What will Trump's trade war do to labor productivity?
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I'm Kyle Rizdahl. It is Thursday. Today, the first to make it is always to have you along, everybody. First of all, good news. No math or formulas in the program today. Second of all, though, we're going to do a bit of a big think as a way to get going. Prompted by something Treasury Secretary Scott Besson said in a speech last week, the theme of which was rebalancing the global economy.

Nowhere is the imbalance I mentioned earlier more obvious than in the world of trade. That's why the United States is taking action now to rebalance global commerce. That action, of course, is tariffs on virtually every country in the world, China in particular.

But changing the entire global economic order is a big, big swing. So we've called Adam Pozen. He's the president of the Peterson Institute for International Economics, a marketplace underwriter, as you might have heard a time or two. And we wanted to ask him about how that might work, that rebalancing. Adam, it's good to talk to you again. Thank you, Kai. The program's great. So, well, thank you for that. So first of all, let's set a foundation here. How did we get out of balance?

Mostly through our own doing. The issue of imbalances, Kai, at a macro level is about are you sustainably managing your public debt? Because that's the ultimate stopping point for an economy. And the U.S. is, after my being one of the less worried, not a fiscal hawk for a very long time, I think now is in the territory of

where we're in trouble, where we were running a very large deficit in the last couple of years of Biden when the economy was at full employment, when the Trump team and the Republican leadership in Congress are putting us on a path to potentially making those large deficits even bigger and permanent. That imbalance of future spending and taxes versus present is the imbalance that matters.

So let's play that now into what Secretary Besant said the other day. The Trump administration is bound and determined with its tariff policy to

to rebalance global trade. What does that mean? What's it going to look like? And can he do it? And I realize that's three questions, so take your time. Yeah, but the questions, and I appreciate the time, but they're pretty straightforward. It doesn't really mean anything because if you try to solve a macro problem through tariffs, it's not going to work unless you put on enormous tariffs and thereby cause a recession. Secondly, it's not clear yet

what it actually means in terms of what's the goal. If the goal is to create more manufacturing jobs, that's not worth turning the whole economy inside out for because it would at most create a million, million and a half manufacturing jobs and those people would have to come from somewhere else in the economy. And if we don't have –

immigrants, then there's fewer people around who can take those jobs. And so it's, and as my colleague at Harvard and Peterson, Robert Lawrence has argued, there's a limit in today's technological world to how many jobs you can create in manufacturing. So the potential we end up with is the Trump administration with support from the Congress puts on this huge number of tariffs. And maybe we do manage to

extort from certain countries that are dependent on us like Korea or Japan or Taiwan, them putting some more manufacturing plants in the US, but they won't be competitive. And ultimately, going back to the fiscal stuff, it's not going to close those deficits. It's not going to make our long term path more sustainable. It's probably going to make it less. Do we need to rebalance global trade?

I don't think so. I think we need to rebalance national security and global trade. I think that was a legitimate point raised by a number of people in both the first Trump and the Biden administrations that being too dependent on some things for China, or too dependent on one location like Taiwan for semiconductors has its risks.

But that's not a rebalancing. That's a refining. The idea that somehow the U.S. is being taken by trade, which I know Trump and his appointees keep saying, is just false, no matter how many times they say it. Yeah, they like to say that a lot. If they called you, not that they would, but if they called you and said, Adam, how do you think we should handle our trade gaps and thus the challenges as they see it in global trade, what would you say?

I would say that the challenges that matter are best done by treating China as a separate issue from everything else in global trade. And if you do that, then you have some hope of working in collaboration with other economies and other governments, which would allow you to better substitute for China and force China to do different things.

But I'd also start with trying to tone down a trade war that just makes everybody worse off. You mentioned the whole timing thing, and I do have to point out it took us decades and decades and decades to get global trade out of balance. And Donald Trump and his officials seem to want to do it in like a week and a half.

That's true and I think that is a bias often of people who come into government and who think that things are very simple and it's just because government people or previous appointees were stupid or lazy or cowardly or whatever adjective. Whereas it turns out the reason government things take time and effort is because there's a lot at stake because a lot of people have a say, some of whom aren't under the control of the US government.

And so you have to just keep working and pushing at it. But it can be done. And it's better done if you work within the system that existed that, frankly, the U.S. set up. Last thing, Adam, and then I'll let you go. There have been costs to Americans because of the imbalance in global trade, right? Manufacturing jobs is the one that comes most immediately to mind and the challenges that that has brought.

presented to a big chunk of the American workforce. But we have also benefited from global trade, cheaper goods, easily accessible goods, all those kinds of things. Is there a price to be paid other than tariffs and a possible recession by Americans for what Trump is trying to do?

