June 12, 2025 • 44 mins
What’s the most likely outcome for President Trump’s tariff strategy – trading partners capitulating, America’s economy and exceptionalism crumbling, or something in the middle?
Hoover fellows and economists Michael Bordo and Mickey Levy discuss a recent paper they’ve published on the history of tariff impositions and four possible outcomes (none of them are good). Their conclusion: the odds favor a “less-worse” case of 12%-14% tariffs and deals with Canada and Mexico, with a “small but cumulative impact” on longer-run potential growth (maybe a mild recession) while the U.S. retains its global dominant status.
Recorded on June 6, 2025
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(00:00):
[MUSIC]
>> Bill Whalen (00:03):
It's Friday, June 6, 2025.
And welcome back to Matters of Policy andPolitics,
a Hoover Institution podcastdevoted to the governance and
balance of power here in America andaround the World.
I'm Bill Whalen.
I'm the Virginia Hobbs CarpenterDistinguished Policy Fellow in Journalism
here at the Hoover Institution.
I'm just one of many Hooverfellows who are podcasting.
And just don't take my word for it.
Check it out yourself.
Go to our website,which is hoover.org/podcast, and
(00:26):
you'll see what all we'retalking about these days.
Today, we're going to talk about somethingthat is very much on radar of this
institution andthat is the thorny topic that is tariffs.
If you go to the Hoover website andsee what Hoover fellows are talking about
these days, you will come acrossa piece by Philip Zelikow.
Philip's a Hoover Senior Fellow andpresidential scholar, and he's looked at
(00:46):
President Trump's actions in relation tothe use of presidential emergency powers.
You'll also find a very excellentNew York Times op ed by Michael McConnell,
who's alsoa Hoover Institution Senior Fellow.
He's a Stanford law professor.
He's one of the nation's foremostauthorities on constitutional law, and
he wrote an essay discussing tariffsin the context of the presidents of
both parties in the seizureof unilateral powers.
(01:09):
So we're going to talk about tariffstoday, but in a different fashion.
We're going to talk about the economicsof the matter and possible outcomes.
We're gonnaweigh the odds andpossibilities of what might happen.
And joining us today are a pairof Hoover economists.
Michael Bordo isthe Hoover Institution's Ilene and
Morton Harris DistinguishedVisiting Fellow,
as well as a Board of Governorsprofessor of Economics and
director of the Center for Monetary andFinancial History at Rutgers University.
(01:33):
Mickey Levy isa Hoover Institution Visiting Fellow, and
he also manages a private economic andconsulting firm.
You might also remember Mickeyfrom a past podcast we did,
talking about that devil called inflation.
Gentlemen, good to see you today.
Thanks for coming on the podcast.
So let's get into the matter.
Before we get into terrorists itself,
I'd like to run four news items at youthings that are in the news this week.
(01:55):
And I want you to tell people who areconcerned about economics, concerned about
tariffs, which of these stories theyshould be paying most attention to.
Item number one,it's hot news because today is Friday.
Earlier today,the news out the May jobs report, and
I believe they came out 139,000jobs in America in May.
If I'm not Mistaken.
The good news is that beat expectations.
(02:16):
The bad news, though, that was less thanApril unemployment holding steady at 4.2%.
So that's item Number 1,the May jobs report.
Item number two, Mickey, Michael, reportearlier this week that goods brought into
the US plunged by 20% in April,recording their largest ever monthly drop.
US purchases from China and Canada fellto the lowest level since 2020 and 2021,
(02:38):
respectively, the Commerce Departmentsaid.
Item number three,
the Trump administration doublingtariffs on aluminum steel to 50%.
We'll have to wait andsee what that does to automobile prices.
Finally, item number four,
an analysis released earlier this week bythe Congressional Budget Office claiming
that the Trump tariff plan will cut thedeficit by $2.8 trillion over a decade.
(03:00):
Good news, except that it will also shrinkthe economy, in the CBO's estimation,
and increase the annual inflationrate by 0.4% in 2025 and 2026.
So, Michael, Mickey,I've given you four news items there.
Which one stands out?
>> Mickey D. Levy (03:16):
Well, I think you have to put all of them into the framework that
Mike and I have been studying,and that is the historic context.
And what we found uniformlyis tariffs are a negative for
the US economy and global growth.
(03:39):
And each of these fouritems just highlights
the focus of the issue of tariffs.
And let me add a fourth itemlurking in the background
that you haven't mentioned, Bill, and
(03:59):
that is President Trump'serratic tariff policies
that have added a tremendousamount of uncertainty
that seems to be affectinglabor markets and
consumer and business behavior.
So>> Bill Whalen: back up a second,
Mickey, when you say erratic policies,are you talking about just
(04:22):
randomly applying numbers to differenttariffs in different countries or.
Right, and his applying tariffs.
And then when facing a pain threshold,
say the stock market goes down andthe dollar falls, he shifts gears,
and it just adds this tremendousamount of uncertainty.
(04:43):
So the broader context forthinking about all these current events,
like the plummeting imports,like the jobs report,
that shows a marked decelerationin job increases, and
then Trump doubling up on these tariffs.
The broader context isPresident Trump seems to be
(05:06):
ignoring the criticallyimportant lessons of history,
that tariffs have negativeeconomic effects and,
and never accomplish their objectives.
So that's my, that's my broader statement.
>> Bill Whalen (05:24):
Michael, let's talk a bit about the historic lessons.
So what fascinates me here,it doesn't get enough coverage,
but you guys did a really greatjob in your, in your column.
If I had tasked you to a couple ofdecades ago to look at the United States
involvement in Afghanistan, let's saywe're about to invade after 9 11.
You, as two military historians,military experts,
you would have sat down,you looked at the history of Afghanistan.
(05:47):
You looked at what the Sovietswent through in the 1970s and 80s.
You looked at what the British wentthrough in the 19th century, and you would
apply that to possible outcomes forthe United States invading Afghanistan.
So, Michael, explain a bit about how youand Mickey researched terrorists and
what you looked at in terms ofhistorical analogies, historical events.
>> Michael D. Bordo (06:06):
Right. So I'm an economic historian.
I've been teaching a course onglobalization, historical perspective for
20 years.
I ran along with two others,
an MBR big conference we had20 years ago on globalization,
which, where we were thinkingexactly about the benefits of
globalization, so with this context,I just viewed this,
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the spate of tariffs that are beingimposed as an extremely terrible thing.
Terrible.
And I look at history andI can give you two,
two examples that willjust illustrate this.
The first one,which a lot of people talk about,
is what happened in the Great Depression,okay, In the Great Depression, in 19.
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In 1930, the US passed a smoot Hawleytariff, which raised tariff rates to
20% above 20%, which is just a littlebit where they are right now.
And what happened after thatwas that Canada first and
then a whole lot of othercountries retaliated.
And so what happened was that, in a sense,international trade totally collapsed.
(07:19):
And along with international trade goescapital flows and also immigration.
Both of these things justcollapsed in the 1930s.
And in fact, what happened inthe 1930s was the end of what was
called the first era of globalization,which was a really important event.
(07:41):
This was something that started in the UKand in England in the 1840s when they
started reducing tariffs becauseeverybody had high tariffs back then.
And they passed something calleda repeal of the corn laws.
The corn laws were taxes on wheat.
And so when the British did that, okay,
that really had a big effecton the British economy.
(08:03):
And the second thing they did isthey worked out a trade treaty
with France calledthe Cobden Chevalier Treaty.
This is in 1860.
And basically it created somethingcalled the most favored nation approach
to tariffs, which is, if we will lowertariffs with you, the French, and
the French will lower towers with us,we'll have reciprocal tariffs, and
(08:27):
then everybody else that trades with uswill get the same deal that England and
France got.
And so what this did was it reallyreduced tariff protection in Europe and
then it spread to other countries.
And this helped encouragea tremendous growth in trade.
And the growth of ratio oftrade to GDP took off, okay?
(08:50):
That was helped by technologicalchange and shipping in railroads and
everything else.
So you had this tremendousboom that starts back then and
it flows around the world,it's associated with the global growth.
And along with that,we had capital flows, okay?
(09:10):
We had a tremendousamount of capital flowing
from Europe to the new countries ofnew settlement, and we had migration.
So this was the first yearof globalization, okay?
And it ended with the terribleevents I told you about for.
Actually, it started even earlier.
It started with a restriction onimmigration at the turn of the last 20th
(09:31):
century, because once allthese immigrants came in,
there was a big backlash from organizedlabor in this country and other countries.
