you put a gun to
my head, please don't. But if you do, I would say,
in six months, I think we are back down to
fairly low teriff rates, and we've made some trade deals
that look like the deals that trade Trump made with
China before, which was empty promises about soybeans that don't

(35:56):
really address national security. The real way to change China's
behaviors through, you know, working with our allies, multi multilateral
organizations like it's not it's not asking that they buy
more story from us. That's not a path to prosperity
or anything. But I think that that seems to be

(36:18):
the direction we're heading. But boy, it is harder than
ever to say.

Speaker 1 (36:22):
Interesting to say, A lot of a lot of a
lot of countries are sitting down and negotiating right now
with the United States and trying to come up with
a better deal. So we'll say if the you know,
if the beat works or not. I mean, to me,
that's that's it. To me, it's either going to be
a great success or of a great failure. So I
don't I'm not I'm not seeing a whole lot in between.

Speaker 2 (36:42):
But look at the previous terror Look at the previous
terrors right in twenty eighteen, twenty nineteen. They didn't destroy
the economy.

Speaker 1 (36:48):
Yeah, but they were tiny compared to what we're what's
going on now, that.

Speaker 2 (36:52):
Maybe what we end up retreating to is very tiny changes.
You know.

Speaker 1 (36:55):
Interesting? Interesting, So, Adam, where can we get more information
about you and the work that your organization does.

Speaker 2 (37:05):
You can go to e i g dot org to
see more of the work we do with the Economic
Innovation Group. Follow me on Twitter at Model Behavior.

Speaker 1 (37:13):
Awesome. Thank you, Adam, very very great, having you a
really good discussion. Thank you for putting up with my
pushback and thanks for pushing back. I love that kind
of discussion. It's that's how we learn. I think that
the more real discussions we have, the more we're gonna learn,
and the more we learn about the macro economics, the more.

(37:36):
We're going to learn about our microeconomics, and we're gonna
make way more money and hopefully pay way less taxes.
But in the right way, not in not in the
boondoggle t GDP way. And so if you like this,
join us again, Share this with your friends, share this
with with your your colleagues, and join us next time

(37:59):
on the Wultibility Show. Remember it's always about making way
more money and paying way less tax See you next time.

Speaker 2 (38:06):
This podcast is a presentation of rich Dad Media Network.

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