There's an enormous price to be paid because it wasn't a huge share of the American workforce. And a lot of the people who were displaced actually found other jobs. So our failing was not addressing the needs of places that were left behind and people who couldn't easily adapt or move. But what it will cost us is not just, oh, there'll be two dolls instead of ten dolls on the shelf at Christmas, as Trump so dismissively put it.

It's going to cost us the amount we're able to shape our private lives because consumption isn't about just dolls or sneakers. It's about all the things we do at home, whether it's volunteering or church work or family time or education. The other thing becomes more expensive for people who can't afford it, and that hits every single American.

And thirdly, it isn't just about variety on the supermarket or Walmart shelf. It's also about inputs to things where we don't have a substitute. And leaning against that costs enormous amounts of money, not in just the sense, oh, those rich crackheads will have less, but in the sense that everyone's job becomes harder.

So this is meaningful, and that's why it'll show up as inflation most likely. But what's really going on is a real income loss for millions of Americans. Adam Pozen, he is the president of the Peterson Institute for International Economics, an occasional guest on this program for which we are grateful. Adam, thanks for your time. I really appreciate it. Thank you, Kai. With the end of the week in sight, traders decided things were...

Okay, actually, big tech in particular. Details, numbers, when we get there. ♪♪♪

The economic conversation in Washington the next couple of weeks, barring more tariff related stuff, is going to shift to Capitol Hill, where the GOP is pushing a budget package along and with it extensions to the 2017 Trump tax cuts.

The House Transportation and Infrastructure Committee took on one piece of that this week, a proposal to charge EV owners, of which, full disclosure, I am one, a $250 annual fee, $100 for hybrid drivers, the revenue to go into the fund that pays for upkeep of the nation's roads and bridges. It is all, as Marketplace's Henry Epp reports, part of a thorny debate over who pays for maintaining the roads we get around on and how much they ought to pay.

We've traditionally funded highways and mass transit at the federal level through the gas tax. Right now, about 18 cents a gallon. For a long time, it was enough to mostly cover what the federal government spent. But Congress hasn't raised the gas tax for literally decades, says Cara Kockelman, a professor of transportation engineering at UT Austin. Because our legislators are too...

nervous to raise taxes of any form. And that's a very visible price because of the advertising that happens on every corner of America at these gas stations that we have so many of. The gas tax has stayed the same since 1993. If it had gone up with inflation, it would be 40 cents a gallon. Then there's another problem. There has been a growing vehicle efficiency in

Yonah Fremark is a researcher at the Urban Institute. On average, cars get better gas mileage now, especially hybrids, and EVs don't use any gas at all. The feeling is that those cars are not contributing as much as gas-powered cars to the maintenance of the transportation system.

And so, in theory, the move by the House Transportation Committee could even that out. The problem is, by Freemark's calculation, the average gas car driver pays about $125 a year in federal gas taxes, half of what EV users would owe under this proposal.

It's in essence punishing electric car users for operating electric cars and encouraging people to use gas driven cars, which is absolutely the opposite of what we'd want to encourage to encourage environmental sustainability and less greenhouse gas emissions. The fact is both gas and electric cars cause wear and tear on the roads. Aside from gas taxes or flat fees, transportation experts have another idea for how to pay for road maintenance. If

If you use the road system more, you should pay more. Gil Tall is a professor at UC Davis. You pay more when you create more wear and tear on the road. You pay more when you're creating more congestion. You pay less when you're just driving a rural road by yourself in the middle of the night. Figuring out how exactly to do that without tracking drivers every movement is another debate. I'm Henry Yap for Marketplace.

All right, here's one from the, yeah, it was only a matter of time file. Data from Redfin that shows record high housing costs and not a little bit of economic uncertainty is putting off homebuyers across the country. Mortgage purchase applications are down 6% from March. Pending sales are also down year on year, especially in warm weather markets like Miami and Houston.

Marketplace is Elizabeth Troval. Check in with people in Florida and Texas where real estate, like the weather, has been hot to see who's buying and who's staying on the sidelines.

An uncertain economy is sidelining some potential homebuyers who may be nervous about job security, says Brian Glasshago, who covers Texas markets for the real estate data firm Zonda. And when you put those two together, buyers making the biggest purchase probably they'll make in their life. When you've got lower consumer confidence and employment uncertainty, it kind of gives you a pause a little bit.

But some are buying homes anyway, like newcomers from other states and countries, says Susan Enora with the Houston Association of Realtors. Luckily, Houston is such a hotbed for inbound migration. We have a lot of new people coming to the city constantly. I think that helps tremendously with the demand. As for those already living in Houston...