It also led to tariffs,which started even before Smoot Hawley.
US Was always a high protection country.
And they raised tariffs after World War I,
(09:52):
the famous tariff calledFordney McCumber Tariff.
So in a sense,this reversed the globalization, okay?
And then of course, what happened isthis led to the Great depression,
World War II, and the belief that cameout from the Roosevelt administration and
(10:13):
Cordell Hull especially that restoringtrade would be associated with peace.
And there was a view that there was acorrelation between the total breakdown of
trade in the 1930s and World War II.
And so then we founded.
The US was really important in foundingthese institutions to restore global
(10:36):
prosperity, global trade, andeventually global capital flows, okay?
And this is the gatt.
This is the imf, okay?
The World Bank.
All these institutions werefounded right after World War II.
And they led to a tremendous growthin trade, in capital flows later.
(10:59):
And migration came back.
And so we had a second yearof globalization, okay,
which kind of peaked with the gfc,okay, but is coming back.
And now it's being threatened,being threatened by the same forces that
destroyed the first year ofglobalization back in the.
>> Bill Whalen (11:18):
1930s when Smoot Hawley is put into place.
Was the strategy the same then?
Michael, it is now.
The strategy now is what,you impose tariffs and
countries will come to you on theirknees begging for a better trade deal.
>> Michael D. Bordo (11:30):
No, it was a different environment, okay?
Back then, it was the Congress thatpassed this Mood Hawley tariff, okay?
And it was not coming from the executive.
And the reason they did this was becausethe depression was already starting and
agricultural prices were falling.
And so the agricultural interests,
(11:51):
which are really strong inthe US Congress back then, okay?
And they were all the way up untilnot that many years ago, okay,
they convinced them to push on a tariff.
But you have this phenomenon inUS Politics called log rolling,
whereby Congress, people from otherdistricts that weren't agriculture said,
(12:13):
look, I'll support you if yousupport tariffs on manufacturing.
So what happened was a simple bill thatwas just going to help farmers ended up
being a tariff on everything, okay?
And there was no talking about dealingwith other countries, none of that stuff.
It wasn't strategic.
It was protection, pure and simple.
>> Bill Whalen (12:34):
We do have a lot rolling these days, Mickey,
it's called the Big Beautiful Bill.
>> Mickey D. Levy (12:37):
Yeah, so, hey, Bill, before we go on to fiscal policy,
Mike introduces a criticallyimportant point here,
that President Trump, or Trump's team,
is not only ignoring the lessonsof history on tariffs and
(12:58):
pushing for very high tariffs.
But also he's pushing regulations andconstraints on immigration.
And if you look at the twoheirs of globalization that
Mike referred to that were associatedwith very strong economic growth and
(13:22):
progress in the United States,large current account
deficits that involve verylarge capital inflows.
And those capital inflowswere critically important
to financing the capital spending andprogress in the United States.
And those two eras wereinterrupted by constraints
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on capital and trade,but also immigration.
And so right now,among the toxic mixes that
we're concerned with is tariffs andalso immigration.
And we know that Trump's team is taking
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unfortunate steps toconstrain immigration and
foreign students being educatedat US university, etc., etc.
But this all goes into the mix that,as Mike said,
could be challenging this second wave ofglobalization that has served the US Very,
(14:35):
very well economically andevery other way.
>> Michael D. Bordo (14:40):
All right, >> Bill Whalen
I assume you're, sorry, Michael,so you said student visas.
I assume you're alsoreferencing what visas for
software engineers to come in the country.
Can you further>> Mickey D. Levy: wait, Bill?
Not just that,immigration from our Southern allies.
I mean, US Desperately needs immigrants.
(15:03):
And I don't think the Trumpadministration is considering the,
not just in the near term, butthe longer run costs of of,
of constraining those immigrants.
>> Bill Whalen (15:18):
Okay, [INAUDIBLE].
>> Michael D. Bordo (15:20):
There's one other issue here which, which is important, and
that is that when you look atthe arithmetic of trade, right,
the current account, which isexports minus imports of goods and
services, is equal to net capital flows.
And if you look at the 19th century,the US was in deficit, had,
(15:41):
you know, current account deficits, okay?
And it was getting tremendouscapital flows coming from Europe,
which built the railroads andreally, you know, globalized.
The really blew up our economy,really made our economy take off, okay?
And we've had capital inflows,which right now, in the recent period
(16:01):
of globalization, okay, which havefinanced the growth of high tech and
all of the industries that wehave a comparative advantage in.
So when you shrink the current accountdeficit, which is what Trump wants to do
because he's a mercantilist, he believesthat the current account deficits, or
even simpler, the balance of trade,
(16:21):
should be positive because we want to getmore resources from the rest of the world.
So this is mercantilism,which you do that.
You reduce capital inflows, which we need.
And this is a very serious thing.
And then getting back to Mickey's point,look,
the growth of the history of the US Wasa massive migration from Europe, okay?
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That, and then from elsewhere.
That was a key part of our growth, okay?
And we need immigrants today, okay?
Then you get intothe issue of human capital.
And many of the Trump's policies are goingto restrict the growth of human capital,
because most of the really smartpeople that have been innovating in
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this country in the last 30 years orso come from other countries.
And if you discouragethose people from coming,
we don't have the talent that'sgoing to substitute for them.
This will hurt our potential growth formany decades.
This is even worse than,than the tariffs in terms of
its potential effect,>> Bill Whalen: right?
(17:27):
So we have a game of chicken going on, ifyou will, you know, post tariffs, and you
assume that the tariffs are going to forcecountries to come cut deals with you.
I'm curious, as an economic historian,Michael, if there's any kind of analogy,
precedent for this.
You have, you have a president whoseeconomic strategy is it's flying by
the seat of the pants, or maybe moreto the point, flying without a compass.
You're just trying,
(17:47):
you're just guessing what would come downthe road with the best case scenario.
Has any president everapproached economics this way?
Not that I know of.
I mean, in the past, as we said before,
the tariffs were reallycoming out of Congress, okay?
It was Roosevelt who shifted the,you know,
the locust from the Congressto the executive power.
(18:09):
And the whole concept of reciprocaltariffs were started in 1935.
But that was designed to reduce tariffs,not to go the other way, okay?
So I can't think of anything, but
what I can think of is the kinds of thingsthat he's doing are some of the things.
And I hate to say this, butthis is what Germany did in
(18:32):
the 1930s to its neighbors in Europe,okay?
It forced them, it threatened themto sign unfair trade deals okay.
And because by the time that,
by the time that trade wascollapsing in the 1930s, the whole
international trade system devolvedinto something called bilateralism.
(18:56):
And when you have a bilateral, eachcountry decides how much they're gonna
trade with each other, andwhat the exchange rate is gonna be, right?
Well, if you're a big nasty country witha big army, you can pressure Hungary,
you can pressure all these otherEastern European countries to buy German
goods at a very favorable rate in exchangefor getting their raw materials cheaper.
(19:18):
And that's what the Germans did.
Okay, this is, I'm not, I don't wantto go that far, but this is what,
this is what the kinds of strategiesthat he's following, I think.
>> Mickey D. Levy (19:30):
Hey, Bill, we're talking to each other and, and,
and usurping your abilityto ask questions.
But let's think about Trump's vision ofthe world and what he would like to see.
>> Bill Whalen (19:45):
Right. >> Mickey D. Levy
of itself doesn't make sense that he,his vision is, you know,
to, to bring manufacturing andmanufacturing jobs back home.
Kind of like this idealized 1950s where,where so
many people work in,in manufacturing factories.
(20:06):
Well, to do so that would involvea huge misallocation of research.
We've, of resources.
We've moved so far beyond that.
And, you know, we're, we're, you know,we've had these advances in productivity.
The US has become an absolute juggernautin high productivity services exports.
(20:30):
And to go back to the 1950s wherea large portion of the population or
workforce is working in manufacturingjust doesn't make any, any sense.
And then his other notions about,in the 19th century, you know,
(20:52):
tariffs were such a largeportion of federal tax receipts.
Well, that was at a time beforethe income tax system was invented.
So it's, it's really quitestriking that Trump has said,
okay, so we need to impose these tariffs.
And there might be some short run costs,but there are long run benefits.
(21:17):
And just from using economiccommon sense and, and
a view of history,it's a negative for the longer run.
It reduces potential growth andfuture growth and
improvement in standards of living.
And Michael, he's making one other calculation to me, which he's
guessing that other nations have the samepolitical calculus as the United States.