They may be more hesitant to buy because they know, you know, the history of what's been going on, you know, with the market up and down. And they may be pausing. And Jonathan Lickstein with the Realtors Association serving Fort Lauderdale and West Palm Beach says while those areas are on the edge of becoming buyers markets,

What's stopping us from doing so is the costs associated with getting into a property. Interest rates, property taxes, and home insurance that are just such high expenses, it decreases the capability of a buyer to hit the price point that they would like to hit.

Molly says the average Joe is holding back on buying a home. We're seeing a lot more sales activity in the luxury marketplace from two to eight million. High-end cash buyers are boosting the South Florida housing markets, says economist Gaye Cororaton with the Miami Association of Realtors. For Miami-Dade County, 25 percent of sales are now million dollars. And

Compare that to just a 7% share back in 2019. Today's market conditions in Miami favor those buying in the upper price tier of the market. I'm Elizabeth Troval for Marketplace.

Coming up. One of the things about beverages is that they're heavy. It turns out not shipping product is key to keeping soda companies afloat. But first, let's do the numbers. Dow Industrial is up 83 points today, two-tenths percent, 40,752. The Nasdaq, 264 points to the good, one and a half percent, 17,710. S&P 500 lifted 35 points, about six-tenths percent, 56 and four. McDonald's

It says same-store sales fell in the first quarter of this year. Biggest drop the company's seen since the start of the pandemic. Shares decreased 1.9%. Restaurant Brands International, parent company of Burger King, ascended 1.3% today. Chipotle Mexican Grill declined 0.4%. You're listening to Marketplace.

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Visit gamma.app, that's G-A-M-M-A dot app, and start creating professional content as fast as you can think it up for free. Marketplace listeners get special access to one month of Gamma Pro free with promo code marketplace. Gamma, how good ideas get into the universe. This is Marketplace. I'm Kai Risdahl. Point number one on this next topic is that we are not, repeat, not in a recession yet.

But point number two is that yesterday's not completely terrible, but also not really great report on GDP got me thinking about an interview I did six weeks or so ago with economist Mohamed El-Erian about how he thought things were going. What's the worst case then?

So the worst case is that the U.S. economy slows to what's called stall speed. My name is Nina Eihacker, and I am now an associate professor of economics at the University of Rhode Island. My name is Nicole Servi. I'm an economist with Wells Fargo. Stall speed, of course, in its original aviation meaning is when the wing of an aircraft stops generating enough lift for the plane to fly. It's kind of the same in an economy.

Stall speed is a level of growth that is slow enough that producers and investors all freak out to the point where they stop doing the things that help the economy keep growing. When economists say stall speed, what we're usually talking about is perhaps we're at an inflection point. Go on.

I'm trying to think about it as a three-legged stool, maybe. If I'm sitting on this stool and it's already shaky, if we kind of downshift into stall speed, then you might actually come to an abrupt halt. So stall speed in practice? Look at the labor market.

What we've seen is that employers have said that they're essentially in wait and see mode. In the Beige Book, you saw several firms across the country reporting that they're doing hiring freezes. But at the same time, you see that companies, because they're so uncertain, they also aren't doing layoffs either. Also, companies, too, managing all this uncertainty and capital expenditures, maybe, that they might be thinking of?

For a producer that is contemplating internalizing giant cost hikes, that could very easily lead to decisions to change production processes, look for new suppliers, cut product lines, let go of staff. You're in a plane that stalls. The memory items are that you lower the nose, you level the wings, and you add power as necessary. You're in an economy that stalls. It's a little trickier.

Whether there is a magical stall speed where, you know, growth dips below a certain level and that translates immediately into recession, the Fed really wants to avoid those sorts of dynamics. Yes, they do. Fed meets next week, by the way.

One of the most promising trends in this economy over the past couple of years is just how productive the American labor force has been. Worker productivity has been growing for two years now, especially last year. And that's important because it means we're taking fewer hours to make more stuff or do more stuff if you work in the service sector, which, remember, makes up more than two thirds of this economy.

Productivity growth can help businesses afford to pay their workers more. It can help keep a lid on inflation. And in the long run, it drives economic growth. But as Marketplace's Justin Ho reports, all the productivity gains we have seen of late are at risk right now.

One of the reasons that productivity growth has been so strong recently is that unemployment's been low. Preston Moy, senior economist at the research group Employ America, says when the labor market is tight, workers feel empowered to find better jobs. So they move from lower-paying jobs to higher-paying jobs, from lower-productivity jobs to higher-productivity jobs.

Mui says rising wages incentivize businesses to buy equipment so they can boost output with less labor. Higher wages are also a good sign for consumer demand. And so this encourages businesses to say, well, if I think that demand is going to be robust in the future, I'm more confident about making investments that might be more forward-looking.

But Mui says the trade war is putting all of that at risk. If it causes a recession, unemployment will rise and workers won't be able to find better jobs. Meanwhile, it already has businesses holding off on making investments. They aren't building factories. They aren't purchasing equipment. They aren't engaging in these longer-term research and development projects. And all of that is going to be a drag on productivity going forward.

Companies that are more productive are also insulated from having to raise prices themselves because they're more profitable. They can afford to take the hit to the bottom line. But Peter Urazem, an economics professor at Iowa State University, says if the president's tariffs push up prices and productivity growth slows down, then we're going to have a much more serious inflationary problem than we would have just from the tariffs alone. There's another threat to productivity growth in the long run.

I think at the core, innovation is at risk. John Haltewanger, an economics professor at the University of Maryland, says the Trump administration's cutbacks and funding freezes to higher education are already adversely affecting research. They could also cause universities to admit fewer students and produce fewer graduates, which would restrict the pipeline of future innovation. In many ways, this may be the most adverse impact on productivity. You're attacking literally the core of science R&D in the United States.

Volatility in financial markets is another threat that can make lenders less willing to support risky startups, which threatens the entrepreneurship boom we've seen since the pandemic. Haltwanger says new and innovative businesses tend to boost productivity. Many of the things they try don't succeed, but if they do, oftentimes it's a more radical innovation. And it's those radical innovations, those things that really change the way we do business that have enormous value.

Halterwanger says research, innovation, and productivity growth boost economic welfare over time. Our incomes, what we're able to consume, how we communicate, our standards of living. So if productivity growth slows down... You're going to slow down the growth in the standard of living. Full stop. Standard of living and productivity go hand in hand. Halterwanger says if productivity stalls this year, the economy will feel the effects for decades. I'm Justin Ho for Marketplace.

As the seasons change, so too do our buying habits, which means as the weather warms, we're buying less of some things and more of others. On the more list, soft drinks. Coca-Cola reported stronger than expected profits this week, coming, of course, despite the tariffs that are flummoxing a lot of multinational companies with global supply chains. But Coke CEO James Quincy attributed the company's success in part to the fact that Coca-Cola itself doesn't actually make much soda.

Seriously. Daniel Ackerman explains.

The economics of the soda industry has everything to do with one immutable law of physics. One of the things about beverages is that they're heavy. Dwayne Stanford publishes Beverage Digest, and he says it just doesn't make sense for a global brand like Coke to ship what amounts to mostly water across oceans. So what Coca-Cola has done over the years is create bottling plants that are strategically located so that you have the shortest distance that makes sense to the retail stores.

And he says most of those Coke bottling plants are not actually run by Coca-Cola. Standalone franchises make Coke drinks, including the bottles and cans, all over the world. Some are even publicly traded themselves. So analysts often talk about Coke not as a company, but as a system. It's a vast and somewhat complicated network.

Bonnie Herzog is with Goldman Sachs, and she says the fact that drinks are made locally can help insulate Coke and its bottlers from tariffs. It's also good for marketing. A lot of the bottlers will have campaigns with their local communities. Like sponsoring the local soccer team. On this week's earnings call, Coke's CEO said the firm is stepping up its Made in Mexico ad campaign. Some Mexican consumers have been giving a trade war-induced side-eye to brands they perceive as American.

Herzog says Coke's goal is to emphasize that... Coke does face other economic headwinds. In North America, it sold less soda by volume last quarter. But in the U.S., it's sold less soda by volume.

Part of that may be because sugary drinks are a target of some in the Trump administration, says Errol Schweitzer, publisher of the Checkout Grocery Update. Big soda is definitely in their crosshairs. Schweitzer says on that front, Pepsi may have a leg up. In March, it acquired Poppy, which calls itself a, quote, better-for-you alternative to sugary sodas. I'm Daniel Ackerman for Marketplace.

This final note on the way out today, a very quick observation about the April unemployment report we're going to get tomorrow. Without getting all technical on you here, just know that the numbers which everybody is going to be trying to decipher for what they mean for interest rates and the fate of this economy, they are not, repeat, not going to be post-tariff palooza numbers. We're not going to get those for another month. So just remember that when those numbers hit tomorrow.

John Gordon, Noya Carr, Amanda Peacher, and Stephanie Seek are the Marketplace editing staff. Amir Bibawi is the managing editor. And I'm Kyle Rizdal. We will see you tomorrow, everybody. This is APM. If there's one thing we know about social media, it's that misinformation is everywhere, especially when it comes to personal finance. Financially Inclined from Marketplace is a podcast you can trust to help you get serious about your money so you can build a life you've always dreamed of.

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