(21:39):
And the last time I checked,Xi Jinping is not term limited.
The last I checked, China does havemidterm elections coming up in 2026.
So the same political pressures thatwould apply to the United States with
election coming up.
My God, tariffs are going to kill importswhat about inflation and so forth?
It doesn't necessarily apply to the othercountries who you want to bring to
their knees.
>> Mickey D. Levy (21:58):
Well, that's right.
And let's consider rightnow the US's three largest
trading partners, Mexico,Canada, and China.
And Mexico and Canada are our allies andwe want them to do well economically.
And both of those countries,about 80% of their
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exports come to the US, andwe want them to do well.
And this,these tariffs assessed on Canada and
Mexico are quite negative for them andfeeding back negative for us.
And then China is our thirdbiggest trading partner and
China's domestic economy is really, reallysuffering and it really needs exports.
(22:48):
But, you know, you could ask the question,
are there items that we tradewith China that do impinge on
national security andshould be monitored, maybe controlled?
Well, the answer is probably yes.
But Trump, in lashing out against Chinaand erecting these very high tariffs,
(23:12):
doesn't distinguishbetween types of goods.
So it is kind of just thisrandom strategy that,
you know, quite, quite damaging.
And then let me just add onceagain what I mentioned earlier,
the uncertainty, imposing a tariff andthen threatening to use tariffs as a,
(23:37):
as a, as a weapon andthen changing a week from now,
how are businesses expected to plan andinvest for the future?
And how are, how do you expect them tocontinuing to expand and hire people?
And we're starting to see the negativesin the Data in employment,
(24:02):
today the revisions toprevious months shows that
the uncertainties in thisenvironment is definitely
having an impact on businesses willing,willingness to hire.
You also see once again in April,the dramatic decline in imports.
(24:25):
And if you look atthe composition of the decline,
most of it's in capital goods andindustrial materials.
And then you dig in deeper andsome of our leading industries
are already complaining about the lack ofmaterials they need to produce things.
(24:48):
It just doesn't make sense.
And we're, so, we're, we see this,
the impacts starting to unfold>> Michael D. Bordo: before we.
Get to the present.
I just wanted to inject oneother historical note, and
that is that there were countries thatwent the other route, that countries that
(25:08):
decided the way they could grow inindustrial is by creating a tariff wall.
And this is what happened inLatin America in the 1930s.
And the brains behind this was a guynamed Raoul Preby in Argentina.
And what happened is all the countriesin Latin America listened to him.
They imposed huge tariff walls tobuild up domestic industry, okay,
(25:30):
Domestic manufacturing.
And of course, what tariffs do.
One of the things we didn't mentionis it creates rent seeking.
Because once you got the tariffs,
the industries that have them are goingto be very reluctant to get rid of them.
So even if you use what's calledthe infant industry argument and you say,
okay, now we're going to grow up andthen once we've gotten big enough,
(25:53):
we've got economies of scale we can rollback, what happens is the rent seeking
take takes over the political andthe tariffs don't come down and
you end up with Argentina,which went from being a rich country in
1900 to becoming emerging,a poor emerging country 10 years ago.
Okay?
And the same thing with India, Nehru,
(26:13):
that was his strategy when theygot independence from the British.
We're gonna build a steel industry,we're gonna build cars.
And they had incredible tariffs.
They had quotas, capital controls,exchange controls, okay?
And the country stagnated until the 1990s.
So in a sense, there's somuch looking at other countries,
(26:37):
looking at shocks likethe Great Depression.
All of them come up with the same answer,which is tariffs are a bad deal.
>> Bill Whalen (26:48):
All right, we've talked about the present and
we've looked at the past.
Let us now talk about the present,but let's look at the future.
So it's time to pullout your crystal balls.
And here I turn to yourdefining ideas column.
Defining ideas for
those not familiar with it as a webchannel at the Hoover Institution website.
The title of this column is Tariffs andDisregarded Lessons.
And you came up with 1, 2,3, 4 possible outcomes here.
(27:11):
And the first thing that stands out,gentlemen, is there is not a fifth
outcome, which is sunshine, rainbows,lollipops, everything wonderful happens.
You just couldn't go there, could you?
>> Mickey D. Levy (27:22):
Well, so Bill, we, Mike and I spoke about this, and what led us to
think about toward this scenarioanalysis is Trump's erratic behavior.
So what we saw in, in March and then earlyApril, where he's putting on high tariffs,
that was when there was a steepstock market correction, right?
(27:46):
And Trump,
the stock market went down at the sametime the dollar was falling sharply.
And that those declines obviouslywent beyond some kind of
pain threshold that Trump had,and he backed off.
And then at the same time, when hewas tripling up on tariffs on China,
(28:10):
Apple CEO Tim Cook madea call into Trump and said,
this is going to drive upthe prices of iPhones dramatically.
And Trump then excused from tariffsover $100 billion worth of,
you know, iPhones and peripheral items.
So we, we see this patternwhere Trump is a negotiator and
(28:35):
he's, he backs off whenhits pain thresholds.
He, he loves to negotiate.
He loves it when E Leaders or, you know,US CEOs come and kiss his ring.
And so based on that,we developed these, these scenarios and
they were developed at a timewhen the average effective
(29:00):
tariff that Trump had originallyimposed is about 25%,
which was higher than the Smoot Hawley of,of, of 1930.
And so we came up with these scenarios and
they, and they run the gamut from->> Bill Whalen: I'm gonna read
(29:20):
each one to you guys, and then I wantyou to explain how you got up with it.
So here we go.
You have four of them.
And let's do these in the order of leastprobable building up to the final one,
which you think is the mostprobable scenario.
So the least probable scenario,you give it a 5% chance of happening.
You call it the worst, worst case.
And let me just read what you wrote.
(29:42):
Effective average tariffs of 25%.
Trade war with China escalates.
Current tariffs on Canada andMexico persist.
Trump ramps up deportation of immigrants,
makes permanent cuts in governmentfunding and research in universities.
US Credibility diminishes, reducing valueof dollar, isolating US economically and
diplomatically stock market falls sharply.
Deep recession andpotential growth diminished by 0.5%.
(30:04):
US exceptionalism arose decidedly.
Yikes,>> Mickey D. Levy: ouch.
>> Bill Whalen (30:08):
But only a 5% chance of that happening.
>> Mickey D. Levy (30:10):
Yes, and the reason why we only put a low probability
on that is we have seen Trump respondto pain thresholds and negotiations.
Note, Bill,that that we call the worst worst case.
The worst case, which is scenario three,has high tariffs.
(30:34):
The hype or high probabilitycase is the less worse case.
>> Bill Whalen (30:39):
And we'll get to those in a minute.
But I want to work these up in order of.
>> Mickey D. Levy (30:42):
Yeah, >> Michael D. Bordo
yes, but, but
in every one.
Note that in every one of our scenarios,they have.
All of them have negative outcomes,>> Bill Whalen: right?
There's pain no matter what.
It's just a question of.
Because. Because tariffs, historically,
tariffs are bad.
>> Bill Whalen (30:58):
Okay, so, Michael, the worst worst case, 5%.
We just did.
Now, that takes us up toa probability of 10%.
Michael, best outcome, mild negative.
And here's how you Describe mild,negative.
10% Average effective tariffs onall imports with select exceptions.
Negotiations reduce trade barriers.
Uncertainties are moderate.
Significant US Slowdown orvery mild recession.
(31:20):
Dollar and stock market remain firm andtreasury yields declined.
Michael, only a 10%chance of that happening.
>> Michael D. Bordo (31:26):
Right, no, yeah, we don't think that that's gonna happen.
We think that the most likelycase is scenario two, okay,
where tariffs are going to settlearound 15%, maybe 12 to 14%.
>> Bill Whalen (31:45):
We'll get to that.
We'll get that finally.
>> Michael D. Bordo (31:47):
But we think this one,
there are too many misstepsthat have already been taken,
and we think it'd be very hardto roll all of that back.
>> Bill Whalen (31:58):
nOkay, Mickey, your third scenario, you call it worst case,
not worst, butworse with an E, worst case.
And you give this a 15% probability andit goes as follows.
20% average effective tariffs,including 10% on all imports.
Easing of current tariffs on China,Canada and Mexico.
Fall in US dollar results andspike in US treasury yields.
(32:19):
Forced Federal Reserveintervention to stabilize markets.
Sizable stock market declines, moderately.
Deep recession with sizable hits tobusiness investment and housing activity.
Sizable negative impact on US Potential.
>> Mickey D. Levy (32:32):
Okay, >> Bill Whalen
small heart attacks.
That worst case scenario that we put 15% on.
>> Bill Whalen (32:39):
Yes.
>> Mickey D. Levy (32:39):
Note that we say, you know, it involves 20% effective tariffs.
>> Bill Whalen (32:44):
Right.
>> Mickey D. Levy (32:45):
We started out with the beginning of Trump and it was 25%.
Before that they had been like 3%.
Okay.
Currently with the givebacks,currently you could say they're about 18.
So it would be keeping allthe tariffs on board right now.
But what we add to this worstcase scenario is as you stated,
(33:08):
the US Dollar continues to fall andtreasury yields spike and
force Fed intervention in the market.
And here, as we discuss in the paper,
if you think about the Fedis given this dual mandate
of 2% inflation and maximum employment.
(33:33):
And the tariffs are ona collision course with that.
They're going to hit the economy, causerecession, push up the unemployment rate.
At the same time, at minimum,it adds, it adds to,
you know,at least a temporary rise in inflation.
So what we're describing inthis scenario is real problems.
(33:56):
That is right now a touchover 30% of all U.
S.Treasury publicly held debt is held
by foreigners.
>> Bill Whalen (34:08):
Right. >> Mickey D. Levy
you know, and, and it's not justthe dollar following, but, but
Trump's, you know, really belligerentbehavior toward our allies.
Global portfolio managers,including some foreign central banks,
could decide to reduce theirholdings of US treasuries.
(34:33):
At the same time, the Fed is trying toreduce its holdings of Treasuries and
at the same time deficits are going up.
It's just a collision course.
And so this scenario three andscenario four,
you know,address the possibility of these,
(34:56):
you know, this toxic mix heading south.
And Bill, this is, this is on the mindsof people in financial markets.
Right.
>> Mickey D. Levy (35:07):
We don't think it's going to happen.
And by the way,the Fed is praying that it doesn't happen.
The Fed is looking very carefullyat easing some regulations that
would allow commercial banksto maybe hold more Treasuries,
but it really doesn't have to intervene.
(35:28):
But this scenario is the worse case,it's not the worst-worst case,
but it does suggest troublein financial Markets.
And while the markets have been, you know,kind of sanguine the last couple weeks,
the market is very awareof these potential risks.
>> Bill Whalen (35:49):
All right, Michael, now let's take scenario number four.
It's your best case scenario.
>> Mickey D. Levy (35:54):
No, that's scenario two.
>> Bill Whalen (35:56):
Well, this is the less worst case, the best case scenario, but
in this case, the less worst case,and you give it a 70% probability.
So it is the runaway frontrunnerhere in terms of likelihood.
Less-worse case reads as follows.
As tariffs declined to 12 to14% average effective rate,
including negotiated lower tariffs forCanada and Mexico, diminished retaliation,
(36:19):
uncertainties diminished from currentlevels, distortions to supply chains and
production processes result in a markedeconomic slowdown or mild recession.
Fed eases and
provides support to stock market dollardeclines modestly in an orderly fashion.
US Retains dominant status in world small,but
cumulative impact on uslonger run potential growth.
(36:39):
Michael?70% probability.
>> Michael D. Bordo (36:42):
Yeah, I mean this is the good outcome, okay?
This is the outcome thatwe think is most likely.
>> Mickey D. Levy (36:52):
Bill.
Okay, so how do we get that?
We get to that scenariobecause we know that
Trump loves to negotiate andwe know that he
has this tendency to backoff when things get bad.
(37:13):
So what we see, forexample, in employment,
employment's going to weak,is very likely to weaken some more.
And Trump, his initial reaction wasto lash out at the Fed this morning,
but his next reaction will beto back off of certain tariffs.
(37:36):
From an international perspective, China'sdomestic demand is exceedingly weak.
China desperately needsto increase exports,
particularly its high tech exports tothe US it's very open to negotiating.
Europe is also weak andwants to negotiate.
(37:57):
Very likely we'll seenegotiations between US And
Canada and then the US And Mexico proceed.
And so Mike and I think the highestprobability outcome is,
you know, we end out with, you know,average tariffs of 12 to 14%.
(38:18):
Those are, those are three timeshigher than what they were pre Trump.
They're very large andthey're very likely to,
they're going to assuredlyslow the economy.
They could lead to a mild recession.
And as we emphasize,they're going to take a few tenths off
(38:42):
of potential sustainable GDP growth,which cumulatively are quite negative.
>> Bill Whalen (38:49):
All right, Part of the murkiness to all this is I find four very
uncertain entities right now.
And I want you two tolook at these four and
tell me which one I shouldbe paying attention to.
Number one, Michael and Mickey,I'm very curious about how the courts
are going to rule in the near futureon various aspects of tariffs,
constitutionality ofthe President's actions.
Secondly, we've been talking about this.
(39:09):
I'm curious as to what trade partners willdo if we're going to see countries come
forward or not, or if they're going tosit back and try to wait out Trump.
And I should note, by the way,that people watching this,
we tape this about five daysbefore you're seeing this.
This is oftentimes a mortal sin in the ageof Donald Trump to record something and
let it sit for 100 hours,because who knows what will happen?
But the question, gentlemen, of whether ornot countries will make the first move to
(39:31):
Trump or they're going to wait forTrump to make the first move to them.
The third entity is, of course,obviously the president himself.
He's mercurial, as Mickey has pointed out.
And then the final one, gentleman,
which Michael referenced earlier in ourconversation, it's where is Congress?
So I've given you courts, trade partners,the president and Congress.
Tell me what I should be paying attentionto right now in terms of those entities.
>> Michael D. Bordo (39:52):
I think, I think the courts are the, I think the courts
are the one that's, they're goingto roll back a lot of this stuff.
And then he's going to go to, he's goingto, he's going to dig down into this,
you know, into the barrel ofjustifications for tariffs.
And there's a lot of legislationthat's out there that goes all the way
(40:13):
back 200 years.
And so he's going to try some other,you know, some other tactics and
then he's going to try to getthe Congress to get involved because
the Congress used to be the entity that,that did create and raise tariffs.
So I think there's going to be a,you know, that there's going to be, you,
there's going to be case A,case B, case C.
(40:35):
Okay.And they're going to,
they're going to keep trying.
So I think that's really important.
>> Mickey D. Levy (40:41):
Let me add a few others.
I agree with you,congress has been totally absent and
they've really abrogated it.
It has abrogated itsmandate to assess tariffs.
I expect Congress to bea little more active as we
approach the midterm elections.
>> Bill Whalen (41:03):
Right.
>> Mickey D. Levy (41:04):
And then I see some key Republican members of the Congress
pushing back andmeeting with President Trump and
just saying, wait a second,you've really gone too far.
But, but Bill, when you mention the,of the four parties,
you mentioned the president, let mebroaden that to the President's team.
(41:31):
And I think you've already,behind the scenes,
seen some of Trump's economics teampush back on Trump's tariff initiatives.
>> Bill Whalen (41:44):
Well, I was going to joke originally that when you did your
worst worst case scenario that you didn'tmention the idea of the Treasury Secretary
quitting.
>> Mickey D. Levy (41:51):
Well, I hope he doesn't quit, but I think you look,
the, the Secretary ofthe treasury has spent decades,
he spent a whole careerin financial markets,
particularly in interest rate andforeign exchange markets,
and he knows that it'sinappropriate to intervene in,
(42:15):
in markets to try to achieve objectives.
Other people on the President'steam know the, the,
the economic history that,that Mike is so steeped in, and
they've picked their spots topush back on, on the president.
So I think it'll be a combinationthat leads us kind of, quote,
(42:38):
unquote, back from the brink to whatwe call the less worst scenario.
>> Bill Whalen (42:44):
Okay, gentlemen, I'm going to leave it there.
I've really enjoyed this conversation.
I have a suggestion.
The next time the Hoover EconomicWorking Group gets together,
maybe you want to update this andmaybe look at the odds and
see if you still want to go 70% onyour scenario or raise it or lower it.
It's kind of like keeping running trackof election where 50% chance of winning,
(43:04):
45% chance or so forth.
I'd be curious to see if you seemovement within these various scenarios.
>> Michael D. Bordo (43:09):
Okay, well, we're coming back in October and
we'll probably do that.
>> Bill Whalen (43:13):
Look forward to it.
Mickey, Michael, thanks again forthe conversation.
And like you, I'm just more than curiousto see where the tariff road takes us.
>> Michael D. Bordo (43:20):
Thank you.
>> Bill Whalen (43:21):
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(43:42):
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(44:05):
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[MUSIC]
>> Bill Whalen (00:03):
It's Friday, June 6, 2025.
And welcome back to Matters of Policy andPolitics,
a Hoover Institution podcastdevoted to the governance and
balance of power here in America andaround the World.
I'm Bill Whalen.
I'm the Virginia Hobbs CarpenterDistinguished Policy Fellow in Journalism
here at the Hoover Institution.
I'm just one of many Hooverfellows who are podcasting.
And just don't take my word for it.
Check it out yourself.
Go to our website,which is hoover.org/podcast, and
(00:26):
you'll see what all we'retalking about these days.
Today, we're going to talk about somethingthat is very much on radar of this
institution andthat is the thorny topic that is tariffs.
If you go to the Hoover website andsee what Hoover fellows are talking about
these days, you will come acrossa piece by Philip Zelikow.
Philip's a Hoover Senior Fellow andpresidential scholar, and he's looked at
(00:46):
President Trump's actions in relation tothe use of presidential emergency powers.
You'll also find a very excellentNew York Times op ed by Michael McConnell,
who's alsoa Hoover Institution Senior Fellow.
He's a Stanford law professor.
He's one of the nation's foremostauthorities on constitutional law, and
he wrote an essay discussing tariffsin the context of the presidents of
both parties in the seizureof unilateral powers.
(01:09):
So we're going to talk about tariffstoday, but in a different fashion.
We're going to talk about the economicsof the matter and possible outcomes.
We're gonnaweigh the odds andpossibilities of what might happen.
And joining us today are a pairof Hoover economists.
Michael Bordo isthe Hoover Institution's Ilene and
Morton Harris DistinguishedVisiting Fellow,
as well as a Board of Governorsprofessor of Economics and
director of the Center for Monetary andFinancial History at Rutgers University.
(01:33):
Mickey Levy isa Hoover Institution Visiting Fellow, and
he also manages a private economic andconsulting firm.
You might also remember Mickeyfrom a past podcast we did,
talking about that devil called inflation.
Gentlemen, good to see you today.
Thanks for coming on the podcast.
So let's get into the matter.
Before we get into terrorists itself,
I'd like to run four news items at youthings that are in the news this week.
(01:55):
And I want you to tell people who areconcerned about economics, concerned about
tariffs, which of these stories theyshould be paying most attention to.
Item number one,it's hot news because today is Friday.
Earlier today,the news out the May jobs report, and
I believe they came out 139,000jobs in America in May.
If I'm not Mistaken.
The good news is that beat expectations.
(02:16):
The bad news, though, that was less thanApril unemployment holding steady at 4.2%.
So that's item Number 1,the May jobs report.
Item number two, Mickey, Michael, reportearlier this week that goods brought into
the US plunged by 20% in April,recording their largest ever monthly drop.
US purchases from China and Canada fellto the lowest level since 2020 and 2021,
(02:38):
respectively, the Commerce Departmentsaid.
Item number three,
the Trump administration doublingtariffs on aluminum steel to 50%.
We'll have to wait andsee what that does to automobile prices.
Finally, item number four,
an analysis released earlier this week bythe Congressional Budget Office claiming
that the Trump tariff plan will cut thedeficit by $2.8 trillion over a decade.
(03:00):
Good news, except that it will also shrinkthe economy, in the CBO's estimation,
and increase the annual inflationrate by 0.4% in 2025 and 2026.
So, Michael, Mickey,I've given you four news items there.
Which one stands out?
>> Mickey D. Levy (03:16):
Well, I think you have to put all of them into the framework that
Mike and I have been studying,and that is the historic context.
And what we found uniformlyis tariffs are a negative for
the US economy and global growth.
(03:39):
And each of these fouritems just highlights
the focus of the issue of tariffs.
And let me add a fourth itemlurking in the background
that you haven't mentioned, Bill, and
(03:59):
that is President Trump'serratic tariff policies
that have added a tremendousamount of uncertainty
that seems to be affectinglabor markets and
consumer and business behavior.
So>> Bill Whalen: back up a second,
Mickey, when you say erratic policies,are you talking about just
(04:22):
randomly applying numbers to differenttariffs in different countries or.
Right, and his applying tariffs.
And then when facing a pain threshold,
say the stock market goes down andthe dollar falls, he shifts gears,
and it just adds this tremendousamount of uncertainty.
(04:43):
So the broader context forthinking about all these current events,
like the plummeting imports,like the jobs report,
that shows a marked decelerationin job increases, and
then Trump doubling up on these tariffs.
The broader context isPresident Trump seems to be
(05:06):
ignoring the criticallyimportant lessons of history,
that tariffs have negativeeconomic effects and,
and never accomplish their objectives.
So that's my, that's my broader statement.
>> Bill Whalen (05:24):
Michael, let's talk a bit about the historic lessons.
So what fascinates me here,it doesn't get enough coverage,
but you guys did a really greatjob in your, in your column.
If I had tasked you to a couple ofdecades ago to look at the United States
involvement in Afghanistan, let's saywe're about to invade after 9 11.
You, as two military historians,military experts,
you would have sat down,you looked at the history of Afghanistan.
(05:47):
You looked at what the Sovietswent through in the 1970s and 80s.
You looked at what the British wentthrough in the 19th century, and you would
apply that to possible outcomes forthe United States invading Afghanistan.
So, Michael, explain a bit about how youand Mickey researched terrorists and
what you looked at in terms ofhistorical analogies, historical events.
>> Michael D. Bordo (06:06):
Right. So I'm an economic historian.
I've been teaching a course onglobalization, historical perspective for
20 years.
I ran along with two others,
an MBR big conference we had20 years ago on globalization,
which, where we were thinkingexactly about the benefits of
globalization, so with this context,I just viewed this,
(06:31):
the spate of tariffs that are beingimposed as an extremely terrible thing.
Terrible.
And I look at history andI can give you two,
two examples that willjust illustrate this.
The first one,which a lot of people talk about,
is what happened in the Great Depression,okay, In the Great Depression, in 19.
(06:53):
In 1930, the US passed a smoot Hawleytariff, which raised tariff rates to
20% above 20%, which is just a littlebit where they are right now.
And what happened after thatwas that Canada first and
then a whole lot of othercountries retaliated.
And so what happened was that, in a sense,international trade totally collapsed.
(07:19):
And along with international trade goescapital flows and also immigration.
Both of these things justcollapsed in the 1930s.
And in fact, what happened inthe 1930s was the end of what was
called the first era of globalization,which was a really important event.
(07:41):
This was something that started in the UKand in England in the 1840s when they
started reducing tariffs becauseeverybody had high tariffs back then.
And they passed something calleda repeal of the corn laws.
The corn laws were taxes on wheat.
And so when the British did that, okay,
that really had a big effecton the British economy.
(08:03):
And the second thing they did isthey worked out a trade treaty
with France calledthe Cobden Chevalier Treaty.
This is in 1860.
And basically it created somethingcalled the most favored nation approach
to tariffs, which is, if we will lowertariffs with you, the French, and
the French will lower towers with us,we'll have reciprocal tariffs, and
(08:27):
then everybody else that trades with uswill get the same deal that England and
France got.
And so what this did was it reallyreduced tariff protection in Europe and
then it spread to other countries.
And this helped encouragea tremendous growth in trade.
And the growth of ratio oftrade to GDP took off, okay?
(08:50):
That was helped by technologicalchange and shipping in railroads and
everything else.
So you had this tremendousboom that starts back then and
it flows around the world,it's associated with the global growth.
And along with that,we had capital flows, okay?
(09:10):
We had a tremendousamount of capital flowing
from Europe to the new countries ofnew settlement, and we had migration.
So this was the first yearof globalization, okay?
And it ended with the terribleevents I told you about for.
Actually, it started even earlier.
It started with a restriction onimmigration at the turn of the last 20th
(09:31):
century, because once allthese immigrants came in,
there was a big backlash from organizedlabor in this country and other countries.
It also led to tariffs,which started even before Smoot Hawley.
US Was always a high protection country.
And they raised tariffs after World War I,
(09:52):
the famous tariff calledFordney McCumber Tariff.
So in a sense,this reversed the globalization, okay?
And then of course, what happened isthis led to the Great depression,
World War II, and the belief that cameout from the Roosevelt administration and
(10:13):
Cordell Hull especially that restoringtrade would be associated with peace.
And there was a view that there was acorrelation between the total breakdown of
trade in the 1930s and World War II.
And so then we founded.
The US was really important in foundingthese institutions to restore global
(10:36):
prosperity, global trade, andeventually global capital flows, okay?
And this is the gatt.
This is the imf, okay?
The World Bank.
All these institutions werefounded right after World War II.
And they led to a tremendous growthin trade, in capital flows later.
(10:59):
And migration came back.
And so we had a second yearof globalization, okay,
which kind of peaked with the gfc,okay, but is coming back.
And now it's being threatened,being threatened by the same forces that
destroyed the first year ofglobalization back in the.
>> Bill Whalen (11:18):
1930s when Smoot Hawley is put into place.
Was the strategy the same then?
Michael, it is now.
The strategy now is what,you impose tariffs and
countries will come to you on theirknees begging for a better trade deal.
>> Michael D. Bordo (11:30):
No, it was a different environment, okay?
Back then, it was the Congress thatpassed this Mood Hawley tariff, okay?
And it was not coming from the executive.
And the reason they did this was becausethe depression was already starting and
agricultural prices were falling.
And so the agricultural interests,
(11:51):
which are really strong inthe US Congress back then, okay?
And they were all the way up untilnot that many years ago, okay,
they convinced them to push on a tariff.
But you have this phenomenon inUS Politics called log rolling,
whereby Congress, people from otherdistricts that weren't agriculture said,
(12:13):
look, I'll support you if yousupport tariffs on manufacturing.
So what happened was a simple bill thatwas just going to help farmers ended up
being a tariff on everything, okay?
And there was no talking about dealingwith other countries, none of that stuff.
It wasn't strategic.
It was protection, pure and simple.
>> Bill Whalen (12:34):
We do have a lot rolling these days, Mickey,
it's called the Big Beautiful Bill.
>> Mickey D. Levy (12:37):
Yeah, so, hey, Bill, before we go on to fiscal policy,
Mike introduces a criticallyimportant point here,
that President Trump, or Trump's team,
is not only ignoring the lessonsof history on tariffs and
(12:58):
pushing for very high tariffs.
But also he's pushing regulations andconstraints on immigration.
And if you look at the twoheirs of globalization that
Mike referred to that were associatedwith very strong economic growth and
(13:22):
progress in the United States,large current account
deficits that involve verylarge capital inflows.
And those capital inflowswere critically important
to financing the capital spending andprogress in the United States.
And those two eras wereinterrupted by constraints
(13:46):
on capital and trade,but also immigration.
And so right now,among the toxic mixes that
we're concerned with is tariffs andalso immigration.
And we know that Trump's team is taking
(14:10):
unfortunate steps toconstrain immigration and
foreign students being educatedat US university, etc., etc.
But this all goes into the mix that,as Mike said,
could be challenging this second wave ofglobalization that has served the US Very,
(14:35):
very well economically andevery other way.
>> Michael D. Bordo (14:40):
All right, >> Bill Whalen
I assume you're, sorry, Michael,so you said student visas.
I assume you're alsoreferencing what visas for
software engineers to come in the country.
Can you further>> Mickey D. Levy: wait, Bill?
Not just that,immigration from our Southern allies.
I mean, US Desperately needs immigrants.
(15:03):
And I don't think the Trumpadministration is considering the,
not just in the near term, butthe longer run costs of of,
of constraining those immigrants.
>> Bill Whalen (15:18):
Okay, [INAUDIBLE].
>> Michael D. Bordo (15:20):
There's one other issue here which, which is important, and
that is that when you look atthe arithmetic of trade, right,
the current account, which isexports minus imports of goods and
services, is equal to net capital flows.
And if you look at the 19th century,the US was in deficit, had,
(15:41):
you know, current account deficits, okay?
And it was getting tremendouscapital flows coming from Europe,
which built the railroads andreally, you know, globalized.
The really blew up our economy,really made our economy take off, okay?
And we've had capital inflows,which right now, in the recent period
(16:01):
of globalization, okay, which havefinanced the growth of high tech and
all of the industries that wehave a comparative advantage in.
So when you shrink the current accountdeficit, which is what Trump wants to do
because he's a mercantilist, he believesthat the current account deficits, or
even simpler, the balance of trade,
(16:21):
should be positive because we want to getmore resources from the rest of the world.
So this is mercantilism,which you do that.
You reduce capital inflows, which we need.
And this is a very serious thing.
And then getting back to Mickey's point,look,
the growth of the history of the US Wasa massive migration from Europe, okay?
(16:44):
That, and then from elsewhere.
That was a key part of our growth, okay?
And we need immigrants today, okay?
Then you get intothe issue of human capital.
And many of the Trump's policies are goingto restrict the growth of human capital,
because most of the really smartpeople that have been innovating in
(17:05):
this country in the last 30 years orso come from other countries.
And if you discouragethose people from coming,
we don't have the talent that'sgoing to substitute for them.
This will hurt our potential growth formany decades.
This is even worse than,than the tariffs in terms of
its potential effect,>> Bill Whalen: right?
(17:27):
So we have a game of chicken going on, ifyou will, you know, post tariffs, and you
assume that the tariffs are going to forcecountries to come cut deals with you.
I'm curious, as an economic historian,Michael, if there's any kind of analogy,
precedent for this.
You have, you have a president whoseeconomic strategy is it's flying by
the seat of the pants, or maybe moreto the point, flying without a compass.
You're just trying,
(17:47):
you're just guessing what would come downthe road with the best case scenario.
Has any president everapproached economics this way?
Not that I know of.
I mean, in the past, as we said before,
the tariffs were reallycoming out of Congress, okay?
It was Roosevelt who shifted the,you know,
the locust from the Congressto the executive power.
(18:09):
And the whole concept of reciprocaltariffs were started in 1935.
But that was designed to reduce tariffs,not to go the other way, okay?
So I can't think of anything, but
what I can think of is the kinds of thingsthat he's doing are some of the things.
And I hate to say this, butthis is what Germany did in
(18:32):
the 1930s to its neighbors in Europe,okay?
It forced them, it threatened themto sign unfair trade deals okay.
And because by the time that,
by the time that trade wascollapsing in the 1930s, the whole
international trade system devolvedinto something called bilateralism.
(18:56):
And when you have a bilateral, eachcountry decides how much they're gonna
trade with each other, andwhat the exchange rate is gonna be, right?
Well, if you're a big nasty country witha big army, you can pressure Hungary,
you can pressure all these otherEastern European countries to buy German
goods at a very favorable rate in exchangefor getting their raw materials cheaper.
(19:18):
And that's what the Germans did.
Okay, this is, I'm not, I don't wantto go that far, but this is what,
this is what the kinds of strategiesthat he's following, I think.
>> Mickey D. Levy (19:30):
Hey, Bill, we're talking to each other and, and,
and usurping your abilityto ask questions.
But let's think about Trump's vision ofthe world and what he would like to see.
>> Bill Whalen (19:45):
Right. >> Mickey D. Levy
of itself doesn't make sense that he,his vision is, you know,
to, to bring manufacturing andmanufacturing jobs back home.
Kind of like this idealized 1950s where,where so
many people work in,in manufacturing factories.
(20:06):
Well, to do so that would involvea huge misallocation of research.
We've, of resources.
We've moved so far beyond that.
And, you know, we're, we're, you know,we've had these advances in productivity.
The US has become an absolute juggernautin high productivity services exports.
(20:30):
And to go back to the 1950s wherea large portion of the population or
workforce is working in manufacturingjust doesn't make any, any sense.
And then his other notions about,in the 19th century, you know,
(20:52):
tariffs were such a largeportion of federal tax receipts.
Well, that was at a time beforethe income tax system was invented.
So it's, it's really quitestriking that Trump has said,
okay, so we need to impose these tariffs.
And there might be some short run costs,but there are long run benefits.
(21:17):
And just from using economiccommon sense and, and
a view of history,it's a negative for the longer run.
It reduces potential growth andfuture growth and
improvement in standards of living.
And Michael, he's making one other calculation to me, which he's
guessing that other nations have the samepolitical calculus as the United States.
(21:39):
And the last time I checked,Xi Jinping is not term limited.
The last I checked, China does havemidterm elections coming up in 2026.
So the same political pressures thatwould apply to the United States with
election coming up.
My God, tariffs are going to kill importswhat about inflation and so forth?
It doesn't necessarily apply to the othercountries who you want to bring to
their knees.
>> Mickey D. Levy (21:58):
Well, that's right.
And let's consider rightnow the US's three largest
trading partners, Mexico,Canada, and China.
And Mexico and Canada are our allies andwe want them to do well economically.
And both of those countries,about 80% of their
(22:23):
exports come to the US, andwe want them to do well.
And this,these tariffs assessed on Canada and
Mexico are quite negative for them andfeeding back negative for us.
And then China is our thirdbiggest trading partner and
China's domestic economy is really, reallysuffering and it really needs exports.
(22:48):
But, you know, you could ask the question,
are there items that we tradewith China that do impinge on
national security andshould be monitored, maybe controlled?
Well, the answer is probably yes.
But Trump, in lashing out against Chinaand erecting these very high tariffs,
(23:12):
doesn't distinguishbetween types of goods.
So it is kind of just thisrandom strategy that,
you know, quite, quite damaging.
And then let me just add onceagain what I mentioned earlier,
the uncertainty, imposing a tariff andthen threatening to use tariffs as a,
(23:37):
as a, as a weapon andthen changing a week from now,
how are businesses expected to plan andinvest for the future?
And how are, how do you expect them tocontinuing to expand and hire people?
And we're starting to see the negativesin the Data in employment,
(24:02):
today the revisions toprevious months shows that
the uncertainties in thisenvironment is definitely
having an impact on businesses willing,willingness to hire.
You also see once again in April,the dramatic decline in imports.
(24:25):
And if you look atthe composition of the decline,
most of it's in capital goods andindustrial materials.
And then you dig in deeper andsome of our leading industries
are already complaining about the lack ofmaterials they need to produce things.
(24:48):
It just doesn't make sense.
And we're, so, we're, we see this,
the impacts starting to unfold>> Michael D. Bordo: before we.
Get to the present.
I just wanted to inject oneother historical note, and
that is that there were countries thatwent the other route, that countries that
(25:08):
decided the way they could grow inindustrial is by creating a tariff wall.
And this is what happened inLatin America in the 1930s.
And the brains behind this was a guynamed Raoul Preby in Argentina.
And what happened is all the countriesin Latin America listened to him.
They imposed huge tariff walls tobuild up domestic industry, okay,
(25:30):
Domestic manufacturing.
And of course, what tariffs do.
One of the things we didn't mentionis it creates rent seeking.
Because once you got the tariffs,
the industries that have them are goingto be very reluctant to get rid of them.
So even if you use what's calledthe infant industry argument and you say,
okay, now we're going to grow up andthen once we've gotten big enough,
(25:53):
we've got economies of scale we can rollback, what happens is the rent seeking
take takes over the political andthe tariffs don't come down and
you end up with Argentina,which went from being a rich country in
1900 to becoming emerging,a poor emerging country 10 years ago.
Okay?
And the same thing with India, Nehru,
(26:13):
that was his strategy when theygot independence from the British.
We're gonna build a steel industry,we're gonna build cars.
And they had incredible tariffs.
They had quotas, capital controls,exchange controls, okay?
And the country stagnated until the 1990s.
So in a sense, there's somuch looking at other countries,
(26:37):
looking at shocks likethe Great Depression.
All of them come up with the same answer,which is tariffs are a bad deal.
>> Bill Whalen (26:48):
All right, we've talked about the present and
we've looked at the past.
Let us now talk about the present,but let's look at the future.
So it's time to pullout your crystal balls.
And here I turn to yourdefining ideas column.
Defining ideas for
those not familiar with it as a webchannel at the Hoover Institution website.
The title of this column is Tariffs andDisregarded Lessons.
And you came up with 1, 2,3, 4 possible outcomes here.
(27:11):
And the first thing that stands out,gentlemen, is there is not a fifth
outcome, which is sunshine, rainbows,lollipops, everything wonderful happens.
You just couldn't go there, could you?
>> Mickey D. Levy (27:22):
Well, so Bill, we, Mike and I spoke about this, and what led us to
think about toward this scenarioanalysis is Trump's erratic behavior.
So what we saw in, in March and then earlyApril, where he's putting on high tariffs,
that was when there was a steepstock market correction, right?
(27:46):
And Trump,
the stock market went down at the sametime the dollar was falling sharply.
And that those declines obviouslywent beyond some kind of
pain threshold that Trump had,and he backed off.
And then at the same time, when hewas tripling up on tariffs on China,
(28:10):
Apple CEO Tim Cook madea call into Trump and said,
this is going to drive upthe prices of iPhones dramatically.
And Trump then excused from tariffsover $100 billion worth of,
you know, iPhones and peripheral items.
So we, we see this patternwhere Trump is a negotiator and
(28:35):
he's, he backs off whenhits pain thresholds.
He, he loves to negotiate.
He loves it when E Leaders or, you know,US CEOs come and kiss his ring.
And so based on that,we developed these, these scenarios and
they were developed at a timewhen the average effective
(29:00):
tariff that Trump had originallyimposed is about 25%,
which was higher than the Smoot Hawley of,of, of 1930.
And so we came up with these scenarios and
they, and they run the gamut from->> Bill Whalen: I'm gonna read
(29:20):
each one to you guys, and then I wantyou to explain how you got up with it.
So here we go.
You have four of them.
And let's do these in the order of leastprobable building up to the final one,
which you think is the mostprobable scenario.
So the least probable scenario,you give it a 5% chance of happening.
You call it the worst, worst case.
And let me just read what you wrote.
(29:42):
Effective average tariffs of 25%.
Trade war with China escalates.
Current tariffs on Canada andMexico persist.
Trump ramps up deportation of immigrants,
makes permanent cuts in governmentfunding and research in universities.
US Credibility diminishes, reducing valueof dollar, isolating US economically and
diplomatically stock market falls sharply.
Deep recession andpotential growth diminished by 0.5%.
(30:04):
US exceptionalism arose decidedly.
Yikes,>> Mickey D. Levy: ouch.
>> Bill Whalen (30:08):
But only a 5% chance of that happening.
>> Mickey D. Levy (30:10):
Yes, and the reason why we only put a low probability
on that is we have seen Trump respondto pain thresholds and negotiations.
Note, Bill,that that we call the worst worst case.
The worst case, which is scenario three,has high tariffs.
(30:34):
The hype or high probabilitycase is the less worse case.
>> Bill Whalen (30:39):
And we'll get to those in a minute.
But I want to work these up in order of.
>> Mickey D. Levy (30:42):
Yeah, >> Michael D. Bordo
yes, but, but
in every one.
Note that in every one of our scenarios,they have.
All of them have negative outcomes,>> Bill Whalen: right?
There's pain no matter what.
It's just a question of.
Because. Because tariffs, historically,
tariffs are bad.
>> Bill Whalen (30:58):
Okay, so, Michael, the worst worst case, 5%.
We just did.
Now, that takes us up toa probability of 10%.
Michael, best outcome, mild negative.
And here's how you Describe mild,negative.
10% Average effective tariffs onall imports with select exceptions.
Negotiations reduce trade barriers.
Uncertainties are moderate.
Significant US Slowdown orvery mild recession.
(31:20):
Dollar and stock market remain firm andtreasury yields declined.
Michael, only a 10%chance of that happening.
>> Michael D. Bordo (31:26):
Right, no, yeah, we don't think that that's gonna happen.
We think that the most likelycase is scenario two, okay,
where tariffs are going to settlearound 15%, maybe 12 to 14%.
>> Bill Whalen (31:45):
We'll get to that.
We'll get that finally.
>> Michael D. Bordo (31:47):
But we think this one,
there are too many misstepsthat have already been taken,
and we think it'd be very hardto roll all of that back.
>> Bill Whalen (31:58):
nOkay, Mickey, your third scenario, you call it worst case,
not worst, butworse with an E, worst case.
And you give this a 15% probability andit goes as follows.
20% average effective tariffs,including 10% on all imports.
Easing of current tariffs on China,Canada and Mexico.
Fall in US dollar results andspike in US treasury yields.
(32:19):
Forced Federal Reserveintervention to stabilize markets.
Sizable stock market declines, moderately.
Deep recession with sizable hits tobusiness investment and housing activity.
Sizable negative impact on US Potential.
>> Mickey D. Levy (32:32):
Okay, >> Bill Whalen
small heart attacks.
That worst case scenario that we put 15% on.
>> Bill Whalen (32:39):
Yes.
>> Mickey D. Levy (32:39):
Note that we say, you know, it involves 20% effective tariffs.
>> Bill Whalen (32:44):
Right.
>> Mickey D. Levy (32:45):
We started out with the beginning of Trump and it was 25%.
Before that they had been like 3%.
Okay.
Currently with the givebacks,currently you could say they're about 18.
So it would be keeping allthe tariffs on board right now.
But what we add to this worstcase scenario is as you stated,
(33:08):
the US Dollar continues to fall andtreasury yields spike and
force Fed intervention in the market.
And here, as we discuss in the paper,
if you think about the Fedis given this dual mandate
of 2% inflation and maximum employment.
(33:33):
And the tariffs are ona collision course with that.
They're going to hit the economy, causerecession, push up the unemployment rate.
At the same time, at minimum,it adds, it adds to,
you know,at least a temporary rise in inflation.
So what we're describing inthis scenario is real problems.
(33:56):
That is right now a touchover 30% of all U.
S.Treasury publicly held debt is held
by foreigners.
>> Bill Whalen (34:08):
Right. >> Mickey D. Levy
you know, and, and it's not justthe dollar following, but, but
Trump's, you know, really belligerentbehavior toward our allies.
Global portfolio managers,including some foreign central banks,
could decide to reduce theirholdings of US treasuries.
(34:33):
At the same time, the Fed is trying toreduce its holdings of Treasuries and
at the same time deficits are going up.
It's just a collision course.
And so this scenario three andscenario four,
you know,address the possibility of these,
(34:56):
you know, this toxic mix heading south.
And Bill, this is, this is on the mindsof people in financial markets.
Right.
>> Mickey D. Levy (35:07):
We don't think it's going to happen.
And by the way,the Fed is praying that it doesn't happen.
The Fed is looking very carefullyat easing some regulations that
would allow commercial banksto maybe hold more Treasuries,
but it really doesn't have to intervene.
(35:28):
But this scenario is the worse case,it's not the worst-worst case,
but it does suggest troublein financial Markets.
And while the markets have been, you know,kind of sanguine the last couple weeks,
the market is very awareof these potential risks.
>> Bill Whalen (35:49):
All right, Michael, now let's take scenario number four.
It's your best case scenario.
>> Mickey D. Levy (35:54):
No, that's scenario two.
>> Bill Whalen (35:56):
Well, this is the less worst case, the best case scenario, but
in this case, the less worst case,and you give it a 70% probability.
So it is the runaway frontrunnerhere in terms of likelihood.
Less-worse case reads as follows.
As tariffs declined to 12 to14% average effective rate,
including negotiated lower tariffs forCanada and Mexico, diminished retaliation,
(36:19):
uncertainties diminished from currentlevels, distortions to supply chains and
production processes result in a markedeconomic slowdown or mild recession.
Fed eases and
provides support to stock market dollardeclines modestly in an orderly fashion.
US Retains dominant status in world small,but
cumulative impact on uslonger run potential growth.
(36:39):
Michael?70% probability.
>> Michael D. Bordo (36:42):
Yeah, I mean this is the good outcome, okay?
This is the outcome thatwe think is most likely.
>> Mickey D. Levy (36:52):
Bill.
Okay, so how do we get that?
We get to that scenariobecause we know that
Trump loves to negotiate andwe know that he
has this tendency to backoff when things get bad.
(37:13):
So what we see, forexample, in employment,
employment's going to weak,is very likely to weaken some more.
And Trump, his initial reaction wasto lash out at the Fed this morning,
but his next reaction will beto back off of certain tariffs.
(37:36):
From an international perspective, China'sdomestic demand is exceedingly weak.
China desperately needsto increase exports,
particularly its high tech exports tothe US it's very open to negotiating.
Europe is also weak andwants to negotiate.
(37:57):
Very likely we'll seenegotiations between US And
Canada and then the US And Mexico proceed.
And so Mike and I think the highestprobability outcome is,
you know, we end out with, you know,average tariffs of 12 to 14%.
(38:18):
Those are, those are three timeshigher than what they were pre Trump.
They're very large andthey're very likely to,
they're going to assuredlyslow the economy.
They could lead to a mild recession.
And as we emphasize,they're going to take a few tenths off
(38:42):
of potential sustainable GDP growth,which cumulatively are quite negative.
>> Bill Whalen (38:49):
All right, Part of the murkiness to all this is I find four very
uncertain entities right now.
And I want you two tolook at these four and
tell me which one I shouldbe paying attention to.
Number one, Michael and Mickey,I'm very curious about how the courts
are going to rule in the near futureon various aspects of tariffs,
constitutionality ofthe President's actions.
Secondly, we've been talking about this.
(39:09):
I'm curious as to what trade partners willdo if we're going to see countries come
forward or not, or if they're going tosit back and try to wait out Trump.
And I should note, by the way,that people watching this,
we tape this about five daysbefore you're seeing this.
This is oftentimes a mortal sin in the ageof Donald Trump to record something and
let it sit for 100 hours,because who knows what will happen?
But the question, gentlemen, of whether ornot countries will make the first move to
(39:31):
Trump or they're going to wait forTrump to make the first move to them.
The third entity is, of course,obviously the president himself.
He's mercurial, as Mickey has pointed out.
And then the final one, gentleman,
which Michael referenced earlier in ourconversation, it's where is Congress?
So I've given you courts, trade partners,the president and Congress.
Tell me what I should be paying attentionto right now in terms of those entities.
>> Michael D. Bordo (39:52):
I think, I think the courts are the, I think the courts
are the one that's, they're goingto roll back a lot of this stuff.
And then he's going to go to, he's goingto, he's going to dig down into this,
you know, into the barrel ofjustifications for tariffs.
And there's a lot of legislationthat's out there that goes all the way
(40:13):
back 200 years.
And so he's going to try some other,you know, some other tactics and
then he's going to try to getthe Congress to get involved because
the Congress used to be the entity that,that did create and raise tariffs.
So I think there's going to be a,you know, that there's going to be, you,
there's going to be case A,case B, case C.
(40:35):
Okay.And they're going to,
they're going to keep trying.
So I think that's really important.
>> Mickey D. Levy (40:41):
Let me add a few others.
I agree with you,congress has been totally absent and
they've really abrogated it.
It has abrogated itsmandate to assess tariffs.
I expect Congress to bea little more active as we
approach the midterm elections.
>> Bill Whalen (41:03):
Right.
>> Mickey D. Levy (41:04):
And then I see some key Republican members of the Congress
pushing back andmeeting with President Trump and
just saying, wait a second,you've really gone too far.
But, but Bill, when you mention the,of the four parties,
you mentioned the president, let mebroaden that to the President's team.
(41:31):
And I think you've already,behind the scenes,
seen some of Trump's economics teampush back on Trump's tariff initiatives.
>> Bill Whalen (41:44):
Well, I was going to joke originally that when you did your
worst worst case scenario that you didn'tmention the idea of the Treasury Secretary
quitting.
>> Mickey D. Levy (41:51):
Well, I hope he doesn't quit, but I think you look,
the, the Secretary ofthe treasury has spent decades,
he spent a whole careerin financial markets,
particularly in interest rate andforeign exchange markets,
and he knows that it'sinappropriate to intervene in,
(42:15):
in markets to try to achieve objectives.
Other people on the President'steam know the, the,
the economic history that,that Mike is so steeped in, and
they've picked their spots topush back on, on the president.
So I think it'll be a combinationthat leads us kind of, quote,
(42:38):
unquote, back from the brink to whatwe call the less worst scenario.
>> Bill Whalen (42:44):
Okay, gentlemen, I'm going to leave it there.
I've really enjoyed this conversation.
I have a suggestion.
The next time the Hoover EconomicWorking Group gets together,
maybe you want to update this andmaybe look at the odds and
see if you still want to go 70% onyour scenario or raise it or lower it.
It's kind of like keeping running trackof election where 50% chance of winning,
(43:04):
45% chance or so forth.
I'd be curious to see if you seemovement within these various scenarios.
>> Michael D. Bordo (43:09):
Okay, well, we're coming back in October and
we'll probably do that.
>> Bill Whalen (43:13):
Look forward to it.
Mickey, Michael, thanks again forthe conversation.
And like you, I'm just more than curiousto see where the tariff road takes us.
>> Michael D. Bordo (43:20):
Thank you.
>> Bill Whalen (43:21):
You've been listening to Matters of Policy and
Politics, a Hoover Institutionpodcast devoted to governance and
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(43:42):
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We'll be back soon with a new installmenton matters of policy and politics.
(44:05):
Until then, take care,thanks for listening.
>> Speaker 4 (44:08):
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